The wisdom of Charlie Munger

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Business Matter

By Manish Shah

Charlie Munger, the partner of Warren Buffett and Chairman of Wesco Financial spoke at his company’s annual meeting in early May. Here are some of the topics he touched on:

On what causes the failure of S&Ls — The S&Ls rely on a modest spread between loans and their cost to make money. If a bank CEO is ambitious, he looks for a double digit growth in the bank’s assets and earnings. To achieve this ambitious goal, the CEO lowers the standards for extending a loan. This action causes deterioration in the quality of the bank assets and eventually leads to financial ruin.

On how he would teach at a business school —He would start off with a history of business. He thinks that it would be useful for students to know why GM rose and then failed. He also thinks it would be beneficial to know why the railroads rose, why they struggled and why they are good investments now.

On how government should handle financial reform — Munger asserted that the capital allocation process should not be mixed up with gambling at a casino. His recommendation is to separate the commercial and the investment banks. The banks should not be allowed to gamble on derivatives. However, the investment banks should be allowed to underwrite securities, sell securities, provide M&A services and run accounts for hedge funds. He strongly believes that banks can pursue a lot of legitimate activities without creating chaos in the financial system.

On how to cope with complex problems — We would do a better job of handling complex systems if we gave them a lot of advance thought. Munger believes that an ounce of prevention is worth a ton of cure. Greece is a good example. The EU should have thought about Greece’s problem proactively and prevented it. Munger believes that wise people step on big problems early.

On China and India — The rate of growth of China is astounding. This is due to fact that the current leadership is totally different from what China has had in the past. Munger calls China’s current leaders “Communists with an engineering background.” Munger is very optimistic about China’s future.

On the other hand, Munger thinks that India has copied the wrong models from the United States.  This has led to red tape in making key decisions. India would have been better served if they had emulated Singapore. Singapore has a proven track record of making quick and rational decisions.

Manish Shah is the former president of Midwest Law Printing in Chicago. He also worked at Intel, PwC and Motorola. He has an MBA from Kellogg Graduate School of Management, and a MS in Computer Science from Illinois Institute of Technology. He can be reached at manishshahus@yahoo.com.

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