Tarzan had Jane. Abbott had Costello.
Bonnie had Clyde. Warren Buffett has Charlie Munger and his
Poor Charlie’s Almanack, filled with economic
Is there a new oracle in town? Warren Buffett still holds
the title of Oracle of Omaha, but Charlie Munger,
Buffet’s sidekick in Berkshire Hathaway and chairman and
CEO of Wesco Financial Corp., is fast becoming the Oracle of
Pasadena. While shareholders and the press have long flocked to
Berkshire’s annual meeting to hear Buffett’s words
of wisdom, Munger is now garnering increasing attention for his
Hardly a shadow of Buffett, Munger has his own perspective
on a range of issues—from the financial crisis to
casinos. He’s so much an admirer of Benjamin Franklin
that he titled his 2005 book Poor
Charlie’s Almanack: The Wit and Wisdom of Charles T.
Munger, a homage to Franklin’s Poor Richard’s Almanack. In the book,
Munger sets out his concepts of “Elementary Worldly
Wisdom” as it relates to business and finance. His
concepts work to solve critical business issues. One of
Munger’s favorite terms is the “Lollapalooza
Effect,” which represents a set of biases or tendencies
that can conspire to cause extreme (perhaps delusional) and
often disastrous decisions.
I thought it would be interesting to share some of
Charlie’s pearls, as reported from Wesco’s May
annual meeting. Here are some edited highlights:
Financial Meltdown: At the
depths of the crisis, it was deadly serious. We were on the
edge of something that could have taken the whole civilization
into severe difficulty. Banks started falling like bowling
pins—boom, boom, boom—and the process was feeding
on itself. It was out of control. The government’s
response was a credit to democracy and capitalism. We had
Wall Street Gambling: The more
complex the game, the easier it is for the best players to beat
the patsies. This is what happened on Wall Street. Casinos work
so well because there aren’t any inventories and accounts
receivable. It’s like God gave you the ability to print
money. But real casinos have huge capital expenditures and
asset requirements. On Wall Street, they can create a casino
without those requirements. How many of us could resist those
The Blame Game: At the end,
Lehman was pathological. The totally crooked and crazy
operators originated mortgages and then packaged them into
securities. It doesn’t work to sell things that are bad
for customers. The disturbing thing is that most of these
people think it is someone else’s fault. When Hitler was
in the bunker at the end of war, he said it was too bad that
the German people hadn’t appreciated him enough. This is
much like what people on Wall Street think.
Government’s Job: In
soccer, the referee has to limit the mayhem on the field. This
is the role government should take with investment bankers. You
can’t expect competitive people to rein themselves in.
Competition leads to too much aggression, and ethical standards
go down. There needs to be an adult in the room.
Fannie Mae and Freddie Mac—Twin
Failures: They had 200 people in OFHEO (the Federal
Housing Finance Agency) whose job it was to regulate Fannie and
Freddie. Both had phony accounting. And both went insolvent
right under OFHEO’s nose. Both had phony accounting, and
both went insolvent right under OFHEO’s nose. You
can’t solve the problem by allowing these entities to do
whatever they want because a regulator is watching. The
regulator is likely to be co-opted or subject to inertia.
Letting the people who failed regulate more isn’t the
SEC—Just Say No: That
Enron was able to record profits upfront on uncertain
derivative contracts was insane. The SEC needs more sense and
has to learn to say no. People will always ask to be able to do
the wrong things. If we don’t tell them no, we are going
to continue to have trouble.
The Siamese Twins—Commercial
and Investment Banks: Commercial and investment banks
should be separated. We should have commodity markets, but not
within the banks. They should not be able to gamble on
derivatives or agriculture hedging. There is a lot of
legitimate activity that they can do without getting into
trouble. Why do they have to do everything else?
Nut-Case Accounting: We have
Alice in Wonderland and nut-case accounting in the U.S.
Accountants learn too much math but not enough common sense.
Under new accounting standards, assets are good until you
actually need them. We don’t need mark to myth
Greece: Greece is serious.
It’s surprising it took so long to surface. Charlie
doesn’t know how to solve it and is glad he doesn’t
The Future: He doesn’t
know what will happen in 20 years. He thinks China is promising
but doesn’t think China has to do everything our way.
China’s rise up the competency ladder is unprecedented,
and the country has a great track record of dealing with
Charlie’s Rule: When a
guy is offering you free money, don’t listen to the rest
of the sentence.
Kemper is The Council’s vice president of Industry