About Chander Chawla

Chander Chawla is the Founder and CEO of Mjedi LLC., a company focused on Mobile Social Commerce. Chander is well established in the wireless industry and is known for his accomplishments, which include growing the T-Mobile WiFi business by 4,000% and accelerating the adoption of 3G in the U.S., among others.

Prior to starting his own company, Chander managed T-Mobile’s $600M International business. During his 5 years at T-Mobile, he held various positions in marketing and regularly consulted with advertising firms such as Publicis, Wongdoody, Avenue A, and Waggener Edstrom to develop marketing strategies for new T-Mobile products and new service launches. He has a bachelor's degree in Electrical Engineering from India and he received his MBA from the University of Miami.

Vegan Dog Food – OH SO California

May 14, 2012 by Chander Chawla

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Posted in: Creativity, Culture, Food/Wine

Location: California, Los Angeles, North America, Orange County, San Diego, San Francisco/Bay Area, USA

Tags: society, Vegan Dog Food - OH SO California

Charlie Munger’s Parody of the Great Recession

July 14, 2011 by Chander Chawla

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Charlie Munger, my hero, handed out the following parody at ” A Morning with Charlie” in Pasadena, California on July 1, 2011 (formerly, this annual gathering with Charlie was known as Wesco Financial Annual Shareholder meeting). The parody identifies the causes of the recent financial crises in the US. Most “experts” have not been able to do that. Furthermore, it offers valuable lessons in human behavior, economics, accounting, and morality. I am still laughing after having read the story twice:-).

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In the country of Boneheadia there was a man, Wantmore, who earned his income as a home mortgage loan originator. Wantmore operated conservatively. All his home loans bore interest rates of 6% or less, and he demanded of all borrowers large down payments, documented proof of adequate income and an immaculate credit-using history. Wantmore sold all his loans to life Insurance companies that, before closing purchases, checked loan quality with rigor—then held all loans to maturity.

As Wantmore prospered, he eventually attracted the attention of Tweakmore, a very bold and ingenious investment banker. There was no other investment banker quite like Tweakmore, even in the United States. Tweakmore had become the richest person in Boneheadia, driven by an insight that had come to him when, as a college student, he had visited a collection of hotels that contained gambling casinos located in a desert.

As Tweakmore saw immense amounts of cash pouring into cashiers’ cages surrounded by endless sand, in business operations that did not tie up any capital in inventories, receivables, or manufacturing equipment, he realized immediately that he was looking at the best business model in the world, provided one could also eliminate commitment of any capital or expense to hotel rooms, restaurants, or facilities providing parking or entertainment. Tweakmore also saw exactly how he could create for himself an operation that possessed all the characteristics of his ideal business. All he had to do was add to investment banking a lot of activities that were the functional equivalent of casino gambling, with the bank having the traditional “house advantage.” Such casino-type activities, masked by respectable sounding labels, Tweakmore foresaw, could easily grow to dwarfall the action in ordinary casinos. Determined to create and own his ideal business as fast as possible, Tweakmore quit college and entered investment banking.

Within twelve years, Tweakmore was the most important investment banker in Boneheadia Tweakmore rose so rapidly because he was very successful in convincing regulators and legislators to enlarge what was permissible. Indeed, by the time Tweakmore called on Wantmore, any investment bank in Boneheadia could invent and trade in any bets it wished, provided they were called “derivatives” designed to make counter parties feel better about total financial risks in their lives, outcomes that automatically happened. Moreover, an investment bank faced no limit on the amount of financial leverage it employed in trading or investing in derivatives or anything else.

Also, Tweakmore had obtained permission to use ”Mark-To-Model” accounting that enabled each bank to report in its derivative book whatever profit it desired to report. As a result, almost every investment bank claimed ever—growing profits and had ownership of assets totaling at least thirty times an ever—swelling reported net worth. And despite a vast expansion of transaction—clearance risk, no big mess had so far occurred.

Tweakmore was pleased, but not satished, by what he had accomplished. And he now planned to revolutionize Boneheadia’s home mortgage loan business in a manner that would make Tweakmore a national hero. In his first proposal to Wantmore, Tweakmore held much of his ingenuity in reserver. All he proposed was that Wantmore hereafter sell all his home loans to Tweakmore at a higher price than life insurers would pay. Tweakmore said that he planned to put all loans into trusts with no other assets.

Each trust would be divided into five “tranches” with different priorities in use of loan payments. Four tranches would use their shares of loan payments to pay off complex new fixed interest-bearing, freely-tradable debt instruments, called CDOs . The fifth tranch got a tiny residue in case all home loan payments were received as due. The CDOs would be sold by Tweakmore, using a highly—paid sales force, to anyone who could be induced to buy, even highly—leveraged speculators and small Scandinavian cities in the Arctic.

To Wantmore, Tweakmore’s proposal at first appeared unfeasible. The planned operation seemed to resemble the operation of a meat vendor who routinely bought 1000 pounds ofchuck roast, sliced it up, and then sold 950 pounds as filet mignon and the balance as dog food. But Wantmore’s doubts melted away when Tweakmore revealed how much he would pay.

Under the offered terms, Wantmore would double his income, something Tweakmore could easily afford because his own income was going to be three times that of Wantmore. After Wantmore accepted Tweakmore’s proposal, everything worked out exactly as Tweakmore had planned, because buyers of CDOs in aggregate paid much more than the life insurers had formerly paid. Even so, Wantmore, as he became familiar with Tweakmore’s prosperity, was soon dissatisfied with a merely doubled income. With Wantmore restive, Tweakmore now displayed the full range of his ingenuity.

What Tweakmore next proposed was that Wantmore add to his product line a new class of “subprime, pay-what-you-wish” home mortgage loans. All loans would bear interest at 7.5% or more, and borrowers would not he allowed to state anything except that they wanted the money. There would be no down payments and no credit checks or the like. Also, each loan would be very user—friendly in its first three years, during which the borrower could make only tiny payments with all unpaid interest being added to principal. After three years, very onerous loan service was required, designed to pay off the greatly swollen principal, plus all interest, over the next five years.

Ths proposal would have seemed preposterous, even hilariously satirical, if it had been presented to Wantmnre when Tweaknwre had first called. But by now Wantmore had doubled his income by going along with a peculiar idea of Tweakmore’s. So Wantmore’s credulity was easily stretched to allow acceptance of the new loan product, which Tweakmore projected would triple Wantmore’s already doubled income.

lt is easy to see why Wantmore became a “true believer” in the new loan product. But why did the already super-rich, prominent, and sophisticated Tweakmore believe his revised scheme would work safely and well for him? Well, we know the answer. As Tweakmore revealed in his prideful autobiography, his thought process was as follows:

1. There would be no significant troubles during the first three years. Under the accounting standards of Boneheadia, all its accountants would be required for a long time to reserve no loan—loss provision at all against unpaid principal and unpaid interest on the new loans. And CDOs would be valued highly in trading markets because underlying loans were booked at unreasonably high value. It wouldn’t matter that home buyers were making no down payments, had no personal liability at any time, and paid only a tiny portlon of interest accrued for three years. It also wouldn’t matter that any competent inquiry would have revealed extreme past improvidence on the part of most borrowers.

2. House prices in Boneheadia would not merely rise as they had done before. Prices would rise much faster as more and more people learned they could bid to acquire homes without using any oftheir own money, no matter how poor were their credit-using histories.

3. All the buyers of new CDOs would have a near perfect investment experience. Ever-rising house prices would cause full payment of all mortgage debt as due. The market for the new CDOs would expand and expand as investors reliably earned much more interest than they could get elsewhere. House prices in Boneheadia would rise faster and faster as the scheme fed on itself in a runaway feedback mode.

4. True, after the first three years many over-stretched home buyers were sure to suffer somewhat as they were forced, by threats of foreclosure, to sell their homes. This would often cost them their credit and the respect of their children, friends, and employers, but that would be the only trouble, and it would prove endurable by Tweakmore and everyone else, except the people forced out of homes.

5. The runaway feedback mode that drove up house prices would cause no significant trouble for decades, as had happened in Japan where a big bust in real estate prices occurred only after the Imperial Palace grounds in Tokyo were apparently worth more than the market value of the entire state of California.

6. The principles of economics would give the scheme a large tailwind and considerable popularity. As Tweakmore, a former student in elementary economics, knew from studying Galbraith, a large undisclosed embezzlement strongly stimulates spending because the perpetrator is much richer and the victim spends as before because he does not yet feel poorer. And what Tweakmore was creating was the functional equivalent of a long-running undisclosed embezzlement on steroids. The perpetrators would not be the only ones to spend more, as typically occurs during ordinary embezzlements. The CDO—buying victims also would spend more as they believed they were getting richer and richer from ever-growing paper gains embodied in accrual of interest at above normal rates.

7. To be sure, the scheme looked a little like a chain-letter scheme, and such schemes were usually ill regarded by prospective users, partly because the schemes were criminal and partly because the schemes always blew up so quickly, bringing criminal troubles so soon. Tweakmore’s scheme, in contrast, would, by design, be lawful and benevolent, and recognized as such, because it would create big macroeconomic stimulus as a public good.

8. And should the scheme eventually blow up alter decades, like the land-price bubble in lapan, who could fairly blame Tweakrnore? Nothing lasts forever. Besides, the blcwup might be lost in a miasma of other blowups like those sure to come in many irresponsible countries and subdivisions of countries.

Tweakmore’s revised scheme worked fantastically well for a considerable period. Naturally, there were some glitches, but Tweakmore turned each glitch into an opportunity to boost profit. For instance, when Wantmore was made nervous as hordes of scumball salesmen were drawn into his business by rich commissions paid for production of easy-to-sell ”subprime” pay-what-you-wish home loans, Tweakmore responded by buying Wantmore’s business. Then Tweakmore replaced Wantmore with a new CEO, Totalscum, who did not consider any business practice optimal unless it was depraved. Totalscum soon increased loan production by 400%, and his success caused Tweakmore to buy five additional loan businesses and replace their CEOs with people like Totalscum, causing profits to soar and soar, even though Twealtmore never again found anyone else whose depraved operations could produce results that matched those of Totalscum.

As Tweakmore’s scheme went on, it was necessary for its continuing success that the accountants of Boneheadia never stop treating as trustworthy a lot of hugely important loan- payment promises that any sensible person would deem unreliable. However, there was almost no risk that accountants would act otherwise than as Tweakmore desired. The accountants of Boneheadia were not allowed to be sensible, They had to use by rote “rules—based” accounting standards set by a dominating man, Countwrong, who was head of Boneheadia’s Accounting standards Setting Board. And Countwrong had ordained, in effect, that all loss provisions on the new loans must remain based on the zero-loss record that had existed before Wantmore met Tweakmore. And, so long as Countwrong was in charge, no one was going to use in accounting an understanding of runaway feedback modes, instead of Countwrong’s rules.

Of course, if Totalscum or Tweakmore ever started to have loan losses, he would have to start making loan-loss provisions against new loans. But there weren’t any meaningful loan losses for anyone for a very long time. Countwrong was so habit—bound as a thinker that he never recognized that his cognition was anti—social. He had always sought simplicity of process for accountants at the expense of “principles—based” rigor in thought that would better serve his country.

He had been rewarded in life for his convictions, and he was now proud of his conclusions, even as they were contributing mightily to the supencatastrophe sure to come eventually from Tweakmore’s scheme. A large economic boom occurred in Boneheadia just as Tweakmore had expected. The boom made the regulators of Boneheadia feel extremely good about themselves as they passively watched the ever—enlarging operations of Tweakmore and Totalscum. A famous regulator named Oblivious was particularly approving. He had been over influenced in early life by classical economics.

So influenced, Oblivious loved all the new derivatives, even those based on outcomes of parts of complex CDOs composed of parts of other complex CDOs. And he did not believe the government should rein in any investment banker until the banker’s behavior was very much worse than Tweakmore’s. The boom initiated by Tweakmore lasted only three years. He had underestimated the boom’s strength and the power of people to understand, in due course, super-sized folly. These factors had helped shorten the boom’s duration. Also, Boneheadia had proved less like Japan than had been hoped.

When the hoom—ending bust came, it was a doozy, Almost every investment bank had been made collapse-prone by Tweakmore’s innovations before he became interested in home loans. And now, in a huge bust, most big financial institutions were sure to disappear, causing total chaos and another “Great Depression” unless there was super—massive intervention by the government, financed by printing money. Fortunately, Buneheadia did so intervene, guided by effective leaders who somehow obtained support from politicians in both political parties. And, after this massive intervention, Boneheadia, with doubled unemployment, is enormously worse off than if the boom and bust had never happened. And its options in case offuture trouble are greatly reduced because, after its money-printing spree, it is nearer to facing general distrust of its money and credit. Boneheadia’s bust is now called the “Great Recession”. Yet, even so, not much has been learned by the ellte in Boneheadia.

Among the protagonists and too—passive types who contributed so much to the mess, only one has expressed significant contrition. To his great credit, Oblivious has recognized that he was grossly wrong. The accounting profession remains unaware of its large contribution to public woe. And it does not recognize the cognitive defects of Countwrong, which are still believed to be virtuous qualities that reduce accountants’ litigation risks and their duty to cause antagonism by opposing the wishes of some of their best-paying clients.

The professoriate in economics has barely budged toward recognition of the importance of optimized, more conservative accounting in both macroeconomic: and microeconomics. And economics professors, even now, do not recognize what was so easily recognized by Tweakmore: the functional equivalent of undisclosed embezzlement can be magnified and have massive macroeconomic consequences when the victims, as well as the perpetrators, are led to believe they are getting richer under conditions that are going to last for a long time, how about the legislators in Boneheadia?

Well, most are confused by what has happened to their most powerful friends and draw no useful implications from the outcome of Canadia, a country just north of Boneheadia that had no “Great Recession” because its simple laws and regulations kept in place home loan operations much like those of Wantmore before he embraced modern finance in the state preferred by Tweakmore.

How about the regulators? Well, very few important regulators or former regulators in all Boneheadia have expressed really serious doubts about the status quo and interest in really serious re-regulation of investment banking.

One of the doubters is Follyseer, a long—retired former Minister of Finance. Follyseer has argued that all the contributions of Tweakmore to investment banking should now be removed and banned, because it is now obvious that (1) augmenting casino-type activities in investment banks was never a good idea, and (2) investment banks are less likely to cause vast public damage when they are forbidden to use much financial leverage and are limited to few long-traditional activities. Regarding accounting, no regulator now in power seems to understand, in a way that has any chance of causing effective remedial action, that the disaster triggered by Tweakmore couldn’t have happened if Boneheadia’s system of accounting regulation had been more ”principles—based,” with a different and less tradition-bound group creating accounting standards that were less easy to game.

The former regulator and life-long professor who seemed extra wise aher the Great Recession was England’s John Maynard Keynes, dead for more than half a century. Keynes had predicted, correctly, that “When the capital development of a country ls a by product of the operations of a casino, the job is likely to be ill-done.

Charlie Munger

Afterword: The foregoing parody is not an attempt to describe in a fair way real contributions to the “Great Recession” in the United States. Certain characters and industries, for instance, Tweakmore and investment banking, are grossly overdrawn as contributors to sin and mayhem, while other contributors are not discussed at all. The whole idea was to draw attention to certain issues in accounting, academic economics, and conceivable over-development of finance as a percentage ofthe entire economy, by making the characters and the story line extreme enough to be memorable.

Posted in: Economy

Location: Europe, North America, USA

Tags: Charlie Munger, great recession, recession

Taiwan: Business, Consumer Electronics, Culture & Insights

June 29, 2011 by Chander Chawla

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Taiwan is a fascinating place. We would be living in a very different world today if Taiwan had not found a way to mass produce consumer electronics (TV, laptops, Smartphones, etc. etc.) at low cost.

Taiwan used to be a Japanese colony and received its independence after WWII. Now, the political status of Taiwan is disputed. Commonly, Taiwan is also known as Republic of China (ROC) which is different than People’s Republic of China (PRC) commonly known as China. PRC claims ROC to be part of PRC after PRC was established by the communist party in China in 1949.

The Taiwanese people are closer to the Japanese than the Chinese. There is no animosity towards the Japanese because they built the infrastructure in Taiwan. The relationship with the Chinese is still not trustworthy. Because of its history, Taiwan culture is unique. It is a blend of Japanese, Chinese and some unique Taiwanese traits. Most people in the high-tech industry in Taiwan work twelve+ hours a day seven days a week. And, they don’t complain about it. The competition is fierce among the high-tech companies and that keeps everyone working long and hard hours. This is one of the reasons that we can afford our iPhones, LCD TVs, etc. in the west. All Americans should visit Taiwan. After the visit, they will gain a new appreciation for their jobs.

There are a lot of migrant workers from Thailand and Philippines. These workers usually do not integrate with the society and do the unwanted jobs. Most of the Taiwanese economy is in the Taipei area which is very expensive. Many people who live in Taipei want to have kids but can’t afford to have them and raise them. I find this very sad. The government has started programs to encourage people to have kids because the population is on decline.

Just like in Japan, service in Taiwan is very good. The taxi drivers wear a black suit and white gloves. People bow to you as a sign of respect. However, the cellphone etiquette in Taiwan is very different than in Japan. I was getting the famous Taiwanese foot massage and the guy who was massaging my feet was talking on his cell phone while giving the massage. It’s a very different place today.

Posted in: Business, Culture, Tech

Location: Asia, Taipei, Taiwan

Tags: cell phones, consumer electronics, Taiwan

Valuable Lessons From Jens-Uffe Andersen

June 12, 2011 by Chander Chawla

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My friend, Jens-Uffe Andersen, passed away on May 26th, 2011. Jens-Uffe was a great man and I admired him. He spent his life being a productive member of the society and made significant contributions to the success of SIEMENS in Denmark. Jens-Uffe taught me valuable lessons in business, specifically:

In a big centralized corporation, when managing a big account, one has to spend more time within the organization aligning various entities than with the customer.

Internal alliances are necessary to get anything done in a big organization.

People like to do business with with people they like even if it costs a bit more.

I am sure that I am not doing justice to the wisdom of the man by just listing three things I learned from him because the list is very long. May Jens-Uffe rest in peace.

Posted in: Spirituality

Location: Denmark, Europe, Scandinavia

Tags: Jens-Uffe Andersen, SIEMENS

Marry the Best and Other Wisdom from Munger and Buffett

May 4, 2011 by Chander Chawla

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I spent the last weekend in Omaha, Nebraska with two of the my heroes: Charlie Munger and Warren Buffett. After attending the Berkshire Hathaway (BH) for a few years, I still get amazed how a shareholder meeting attracts 40,000+ people and the meeting is about two guys having fun. Everyone else enjoys watching them have fun. The format is six hours of open Q&A. There is no preparation by Munger and Buffett. Anyone can ask anything about anything expect what BH is going to buy/sell next. You will see it in the notes that a wide variety of topics are covered. Notes from previous years are available here.

The David Sokol issue was covered by Buffett and that part of the meeting has been recorded so I have not covered it in my notes. You can see it here. Munger talked more this year compared to previous years. I just love this man. He is brilliant!

Following are my random notes from the meeting:

Buffett does two things in his job- 1) keep operating managers happy 2) allocate capital.
Make decisions based on opportunity cost. There is no better way.
Marry the best who will have you – Munger
“Lose money from the firm and I’ll be understanding. Lose a shred of reputation and I’ll be ruthless.” Buffett [from Salomon Bothers hearings].
The balance sheet does not represent goodwill very well. For example, the value of a new Geico customer is ~$1,500. If 66 people sign up today, Geico will get Goodwill worth $100k. And, these $100k won’t be represented anywhere on the Geico balance sheet.
Sometimes Net Income is a very deceptive but it gets a lot of media attention every quarter. The quarterly net income has no bearing on how satisfactory the quarter has been. For example, seasonality, long term business decisions, market conditions, accounting adjustments, etc. all affect the net income number.
Hubris is the only explanation on why really smart people do really stupid things.
Most interesting part of any proxy statement is “History of Transaction”.
One should not make important decisions in anger. And, one should not put an iota of ruthlessness than necessary when punishing someone. Like Tom Murphy said, “you can always tell a man to go to hell if it is such a good idea.”
The affect of POMO (Permanent Open Market Operation) ending in a few months would be minimal because the fact that POMO is going to end is well known.
The bible says, “meek shall inherit the earth” The question is, “will they stay meek?”
It has gotten better to replace CEO. However, it is still very hard to replace a mediocre CEO especially when he is the chairman of the board as well. To reduce the chances of getting a bad CEO, a company should have an independent chairman with large shareholdings and should have no desire to be a CEO.
The two sectors which Buffett and Munger want to invest in over next 50 years are Technology and Energy. However, both don’t believe that they have the expertise to invest in Tech/Energy. They have no desire to develop that expertise either:-). Therefore BH is not going to invest in Tech/Energy. Technology companies have high degree of disparity i.e. some win really big and others lose everything .Furthermore, a new technology can make a tech company irrelevant in a few years.
When making investment/acquisition decisions, Buffett looks at:
1. Industry Dynamics
2. How the business developed over time.
3. Easy of entry [for other companies to get into that business]
4. Durable Competitive Advantage
5. Economics of the business

He followed the same rules for Lubrizol acquisition.

BH is valued like an operating company. The value of the investing business is not reflected in the stock price.
Making acquisitions with stock is a bad idea. Stock has a intrinsic value of the company and it should be sparingly used as currency. When you are making an acquisition with stock what you are saying to shareholder is that I am giving away my business I already own and like for something that may be good. Doing an all stock deal is saying that either the seller is stupid or the buyer does not value his own business.
Intrinsic value is a range and not an exact number.
US is the most extraordinary economic story. Buffett was born on August 30, 1930. Since then the average standard of living has increased six times! Nothing happened for centuries re standard of living for average people. However, in the US since 1776 we have seen an economic miracle. Of course, the ride has been bumpy. We have problems all the time but the power of capitalism is enormous. The US has a bright future ahead.
The US is not going down. Rest of the world has caught up with the US.
Consumer products that take little capital to grow are wonderful businesses and they survive inflation well if they can tolerate price increases to offset inflation. For example, 20+ years ago, when BH bought Sees candy, it was a $25M/year business. Overtime, BH has invested ~$30M in assets in Sees candy and today it is a $300M/year business. On the other hand, businesses that have to invest capital to grow, manage inventory, receivables, etc. don’t do well during high inflation periods.
I’m a better investor because I’m a better businessman. And, I am a better businessman because I am a better investor- Buffett
When a company pays dividends, it is telling the shareholders that the company has lost the ability to convert a dollar into anything more than a dollar. BH has no plans of paying dividends .
In the coming years, US banking profits will be considerably less because the banks’ leverage is reduced. It is good for the society but not good for banks:-)
FDIC does not cost US taxpayers a penny.
One should read annual letter of M&T Bank and Jamie Dimon’s letter to understand what is going on in the banking world.
In capitalism, market creates a reward system that people who deal with money make the most money.
In words of Elizabeth Warren, the dollar bill should read “In government we trust” instead of “In God we trust”. It is government’s job to keep the currency valuable.
All currencies decline with time. The economic system works that way. Japan tried a different approach and it did not work.
Purchasing power of US$ will decline over time. The question is at what rate.
One dollar in 1930 is now worth $0.06. So, inflation has not destroyed us. We have adapted really well to inflation.
One can invest in three types of assets
1. Currency
2. Non-productive Assets (like Gold that do not produce anything)
3. Productive Assets (that produce something, like a business)

BH mainly invests in productive assets because you can value them and return is not based on other people’s speculation.

The Gold Story: If you take all the Gold in the world, and make a cube out of it, it will be a cube with side-length of 67 feet and it will weigh 170 metric tons. You can sit on top of it and feel like you are on top of the world for a few minutes. Then what? The cube does not do anything. The chapter 12th of Keynes book explains very well how the value of Non-Productive assets goes up. By investing in Gold, you are betting that other people will value it more at a later time.

Munger does like the idea of investing in Gold because the value of Gold goes up with the world goes to hell. The concept is bizarre. You dig gold out of ground in Africa, ship it to the US to Federal Reserve and the Fed puts it back in the ground (locker).

All Gold in the US is worth $8 Trillion and all farm land in the US (one billion acres) is worth only $2 Trillion. There is something wrong with this picture.

We don’t invest in paintings of soup cans either:-)-Munger
Buffett did not like selling securities because when the price of a security goes down, you have to face people. When Buffett started his partnership, he was very clear to investors that he will not provide visibility into how he will invest.
If you are starting a hedge fund, you have two jobs- 1) attract money 2) invest for above average returns. However, with the current fee structure, one maybe better off just focusing on attracting money:-)
BH conglomerate structure offers tax advantages. In the seventies and eighties the Conglomerates became generally unpopular because many of them were operating like semi-ponzi scheme i.e. they are were printing stocks and buying companies for confetti (stock). Buying real assets for confetti runs out of gas eventually.
How most mangers operate, “I know what I am going to report [next quarter] but I don’t know how I am going to do it.” This behavior causes managers to fudge numbers and do unethical things.
On how Buffett/Munger would like to be remembered after death
1. For old age. Munger wants people to say that “this is the oldest corpse I have ever seen.”
2. For “Fortune fairly won and wisely used.”-Munger
3. Or like Will Chamber said, “Finally, I sleep alone.”
Adam Smith said that a great civilization has a lot of ruin in it. Greece is still around. Munger does not understand that for a country whose main economic activity is tourism, the countrymen go on vacation during the busy holiday season.
I would rather be born in the US today than any other place at any other time-Buffett
An average investor should choose to invest in index funds over mutual funds because mutual funds charge high fees and do not perform better than index funds.
I am a big fan of lower expectations. That is how I got married. My wife lowered her expectations-Munger
It is so much fun to be trusted- Munger
BH has 260,000 employees. At any given point, someone is breaking some policy. Leaders should set an example on how they deal with the violation of integrity. Buffett sent his friend, who worked for BH, to jail because he was doing fraud.
The government has done a good job with Stimulus and has kept the economy going. Stimulus is part of how the government is operating today-they are taking in 15% of GDP and spending 25% of GDP.
We [Americans] are creating households faster than houses. Hence, the housing market will catch up and start growing again. Buffett’s best guess is that it will start happening by the year end.
Enabling companies which enable other companies to produce goods are doing well. Both TTI and Iscar sales are rising. Hence, the economy is back on track to grow.
If Munger were to design the tax system, he would make sure that the tax system discourages trading. And, Munger is not happy that 25% all engineers go into Finance. The current tax system is highly flawed. If I buy an S&P futures contract and hold it for ten seconds before selling it then 60% of my profit is taxed at long-term gain and 40% at short-term gain. There is something wrong with a tax system where a hedge fund manager has lower tax rate than a taxi driver.
It is tough to know the direction of oil and commodity prices. Oil and commodities are non-productive assets. You can’t really create an edge in guessing the price of oil.
Munger recommends reading “In the plex” a book about Google. He does not know how he is going to use what he learned in the book but that does not matter because what you are here for is to go to bed a bit wiser every day.
If the society has to intervene to save a company for the sake of society then the CEO of that company and his spouse should be left down broke. And, there should be severe penalties for the directors of the company. The current incentive system is misaligned.
Re too big to fail, we did not fix the problems so you can confidently expect that we will see more failure. It is a problem of stupidity and not of evil. Academia deserves a lot of the blame.
People attracted to finance today are better suited for snake charming -Munger
Serving on a lot of boards is for the birds-Munger
We spend every day thinking about earnings power and intrinsic value of BH.
It is almost impossible to have an edge in making equity investments today. That is one of the reasons BH is more focused on acquisitions.
May you live until the A stock splits -Munger [BH has no plans of splitting the A shares]
Ajit Jain has made no decision that I [Buffett] could have made better. He loves what he does which is important for doing well.
The secret of success in any field is getting interested in it:-Munger
When you see a duck on the pond rising, you should understand if it is doing it with its own merit or it is just raining- Buffett
When you evaluate underlying economics of a business, you should look at return on net tangible assets and not worry about goodwill. However, when you are allocating capital, you should look at goodwill. Amortization of goodwill does not make sense. However, if you paid too much for a company then goodwill write-off makes sense. AOL/Time Warner merger is a good example of goodwill write-off
Costco has extreme meritocracy and self-imposed extra-ordinary ethical duty. They have been able to achieve remarkable success. There is Costco in South Korea that is going to do $400M in sales this year. Munger is on the board of Costco.
Buffett told a story about Munger’s love for Costco. Both Munger and Buffett were traveling on a plane which was hijacked. The hijackers wanted to shoot both Munger and Buffett. However, they asked both of them for a last wish. Munger went first. He said he wants to give a talk about Costco to all passengers. The hijackers thought the wish was reasonable and granted it and they turned to Buffett for his last wish, Buffett said, “shoot me first.”
Business should be taught by studying companies. How they go up, come down, survive or disappear. In addition to Costco, other good companies to study are GM and IBM. No one made graphs that show how companies evolve. “I am yearning for these graphs” said Munger. Harvard used to do that and they stopped doing it because of bureaucracy. There should be a Harvard Case Study about that. In bureaucracy, people try to hold on to their territory.
Your kids should not get an idea that they are special regardless of how much money you have. Academically, it will be tough for American kids to compete with kids in emerging markets. Munger advised, “lose gracefully.”
Base price for the options for a new CEO should be set at market value of the company at the time. CEOs should be compensated on the increase in market value during their tenure.
Somebody in America has to be an exemplar of not grabbing it all he can. The new BH CEO will do that.
If there is enough energy then the water purification problem goes away. Israel makes drinking water out of sea water every day.
One should not measure deals based on other deals one has done. The goal should be to make a deal you can make at that time and it should have nothing do with other deals one has made in the past.
Woody Allen took a speed reading class and he was telling a friend that he finished war and peace in twenty minutes. It is about Russia. The goal of reading should be understanding and not how fast you can read.
The only thing more stupid than debt ceiling bill the congress did was in 1897 when Indiana House representative introduced a bill to reduce the value of π to 3 so that it is easier for kids.
Debt ceiling is a mistake. The debt carrying capacity of US is much higher today than twenty years ago. US will not have a debt crisis as long as we can keep on issuing debt in our own currency.
There is bipartisan stupidity in the government. Both parties are trying to see who is more stupid. They keep on topping each other.
20% of US electricity comes for nuclear power. And, 80% of France electricity comes from nuclear power.
It is CEOs job to be the Chief Risk Officer. Buffett is the Chief Risk Officer at BH.
BH stopped its charitable donation program, which allowed shareholders to donate to any charity of their choice and get tax write-offs, because people started boycotting Pampered Chef and was affecting livelihood of 50,000 employees of Pampered Chef which is a BH company.
BH does not rule out companies [for acquisition] that don’t represent high growth if the price is right. BH looks at earnings potential and future capital requirements.
The growth projections are useless and represent precise falsification. They do more harm than good. I [Buffett] have never seen an investment banker show earnings gowning down over time. It is like asking a barber if you need a haircut. We [Buffett and Munger] do calculations in our head re growth projections.
On BH investments in China, Munger said that it like a general went out south and came back and told his boss that the Indians always walk in a single file. When the boss asked how do you know. The general said that he saw one and he did. The point is that BH has not had enough experience investing in China yet. BYD investment is doing well.
All BH cash is in T-Bills. It is stupid to try to maximize gains from short-term investments.
BH can use its taxpaying capacity to use wind power [Wind Power offer tax benefits to corporations].
Advice to recent graduates: anything you can do to enhance your skills will pay-off eventually. Communication skills are very important. I [Buffett] only has one diploma hanging on my wall and that is for the $100 course I took with Dale Carnegie on communication. Do what you are passionate about and continue skill development. Focus on learning easy stuff. A field where the experts disagree is usually very hard to grasp. My [Buffett] economics courses in college were waste of time.
Re-insurance business looks easier than it is.
You cannot judge an investor in six months or a year. You need five years.
Alabama uses more brick per capita than any other US state.
Sees candy business loses money 8 months out of the year. So, we look at the business 3 out of 4 quarters, it looks bad. However, we know that Christmas comes every year and we will make up for the loses.