Berkshire's Charlie Munger on GM, Politics, and High Frequency Trading (Part II)
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I am translating what he says into speak easy for investors and also, in an effort to attract a wider audience, jocks.
On Generating Profits by Growth versus Savings
Munger: People running corporations prefer to expand via growth. They want to build new plants based on anticipated growth, but when the avenue for growth looks difficult that's when companies go to cost containment. Berkshire Hathaway has always been great at cost containment, always watching their pennies. Businesses must change their cost structure to adapt to the competitive reality.
Jock Speak: We'd rather be throwing oops and running but when you go on a cold streak, you better amp up the D.
On GM and the Auto Bailout
Munger: He particularly faults General Motors (NYSE: GM) and the decision to wipe out their shareholders. Whether it was right to bail out GM, he replied, "That's a very hard question, I don't have a strong feeling one way or the other."
On Creative destruction
Munger: A necessary part of capitalism, what happenned to Kodak was awful for Rochester (where Kodak was based) and the employees, but good for the rest of the world and society.
Jock speak: Sometimes you just get too old and stiff to continue playing at the highest level, and you give up your spot to a younger player.
On Politics and the Election
Munger: While a Republican, there's plenty to regret about the Republican party. He remembers a more bipartisan world with affection, and believes that Romney was by far the best of the republican nominees with Warren Buffet in complete agreement. With the adversarial political atmosphere, it's amazing that the two candidates for president have as much merit as each of them do. He doesn't believe that it matters all that much who wins.
Investor Speak Easy: To those of you get all huffy and puffy over politics, it really doesn't matter. To counter that point, let's all give a great big sigh of relief that Newt "the hater" Gingrich was not the nominee.
Jocks: It doesn't matter who's coaching us. As long as we have Kevin Durant, we'll be fine.
On The Average Investor
Munger: The whole market is more institutional than it used to be. He believes that if you're an ordinary investor, you would be better off purchasing an index. Most day traders and people will follow the recommendations of their stockbrokers will get worse returns overall.
On China + US Relations
Munger: The unprecedented growth in China is a huge development, and neither the Chinese nor the U.S. have any sensible alternative other than to have good relations with one another. China will not grow in real terms of 10% per annum for the next 40 years.
Where they started with a Chinese bureaucracy and widespread starvation, to transform a nation that big, by a combination population control and bringing in free market principles, it is one of the greatest achievements in human history, and he can't help but feel some admiration for those who created the policies that made this possible.
Investors: The Chinese consumer still represents HUGE potential markets to US Companies, both sides have much to gain from good relations. Of course, the Chinese would do well to stop bolstering North Korea, Iran, and engaging in massive cyber espionage.
Jocks: Why did Ben + Jerry's have to apologize for including "fortune cookie" as an ingredient in their Jeremy Lin "Linsanity" flavor. Are we seriously that politically correct and sensitive? That's straight up ridiculous.
Munger: What took place in Singapore, which the Chinese modeled to a degree, is the greatest governmental achievement in the history of the world. They took what used to be a malarial swamp, and massive slums, and turned it into one of the great economic and democratic successes of the world.
Investors: Having been there and knowing the history, I tend to agree. The bottom line is that the population has a tremendous incentives to comply with the laws, and are held accountable. Though such measures would never pass in this country, we also would be wise to look at what they got right, which is plenty. That said, it's not a utopia, but it certainly is a safer place to invest your money than perhaps any other country in the world.
On The State of Wall Street
Munger: When asked about Michael Lewis, who said more needed to be done help heal the ills of Wall Street, and that the Volker rule was insufficient, Munger replied, "The majority of what was wrong has not been fixed. The Volker rule is not enough. If he was making the rules,he would make Lewis look like a "piker. " (An overly cautious person.)
He would employ a Tobin Tax, named after a Yale economist, who wanted taxes which discouraged short term thinking and investing. He stated, "If taxes on short term trades were 99%, nobody would ever do it."
Investors: Human beings are stimulus response creatures, and if we agree as a society that people must be guided to or away from a certain behavior, the simplest, fastest, and most logical way are through stong incentives.
Jocks: If you were to take half a year's pay every time I threw a 'bow, I couldn't throw more than two per year. In fact, I don't think I would throw any. (I'm talking to you Artest)
If you're unfamiliar with front running + high frequency trading (as described below) Watch this Video Explaining it
On High Frequency Trading + Hedge Funds
Munger: Those people have all the social utility of a group of rats admitted to a grainery. I don't want the brilliant young men of America acting as rats in someone else's grainery. It has done more harm than good to have this enormous liquidity in the stock market because it turns Wall Street into a perfect casino for gamblers. With the right tax incentives on short term trading, the gamblers could not win. What good does it do for society to have a group of people clipping money through computer algorithms that work a lot like legalized front-running.
Less gambling more long-term thinking, and legitimate investing, instead of this short term trading frenzy. He also would not allow hedge managers to report their pay as long-term capital gains. "Once such wrong thinking to become entrenched into the laws and culture, it becomes very difficult to remove."
Investors: The explanation from Goldman Sachs and other investment banks that high frequency trading produces more liquidity for the market and thus should be exonerated, is akin to a shoplifter stating that through her theft she helps stimulate the economy, and thus should be lauded.
Jocks: If the refs let somebody get away with a foul every time, they're going to foul you every play. Eventually you ain't playing basketball, you're playing cheat ball.
On the Past Versus the Future:
Munger: While we as a country, are not at the same level of morality, that existed in his youth, he also says, "We tend to idealize the past," and that there was plenty of sin throughout time. His favorite sayings were about Congressmen Jay Gould and Russell Sage, "When they are talking they are lying and when they are quiet they are stealing," along with, "He was scrupulously dishonest."
Another favorite, and how he and Warren try to run Berkshire Hathaway: "Nobody envied the success so fairly won, and wisely used."
Jock + Investment Communities: Amen to the last aphorism. If more people lived by this, we'd live in a utopia. We certainly have the technology for it.
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