Overview:
Charles T. Munger, Vice Chairman of Berkshire Hathaway, and financial journalist Becky Quick were welcomed to the University of Michigan for a special event. President Mary Sue Coleman highlighted Munger’s contributions to the University, including his gift for lighting the law quadrangle. Becky Quick was introduced as the co-anchor of CNBC’s Squawk Box and a well-respected journalist. Munger’s background, including his time at the University of Michigan, military service, and legal career, was discussed. Munger’s investment success with Warren Buffett at Berkshire Hathaway and his adherence to principles of patience, hard work, and rational thinking were mentioned. Munger’s charitable involvements in education, healthcare, and the arts were noted. His lifelong commitment to learning, reading, and problem-solving was highlighted as a key factor in his success. A quote attributed to Munger, “Ability will get you to the top, but it takes character to keep you there,” was shared.

Navigating Economic Uncertainty:
Charlie Munger emphasizes the difficulty of predicting macroeconomic cycles and advises against betting on macroeconomic predictions. He recommends focusing on swimming competently and playing the game for the long term rather than trying to outguess economic tides.

Employment Challenges in a Difficult Economy:
Munger warns of a challenging employment market where businesses are rationalizing operations to protect balance sheets and earnings while reducing headcount. He suggests that the current job market is less favorable for easy employment compared to previous decades.

Coping with Employment Challenges:
Munger advises individuals to maintain a positive attitude and remember that economic tides change over the long term. He encourages individuals to focus on constant self-improvement and competence, trusting that their share of rewards and recognition will come in due time. Munger emphasizes the importance of deserving what one wants and avoiding a sense of entitlement.

A Personal Example of Economic Hardship:
Munger shares the example of his uncle Fred, a successful architect who faced significant challenges during the Great Depression. Fred’s architectural practice in Omaha was severely impacted, with building permits in the city plummeting to extremely low levels. To cope with the lack of work, Fred moved to California and took on various drafting jobs at low rates.

Finding Opportunity in Adversity:
Despite the economic hardship, Fred remained resilient and resourceful, accepting work that allowed him to exercise his skills. He never complained or felt sorry for himself, maintaining a positive attitude throughout his struggles. Eventually, Fred secured a position as the chief architect for the FHA in Los Angeles, a responsible and fulfilling role that he held for the rest of his career.

Munger’s Advice:
Munger concludes by advising individuals to never feel sorry for themselves and to focus on coping with life’s challenges with competence and grace. He emphasizes the importance of constantly improving oneself and deserving what one wants, rather than seeking undeserved rewards.

Adversity and Resilience:
Avoid self-pity and envy during challenging times. Embrace hardships as opportunities for personal growth.

Kipling’s Advice:
Maintain composure when others lose theirs, as Kipling suggests in his poem “If”. Treat success and failure with equanimity. Strive to become a resilient and capable individual.

Navigating Economic Challenges:
Stay persistent during economic downturns. Learn from those who succeeded despite adversity. Recognize that the job market may remain challenging for a while.

Potential Investment Pitfalls:
Universities that invested heavily in timber may face setbacks due to market dynamics. Real estate ventures may experience further difficulties. Be prepared for ongoing economic challenges.

The current job market is not as challenging as the Great Depression of the 1930s, where families relied on each other for support. In the past, families supported each other during economic downturns by sharing housing and resources.

Wall Street:
Wall Street’s competitive environment attracts ambitious individuals, leading to occasional regrettable behavior. Easy money and lax accounting standards contributed to the financial crisis and unethical practices. Accountants failed to prevent financial misconduct due to complacency and a desire to please clients. Accepted accounting principles allowed companies to manipulate financial statements, leading to the financial crisis.

Accounting Standards:
Accounting standards for banks are flawed, resulting in misleading financial statements. Accountants lack a sense of responsibility and fail to act as referees in preventing financial misconduct. Competitive CEOs are driven to report inflated earnings, influenced by their peers’ actions.

Political System:
Politicians tend to behave poorly due to the pressures of their profession and wrong incentives. Gerrymandering and extreme partisanship lead to a dysfunctional political system.

Despotism and Cuba:
Cuba is considering removing 500,000 people from government jobs, showing that even despotism can fail. East Germany, after losing 5 million people, suffered under communist rule for 60 years, ruining its people.

The Importance of Infrastructure:
Charlie Munger suggests a massive infrastructure program focused on renewable energy sources to help the economy and the job market. He advocates for solar energy and transitioning away from fossil fuels, considering traditional financial resources are depleted.

Tax Cuts and Economic Solutions:
Munger disagrees with the latest round of tax cuts, stating that his taxes are already low enough. He believes hedge fund managers should not pay lower taxes than taxi drivers as a percentage of income. He lived through the Great Depression and saw how World War II’s “accidental Keynesianism” helped pull the economy out.

Renewable Energy and Infrastructure:
Munger proposes a vast infrastructure program to shift to renewable energy sources, particularly solar power. This transition would provide stimulus and create jobs, and the infrastructure would be useful for utilizing renewable power.

Oil and Gas:
Munger emphasizes that China’s remarkable growth was achieved despite spending 3-5 times more of its GDP on oil and gas compared to the US. He believes the fear of spending more on oil and gas is exaggerated and that a short-term tax on consumers could be offset by borrowing and creating infrastructure.

Hydrocarbons and Global Warming:
Munger argues that the main problem is using up hydrocarbons too quickly, as they are essential for insecticides, weed control, and fertilizer. He believes we should slow down hydrocarbon use and transition to renewable energy sources. Global warming is not the main problem, but using hydrocarbons responsibly is essential for feeding the growing population.

Energy Storage and Batteries:
Munger acknowledges the challenges of storing solar power during nighttime. He suggests that pumping water uphill and back down could be a viable solution if enough resources are committed. He is optimistic about the development of effective batteries, particularly lithium batteries, for energy storage.

Long-Term Outlook:
Munger believes the long-term outlook is positive as we are addressing the main technical problem of mankind, which is energy. With enough energy, water shortages can be solved, and technical solutions to the energy problem are available. The cost of transitioning to renewable energy is not overwhelming considering the need for it.

Challenges to Finding Rational Solutions:
Charlie Munger emphasizes the difficulty in finding rational solutions to complex issues, especially when many stakeholders with different perspectives are involved. He believes that focusing energy on the most critical issues, such as solar power, could lead to more effective outcomes.

Advancements in Solar Power:
Munger expresses optimism about the future of solar energy, stating that it will become significantly cheaper and technologically feasible. He dismisses concerns about the cost of solar power, arguing that it is a small price to pay for a sustainable energy source.

Criticism of Al Gore:
Munger criticizes Al Gore for speaking on the subject of sustainable energy despite his lack of technological expertise. He suggests that Gore’s influence on the topic is questionable due to his limited understanding of the technical aspects.

Diversity of Energy Sources:
Munger acknowledges that various energy sources, including wind, solar, natural gas, and nuclear power, will likely coexist in the future. However, he believes that solar power will ultimately become the dominant source due to its abundance and reliability.

Advantages of Solar Power:
Munger praises solar power as a reliable and sustainable energy source. He draws a comparison to the people of Easter Island, who faced challenges due to a lack of sustainable resources. He emphasizes the fortunate position of the current generation, as they have a viable solution to their energy needs.

Transmission Lines and Power Storage:
Munger acknowledges the need to develop efficient transmission lines and storage solutions for solar power. He expresses confidence that these challenges can be overcome, highlighting the existing knowledge and capabilities in these areas.

Long-Term Benefits for Future Generations:
Munger concludes by emphasizing the benefits of solar power for future generations. He encourages young people to embrace the challenge of developing solar energy solutions, as they have the opportunity to solve a critical technical problem for their civilization.

Overall Impressions of the University of Michigan:
Charlie Munger expressed his admiration for the University of Michigan’s campus, culture, and success, noting that it stands out compared to the decline of neighboring cities.

Culture of Accountability and Compassion at the University of Michigan Hospital:
Munger highlighted the unique culture of the University of Michigan Hospital, where mistakes are acknowledged and addressed openly and proactively. He contrasted this with the blame-shifting and adversarial approach common in many other hospitals.

The Value of an Honest and Ethical Approach:
Munger emphasized the benefits of the University of Michigan Hospital’s approach, which prioritizes patient care, amends for errors, and seeks to prevent future incidents. He expressed pride in being part of such a culture and contrasted it with the financial-driven culture of Wall Street, where stories of honesty and integrity are harder to find.

Short-Term Incentives and Their Consequences:
The current incentive system in the U.S. encourages short-term thinking, leading to problems in various sectors, including Wall Street, energy initiatives, and politics. Politicians and corporate leaders prioritize short-term gains over long-term planning and sustainability. Combining short-term incentives with low moral standards amplifies the issue, resulting in unethical behavior and systemic problems.

Fixing Human Systems Through Incentives:
To address these issues, it is crucial to focus on changing the incentives that drive human behavior. The existing system is perverse, causing even good people to behave badly due to its structure. Irresponsible incentives create problems, and attempts to point out these flaws are often met with resistance.

Berkshire’s Approach to Incentives:
Berkshire Hathaway’s unique incentive structure differs from the norm. The company doesn’t emphasize short-term earnings or pay directors large sums. Berkshire’s approach reflects a quiet form of rebellion against the prevalent culture of excessive incentives.

Perverse Incentives and the Importance of Self-Awareness:
Munger emphasizes the need to avoid perverse incentives and seek out environments that align with one’s values. He shares a personal anecdote about his father almost signing a perjured hunting license, highlighting the susceptibility of individuals to cultural influences. Munger advises developing a strong sense of self-awareness to resist negative cultural pressures.

Avoiding the Perils of Crazy Cultures:
Munger cautions against entering cultures that promote irrational behavior and excessive competition. He emphasizes the importance of recognizing and avoiding such environments to maintain one’s sanity. He urges individuals to seek out places where they can work with people they admire and where values are sound.

Finding the Right Place to Work:
Munger suggests finding a place to work where the culture aligns with one’s values and where temptations are low. He advises identifying people one genuinely wants to work for and expressing that desire directly. Munger shares an anecdote about how his willingness to express his admiration led to a successful working relationship.

Munger on Accounting and Enron:
Munger blames too optimistic accounting for 99% of the problems that threaten civilization. He believes the accounting profession sold out and feared the liabilities of making difficult judgments. Munger criticizes mark-to-myth accounting and the accounting firm that blessed Enron’s crazy scheme.

Munger on Investing:
In the long term, Munger prefers common stocks he picks over government bonds at current rates. He emphasizes considering opportunity costs and the likelihood of needing money suddenly.

Munger on the Past 100 Years and the Future:
Munger highlights the incredible progress made in the 20th century, especially in terms of living standards, human options, and technological advancements. He believes the next 100 years won’t see as much progress due to the magnitude of past achievements. Munger still expects more improvements and options but also acknowledges potential tragedies and occasional big death rates. He remains optimistic about the future and sees it as a good time to be alive.

Munger on the Big Picture:
Munger encourages a big-picture perspective on the enormous gains in longevity, behavior, and liberty achieved over the past century. He cautions against being discouraged by potential setbacks, such as a 25% death rate, which would be devastating to those affected but ultimately beneficial for the survivors, as in the case of the Black Death.

Key Points:
Addressing Challenges: Charlie Munger emphasized that the current generation, though facing challenges, will be capable of handling them. The talent pool is diverse, and contributions from different backgrounds, like Lee Liu, are growing. Economic Stagnation: The possibility of economic stagnation, similar to Japan’s experience, was acknowledged. Munger expressed concern about handling such a situation as well as Japan did. Japan’s ability to maintain stasis was attributed to its courteous and submissive ethos. The United States might face more tension in a similar situation. Gold vs. Equities: Munger showed disinterest in gold, emphasizing the importance of understanding human systems. He viewed hoarding gold as irrational and morally questionable. Advising the audience to focus on equities, he suggested that even if gold worked, it would make them “jerks.” Pension Liabilities: Munger acknowledged the severe problem of pension liabilities and the manipulative tricks used to obtain unfairly high pensions. He stressed the moral and behavioral failures that contributed to this issue. The unfunded liabilities for medical care and pensions were highlighted as a concern greater than the national debt. The potential for social tensions in a Japan-like situation was acknowledged. Social Security: Munger expressed his support for Social Security and its low administrative costs and fraud. He believed that as a wealthy nation, the United States should find a way to afford it. The possibility of a value-added tax to support Social Security promises was proposed. Munger viewed a value-added tax as beneficial for subsidizing exports and addressing trade imbalances.

Social Security:
Munger believes that tweaking Social Security to hold down costs is not feasible in a modern democratic civilization. He opposes gradually raising the retirement age, arguing that it would be politically unpopular and unnecessary. Munger suggests focusing on addressing the larger problems with unfunded promises and misbehavior in the system rather than making minor adjustments to benefits.

Taxation:
Munger lived through the period of 90% income taxes and considers it a crooked and lying system. He believes the current income tax rates are close to right when combining state and federal taxes. Munger criticizes the favorable tax treatment of hedge fund managers, who pay a trivial amount of tax compared to their earnings.

Hedge Fund Industry:
Munger views the hedge fund industry as a misuse of talent, with many successful traders making money without any understanding of the companies they invest in. He cites the example of a hedge fund manager with advanced degrees in computer science and math who uses computer algorithms to trade stocks without knowing anything about the businesses. Munger believes it is a waste for such talented individuals to be engaged in this type of activity rather than contributing to society in more meaningful ways.

Impact Investing:
Munger questions the effectiveness of charitable giving, citing examples of “folly and stupidity” by major philanthropic groups. He believes that capitalistic ventures like Costco have a more positive impact on society than traditional philanthropy.

Seizing Opportunities:
Munger emphasizes the importance of recognizing and seizing rare, significant opportunities when they arise. He shares his great-grandfather’s advice to boldly embrace these opportunities rather than hesitating or underestimating their potential.

Life’s Major Opportunities:
Munger suggests that truly major opportunities in life are few, and one should treat them as “Lollapaloozas” and not miss out on them. He highlights the example of Berkshire Hathaway’s success, which he attributes to a handful of exceptionally profitable transactions.

Rise of Asia and Global Competition:
Munger acknowledges the profound impact of Asia’s rise on the global economy, particularly in manufacturing sectors like Michigan’s automobile industry. He describes the highly competitive work ethic of Korean and Chinese workers, which poses challenges for Western economies. Munger observes the increasing presence of Asian talent in California, particularly in fields like engineering and healthcare.

Educational Changes:
Munger notes the significant changes in California’s educational system, with a growing proportion of Asian students, especially in STEM fields. He believes that California’s success is partly driven by the contributions of talented Asian immigrants.

Challenges for Western Economies:
Munger acknowledges the challenges faced by Western economies in competing with Asia’s rising economic power. He suggests that the influx of Asian talent in fields like healthcare and technology may help mitigate some of these challenges.

Adapting to Asian Dominance:
Charlie Munger emphasizes the need to adapt to the rising dominance of Asian manufacturing due to its cheap labor and adaptability to modern capitalism.

Competition and Meritocracy:
Munger expresses indifference towards competition from Asian mongers and believes in the principle of meritocracy, especially in a context of remarkable achievements.

Historical Passing of the Baton:
He draws parallels to historical transitions of power and dominance, using examples such as Athens, Rome, and London, and suggests that the baton has now passed to Asian countries.

Welcoming Asian Leadership:
Munger welcomes the increasing presence of Asians in leadership positions, particularly in the medical field, and highlights the improved performance of hospitals with a diverse workforce.

The Changing Workforce:
Munger acknowledges the shift in the workforce, where Asian faces are becoming more prevalent, and encourages acceptance of this change.

Adaptability to Reality:
He emphasizes the importance of facing reality and adapting to changing circumstances, regardless of personal preferences.

Passing the Baton in Human Systems:
Munger observes that even in leadership positions, the iron rule of life dictates that the baton must eventually be passed, as seen in biological systems where all living beings eventually die.

Charlie Munger cautions that prolonged economic stagnation could lead to increased social tensions in the United States due to its diverse population and cultural differences. He compares it to Japan, a more homogeneous society, where weathering such periods may be easier. Munger notes that the rise of resentment and anger is not unusual, but it is more pronounced in the current context.

Importance of Bailouts and Responsible Spending:
Munger emphasizes that the bailouts during the financial crisis were necessary to prevent a catastrophic collapse and preserve civilization. He criticizes those who resent the bailouts and argues that they should be grateful for the actions taken to protect the economy. Munger warns against excessive bailouts for individuals, as it can lead to a culture of dependency and undermine resilience.

Reputation and Responsible Borrowing:
He emphasizes the importance of maintaining a credible reputation in the world, especially when borrowing money. Munger argues that responsible borrowing for necessary and desirable projects, such as protecting Holland from flooding, is acceptable and can be seen as a sign of strength. However, he cautions against reckless spending and shoveling money at people without addressing the root causes of their financial difficulties.

Healthcare in the United States and China:
Munger acknowledges that healthcare spending in the United States is high compared to China. He suggests that in an aging and affluent society, spending a significant portion of GDP on healthcare is not inherently problematic, even if some of it is inefficiently used. However, he criticizes the perverse incentives and abuses in the healthcare system, such as hospitals admitting patients from nursing homes just to bill the government.

Medical System Abuses:
Some doctors in leading academic hospitals are exploiting the system by admitting patients from nursing homes unnecessarily to generate revenue. These practices lead to excessive treatment and increased risk of infections for the patients.

Importance of Intervention:
Charlie Munger emphasizes the importance of intervening to stop abuses in the medical system. He highlights the need to identify and rationalize these abuses and be willing to face opposition from those benefiting from the system.

Case Study: Chief of the Medical Staff, Southern California Hospital:
A chief of the medical staff in a Southern California hospital discovered that a group of non-board-certified anesthesiologists had caused three unnecessary deaths and covered up the incidents. Despite the personal consequences, he took action to remove them and reform the anesthesia department, leading to the end of their harmful practices.

Significance of the Story:
This story exemplifies the triumph of wisdom and virtue over wrongdoing in the medical system. It highlights the importance of individuals taking a stand against abuses, even when it means facing resistance and personal consequences.

Career Choice:
Munger reflects on his decision to pursue law instead of business school. He acknowledges that he would have accumulated more wealth if he had chosen business earlier but asserts that money accumulation is not his primary concern. Munger emphasizes the value of living a fulfilling life and not dwelling on regrets.

Legal Profession:
Munger describes the legal profession as a diverse field that offers flexibility and various career paths. He highlights the challenges faced by small-town lawyers and the demanding work culture of large firms. Munger criticizes the excessive focus on billable hours and the abuses that can result from it, comparing bankruptcy cases to hyenas fighting over a carcass. He acknowledges the existence of misconduct within the legal profession but commends the overall integrity of the American judiciary.

System Design:
Munger discusses the importance of designing systems that encourage rational behavior and discourage perverse incentives. He cites Singapore as an example of a successful governmental system that effectively addresses societal issues. Munger emphasizes the need to address problems while they are still manageable and criticizes the tendency in America to wait until issues become unfixable. He expresses concern about the governance of central cities, where problems can reach a tipping point that makes them difficult to solve through conventional means.

Contrarian Thinking:
Charlie Munger challenged conventional wisdom by questioning the assumption that higher voter turnout always leads to better political systems.

Lee Kuan Yew’s Success:
Munger admires Lee Kuan Yew, the former Prime Minister of Singapore, for his ability to make difficult decisions that led to Singapore’s success.

Solving Singapore’s Problems:
Munger highlights Yew’s practical approach to solving problems, such as eliminating malaria by draining swamps and adopting the military’s drug bottle policy to combat drug abuse.

Attracting the Right People:
Yew created a business-friendly environment to attract foreign investment and expertise, contributing to Singapore’s economic prosperity.

Promoting Racial Harmony:
Munger discusses Yew’s efforts to promote racial harmony by enacting a law prohibiting Chinese Singaporeans from expressing superiority over Malays.

Marriage and Success:
Munger observes that Yew’s wife, who was slightly more intelligent than him, became the Prime Minister of Singapore, demonstrating the value of marrying an intelligent partner.

Learning from Yew’s Story:
Munger recommends studying the life and work of Lee Kuan Yew to gain valuable insights into political leadership and nation-building.