PASADENA, Calif. (AP) - Billionaire Charlie Munger said
Wednesday investors should lower their expectations because the economic
conditions many people used to build wealth over the past three decades aren't
likely to be repeated.
Berkshire Hathaway Inc.'s vice chairman also predicted that the derivative
contracts companies use to hedge against risk will one day cause widespread
problems in financial markets.
Munger spoke at the annual meeting of Wesco Financial Corp., a Berkshire
subsidiary he runs.
He said investors should expect annual returns of 4-to-5 percent going
forward because many stocks are priced high and bonds are offering meager
returns.
"It's going to be difficult for people to have high real returns," Munger
said.
Plus, Munger said he believes "a lot of rot" has gotten into financial
markets, and more scandals, like the current subprime mortgage mess, are likely.
"There will be a hell of a mess in these derivative books eventually," he
said.
Munger said better accounting standards are needed and banks should not be
allowed to put money into risky and complicated investments.
"These people wouldn't get away with this horrible behavior if the
accountants didn't bless it," he said.
Munger said the testosterone-driven, competitive executives heading most
investment banks are partly to blame for the current financial problems.
"I do not think we'd have this mess if women were running all the financial
institutions," he said.
Munger said that in many ways the period between 1981 and today was "hog
heaven" for investors who could simply put their money into sensible stocks and
other investments and wait for a number of years to become rich.
"Such a world is by no means guaranteed," he said.
The Wesco meeting is held each year in Pasadena a few days after thousands
of Berkshire shareholders descend upon Omaha, Neb., to hear chairman and CEO
Warren Buffett and Munger spend most of a Saturday answering any and all
questions.
Berkshire owns 80.1 percent of Wesco, but the company has its own publicly
traded stock so it is required to hold annual meetings.
Munger is chairman, CEO and president of Wesco, but he consults with Buffett
on Wesco's investment decisions and major capital allocations, much like Buffett
consults with Munger about Berkshire decisions.
At Berkshire meetings, Buffett does most of the talking while Munger answers
most questions, often with a pointed remark that cuts to the heart of what
Buffett just spend 10 minutes explaining.
But sometimes he offers only "I have nothing more to add" after one of
Buffett's more long-winded responses.
Munger didn't envision the Wesco meeting becoming much of an event until
some members of the crowd started to look familiar.
"These Berkshire groupies started flying in from all over the world," he
said. "And you naturally feel an obligation when people fly in from all over the
world to give them what they want, which is conversation about the current
business scene and investment process and so on and so on."
On Saturday, about 31,000 Berkshire shareholders filled the Qwest Center
Omaha for that meeting. About 1,000 people came to Pasadena for the Wesco
meeting and a chance to hear Munger alone.
"It's really a rare treat hearing a mind like that operate for a number of
hours," said investment fund manager Whitney Tilson, who regularly attends both
meetings.
Wesco shares gained $5 to close, or 1.2 percent, at $430 Wednesday.
Berkshire's Class A shares lost $1,800, or 1.4 percent, to close at $128,400.
Wesco includes a reinsurance division, Kansas Bankers Surety Company, which
offers specialized insurance to banks; CORT Business Services, which rents
furniture to companies; Precision Steel, which buys scrap metal, cuts it to
order and resells it.
In 2007, Wesco generated about $109 million profit for Berkshire.
Wesco is one of Berkshire's more than 60 subsidiaries that range from
insurance to clothing, furniture, and candy companies, restaurants, natural gas
and corporate jet firms. Berkshire also has major investments in such companies
as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.
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