Munger Speaks on Berkshire's Success

"I didn't set out in life to become the assistant leader of a cult."

That is how Charlie Munger welcomed shareholders to the 2007  Wesco  annual meeting. The cult, of course, is the loyal throng of value investors that invade both Omaha, Neb., and Pasadena, Calif., each spring to learn at the feet at Warren Buffett and Charlie Munger, and as Munger noted "to leave a little wiser than they came."

This year the meeting was held inside a massive tent at the Pasadena Civic Center. Munger called the tent, which was an impressively engineered structure, a "tribute to the civilization."

The body of Munger's talk this year focused on the reasons why Buffett and  Berkshire Hathaway (BRK.B) became such a "lollapalooza" success. Munger gave several factors that, working in concert, led to one of the most spectacular investment and business records in the history of capitalism. Those factors are:

Mental Aptitude. Warren Buffett is obviously a very smart man, but Munger stated he probably overachieved given his innate mental ability. For example, Buffett could not "beat all comers playing chess blindfolded" like U.S. chess champion Patrick Wolff. (Wolff beats multiple opponents simultaneously while blindfolded at Berkshire Hathaway annual meetings.) Using the dry humor of a ridiculous understatement, Munger called Wolff's skill "interesting."

Intense Interest. Munger noted that Buffett was intensely interested in business and investing from a very young age. "There is no substitute for a very intense interest."

Early Start. Another factor in the success of Berkshire Hathaway was that Buffett got an early start and was able to use his skills to compound capital over many decades.

Constant Learning. Munger stated that Buffett is one of the best "learning machines." The key to success is to continue learning throughout your life with a voracious appetite. Munger later circled back to this topic when he said the best way to gain wisdom was by "sitting on your [behind] and reading all day."

Concentration. Another factor in Berkshire's success was that the work was heavily concentrated in Buffett's mind. "It's hard to think of committees that have been successful." Munger used the analogy of John Wooden's player rotation strategy. The great UCLA basketball coach would only play seven out of his 12 players, so as to concentrate the experience into his seven best players. Similarly, most of Berkshire's work was concentrated in its best mind, Buffett's.

Notes for Living Well
With humor and clarity, Munger dispenses advice for living a well-examined life. Here are some nuggets of wisdom:

� Munger stated that many smart people handicapped themselves with "nuttiness." One example is being an "extreme ideologue," which is the equivalent of "having taken your brain and started pounding it with a hammer."

� Your life must focus on the "maximization of objectivity."

� "You must learn the method of learning."

� "It is totally unproductive to think the world has been unfair to you. Every tough stretch is an opportunity."

� "You can get away with more than you deserve in life by being slightly more rational."

� "I'm not going to complain about my age because without it, I'd be dead."

Tag Ends
One questioner asked about a closely held belief that Munger had recently overturned. After some thinking, Munger responded that Berkshire's recent purchase of railroad stocks marked a 180 degree change in thinking about the industry. According to Munger, railroads now have a huge competitive advantage over trucking because of innovations such as double-stacked cars and computer modeling of routes. Munger said he and Buffett were too late in recognizing the changes and could have made much more money. Apparently, Bill Gates figured out it out two years ago and made "multiples of his money" with railroads.

Munger gave two book recommendations. The Martians of Science: Five Physicists Who Changed the Twentieth Century by Istvan Hargittai and Einstein: His Life and Universe by Walter Isaacson. Munger said he had read every Einstein biography, and this new one by Isaacson was the best.

There are two kinds of inefficient markets: ones that are small and neglected and ones where people do crazy things. The latter happens from time to time.