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Charlie Munger, at 99, and still a director of Berkshire Hathaway, spoke at the AGM of another company he dominates, Daily Journal, about how people fool themselves into believing what they wish to be true. This is especially the case for those offering financial services such as fund management:
“If I had to name one factor that dominates human bad decisions, it would be what I call denial. If the truth is unpleasant enough, their mind plays tricks on them and they think it isn’t really happening. Of course, that causes enormous destruction of business where people go on throwing money into the way they used to do things, even though it isn’t going to work at all well in the way the world is now, having changed.
“If you want an example of how denial is affecting things, take the world of investment management. How many managers are going to beat the indexes, all costs considered?
“I would say maybe 5% can consistently beat the averages. Everybody else is living in a state of extreme denial.
“They’re used to charging big fees for stuff that isn’t doing their clients any good. It’s a deep moral depravity if some widow comes to you with $500,000 and you charge her one point a year when you could put her in the indexes — but you need the one point. So people just charge some widow a considerable fee for worthless advice. The whole profession is full of that kind of denial. It’s everywhere.
“I always quote Demosthenes… more than 2,000 years ago he said, “What people wish is what they believe.”
“Think of how much of that goes on. Of course, it’s hugely important. You can just see it.
“I would say the agency costs of money management, there are just so many billions, it’s unaccountable. And nobody can face it. You want to keep your kids in school, you need the fees. You need the brokerage commissions. You need this or that, so you do what’s good for you and bad for them.
“I don’t think Berkshire does that and I don’t think Guerin and I did it at the Daily Journal. Guerin and I never took a dime in salary or directors fees or anything. If I have business and talk on my phone or use my car, I don’t charge it to the Daily Journal. That’s unheard of. It shouldn’t be unheard of and it goes on in Berkshire and it goes on in the Daily Journal.
“We have an incentive plan now in this Journal Technologies and it has a million dollars worth of Daily Journal stock. That did not come from the company issuing those shares, I gave those shares to the company to use in compensating the employees. I learned that trick, so to speak, from the guy at BYD which is one of the securities we hold in our securities portfolio.
“BYD, at one time in its history, the founder/chairman didn’t use the company’s stock to reward the executives, he used his own stock. It was a big reward, too.
“Well, last year, what happened? BYD, last year, made more than $2 billion after taxes in the auto business in China. Who in the hell makes $2 billion as a brand new entrant in the auto business, for all practical purposes? It’s incredible what’s happened.
“So there is some of this old-fashioned capitalist virtue left in the Daily Journal and there’s some left in Berkshire Hathaway and there’s some left in BYD. But, most places, everybody is trying to take what they need and just rationalizing whether it’s deserved or not.”
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
