WB: I try to figure out if I owned the entire business what I’d pay them. This is not rocket science. The seventy businesses we have each have different economics – we don’t set a standard Berkshire compensation plan. A BNSF needs lots of capital, others could be run by a chimpanzee, while others with Alfred P Sloan as CEO couldn’t run them well. I try to figure out the best strategy – and we find that managers stay with us. It is not rocket science. But I spend time on it, and it takes ability to differentiate. An HR dept would be a disaster, and they would have people telling them all sorts of different equations. It requires common sense and interaction with managers. We agree on a measure of what they are adding to company.
You look for three things, you look for intelligence, you look for energy and you look for integrity. You don’t need to be brilliant, just reasonably intelligent, Ray Kroc, for example, has good intelligence, which he combined with good busi- ness principles and passion for business and a passion for his particular business. Every business student you have has the requisite intelligence and requisite energy. Integrity is not hard wired into your DNA. A student at that age can pretty much decide what kind a person they are going to be at sixty. If they don’t have integrity, they never will. The chains of habit are sometimes too heavy to be broken. Students can forge their own chains. Just pick a person to admire and ask why you admire them, usually it is because they are generous, decent, kind people, and those are the kind of people to emulate.
In 1998, there were incredible opportunities. Just like today, there were a lot of smart people with 150 IQs running around with lots of money, but there was a panic. For example, there was a 30 basis point difference in the yields of on-the-run and off-the-run 30-year Treasuries. Literally, a 29 1/2- year traded 30 basis points higher than a 30-year because of the slight liquidity difference. You could have made a lot going long one and short the other. You wouldn’t have thought this kind of thing was possible, but it happened.
A great example [of how this can work] is Wal-Mart when Sam Walton died. The Walton family has done a magnificent job of hiring successors to run the place and maintain the culture. The Waltons are there to step in if needed, but they don’t run the business.
Nobody knows. Eddie is a very smart guy but putting Kmart and Sears together is a tough hand. Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around? Broadcasting is easy; retailing is the other extreme. If you had a network television station 50 years ago, you didn't really have to invent or being a good salesman. The network paid you; car dealers paid you, and you made money.
[CM: "Creative accounting is an absolute curse to a civilization. One could argue that double-entry bookkeeping was one of history's great advances. Using accounting for fraud and folly is a disgrace. In a democracy, it often takes a scandal to trigger reform. Enron was the most obvious example of a business culture gone wrong in a long, long time.]
Munger: I don’t get too excited about these oddball things that come along once in 50 years. I think Wells Fargo [for example] will come out of this mess much stronger.
Owning stock in a company means that you own a piece of that company. If you own stock in the McDonald's company for example, it means you are one of the owners of McDonald's. Each piece of stock is called a share, and the more shares you own, the more of the company belongs to you. When the company is successful, your stock will become more valuable, too.
We are doing less directly in currency futures because the carry costs have gone from positive to negative. In my view, there are considerably better ways to protect against the dollar getting weaker in the future. For example, we like to invest in companies, like Iscar, whose earnings are primarily in other currencies. We earn a lot of money in other currencies.
You'll see way more stocks that are dramatically overvalued than dramatically undervalued. It's common for promoters to cause a stock to become valued at 5-10 times its true value, but rare to find a stock trading at 10-20% of its true value. So you might think short selling is easy, but it's not. Often stocks are overvalued because there is a promoter or a crook behind it. They can often bootstrap into value by using the shares of their overvalued stock. For example, it it's worth $10 and is trading at $100, they might be able to build value to $50. Then, Wall Street says, "Hey! Look at all that value creation!" and the game goes on. [As a short seller,] you could run out of money before the promoter runs out of ideas."
We had a lot of silver at one time, but we don’t have it now. My original decision was that the production and reclamation of silver were running at 100 million ounces less than the consumption. Now a lot of consumption has gone down, for example in photography, but that’s where a lot of reclamation is as well, so it balances out. Silver was out of balance, but there’s now a lot above ground and a huge amount could be removed from other uses, which could increase supply, which is what happened when the Hunt brothers tried to corner the market in the early 1980s [actually 1979-80].
[CM: Black-Scholes is a know-nothing system. If you know nothing about value -- only price -- then Black-Scholes is a pretty good guess at what a 90-day option might be worth. But the minute you get into longer periods of time, it's crazy to get into Black-Scholes. For example, at Costco we issued stock options with strike prices of $30 and $60, and Black-Scholes valued the $60 ones higher. This is insane.]
Buffett: There is nothing wrong with people who are positive or negative speaking out as long as they are responsible for what they say. You can do things on the long or short side that are unethical or illegal. Anytime you attack conventional wisdom though, you will get a lot of negative feedback. When he and Charlie criticized the EMH (Efficient Market Hypothesis), it was so widely accepted people didn’t like their comments. In general he has no problem with short selling.