Source: Qile Club
The Way of Munger: Excerpts and Reflections from the 1990 Wesco Financial Shareholders Meeting
A significant portion of Munger’s 1990 shareholders meeting speech focused on the savings and loan industry. In light of the economic conditions at the time, his assessment was that this industry would face increasing challenges. Beyond that, several key insights emerged:
1. If someone much smarter than you wants to deceive you, it is very difficult to escape being deceived. Therefore, it is crucial to stay within your circle of competence and clearly distinguish between what you know and what you do not.
2. Due to vested interests within educational institutions, the knowledge we acquire cannot be guaranteed to be entirely impartial.
3. 'Approximately correct is better than precisely wrong.' Decisions should not rely solely on specific data, and when faced with approximate correctness, efforts should be made to clarify it as much as possible.
4. The risk of chasing the last bit of profit can be extremely high. There should be certain restrictions on the use of idle funds, and excessive risks should be avoided.
1. If someone much smarter than you intends to deceive you...
If someone much smarter than you deliberately tries to deceive you, no matter how carefully you analyze and judge the situation, it is still very difficult to avoid being deceived.
Design a highly rewarding sales system, hire a group of highly intelligent employees, and tell them their job is to aggressively market complex strategy-based products to savings and loan institutions. If they fail to sell, they don't eat. Won’t these salespeople go all out? They will certainly find ways to mislead savings and loan institutions into making poor decisions.
Fortunately, Graham was a genius. Among the people we have met, there are few as intelligent as he was. Moreover, we are acutely aware of our own limitations and understand there are many things we cannot achieve. Therefore, we remain cautiously within our circle of competence.
The schemes of fraudsters always evolve with the saying 'as methods improve, so do countermeasures,' but critically, they are often professional, making it difficult not to fall prey. The solution proposed by Munger is twofold: first, as he has mentioned in other contexts, avoid individuals with questionable character. Additionally, as highlighted here, one must be wary of professional swindlers whose success is closely tied to their ability to deceive. Second, stay within one's circle of competence.
Tracing back to the root, this brings us to another issue: how to identify fraudsters and how to recognize one’s circle of competence. For the former, one must start from fundamental principles of human nature, such as banking crises stemming from competition, managerial greed and short-sightedness, regulatory failures, and complicity. As for the latter, one must reflect deeply. As Zengzi said, 'I examine myself three times a day.'
Of course, in the stock market, it may not necessarily involve acts of deception with strong emotional connotations; perhaps manipulation is a better term, as calculating moves in the market are quite common.
2. Business schools cannot remain entirely impartial.
Modern business schools tend to teach students to view companies from the perspective of managers, focusing on how a company is managed. Business schools should teach students to evaluate companies from the standpoint of securities analysts, assessing whether a company is worth investing in. Once learned, analyzing from this angle allows managers to resolve many management issues more effectively, leading to better company governance.
Business schools rely on donations from large corporations, and their graduates seek employment at these firms. Therefore, driven by self-interest, business schools are unlikely to condemn unethical corporate behavior unless a corporation has already drawn widespread societal condemnation, in which case they might follow suit in criticizing it. Even within the ivory tower of academia, the influence of vested interests can prevent complete objectivity and fairness.
The inability to maintain complete objectivity and fairness stems primarily from the influence of vested interests. What makes business schools unique is that they impart knowledge; if they fail to teach in an impartial manner, their value diminishes. Of course, this is a natural phenomenon, as Mencius said, 'Believing entirely in books is worse than having no books at all.'
Management and investment issues are interconnected. Companies with sound management often possess investment value, and investment value requires good management.
Why should management issues be considered from an investment perspective? First, people only engage in deeper reflection when their personal interests are at stake. Second, investment value represents a more systemic issue, with management being part of that system. Focusing solely on management without considering the broader system risks missing the forest for the trees.
3. We would never make decisions based solely on partially accurate information.
We always bear in mind the maxim of Lord Keynes, a phrase often quoted by Warren: 'It is better to be vaguely right than precisely wrong.' For critical information, even without exact figures, we will make every effort to estimate and absolutely avoid making decisions based solely on partial accurate information.
The phrase 'better to be vaguely right than precisely wrong,' frequently cited by Buffett, requires profound understanding.
Firstly, from a broad perspective, correct information is preferable to incorrect information. This is the core requirement, which means we must strive for accuracy, demanding basic discernment skills to avoid mistaking correct for incorrect or vice versa.
Secondly, in terms of the precision of information, precision is superior to vagueness. Given the correctness of direction, the more precise, the better.
'Vaguely correct' is superior to 'precisely wrong,' not because vagueness is better than precision, but because 'correctness' surpasses 'incorrectness.' While ensuring correctness, efforts must be made to estimate as precisely as possible.
Do not assume that vague correctness should bring peace of mind. For most people, vagueness often implies not knowing whether it is correct or incorrect.
4. Not earning the last copper
During different periods at Berkshire, we have established various regulations to manage capital restrictions. To mitigate risks, the rule we formulated is precisely not to earn the last copper.
For instance, we stipulate that if a certain type of investment yields more than 0.125% above the benchmark yield of high credit ratings, it is prohibited from investment.
If an investment's interest rate exceeds normal levels, we will absolutely avoid it. Additionally, we impose restrictions on issuers, investing only in securities issued by qualified entities.
Why not earn the last penny? Because the easy money has already been made, and the subsequent earnings will be more difficult with greater risks. Being overly greedy will not lead to good outcomes, such as always wanting to sell at the peak or expecting to double gains from 100% to 200%. Greed can create blind spots in thinking.
The criterion for evaluating 'the last penny' is 'returns exceeding the normal level.' This 'normal' is not a fixed value but requires logical analysis to determine. 'When something is unusual, there must be a problem.' If it cannot be understood through common sense, there may be an issue, and it is best to avoid it.
5. Xike will not arbitrarily sell its subsidiaries.
Xike will not arbitrarily sell its subsidiaries. Berkshire will not simply sell off a subsidiary just because it encounters difficulties. We will only sell when the subsidiary faces problems that we absolutely cannot resolve.
For a subsidiary with honest and upright management, average performance within the industry, but unsatisfactory profitability, we will learn from this experience and refrain from making similar investments in the future. However, we will not sell it. We do not treat investments like playing cards, discarding one after drawing another.
Munger leaves room for flexibility; it is not that he will not sell, but rather that he will not 'sell arbitrarily.'
Profitability is a standard for evaluating the quality of an investment. Unsatisfactory profitability requires 'learning a lesson and avoiding similar investments in the future.' However, when mentioning not selling, Munger also pointed out two requirements: 'honest and upright management' and 'average performance within the industry.' If these conditions are not met, it may fall into the category of situations where selling is warranted.
Editor/Jayden