Charlie Munger: 'We have a passion for keeping everything simple'

uh jack hurst philadelphia i have three questions or three points the first is i want to thank you for the pleasure it is to shop at borsheims or nebraska furniture mart or even benjamin moore you have terrific people working there and i've never been as satisfied with products this is what i bought at those firms thank you for that and i thank you on behalf of the management so they they're terrific people that work at this i agree with that uh the uh you've dropped quite a bit from the annual report there must be some god given decree that would be limited to 72 pages but i wondered if you could put that in an internet message such as that wonderful table about geico is renewal policies and new policies and the four pages at the end of the report about the uh business business categories where you separate the insurance from the finance from the manufacturing and also that discussion that you had at look through earnings i think that's invaluable for looking at the company okay well i appreciate the suggestions and i have a third point oh go ahead but we do go through i mean i don't know what 72 pages is the magic number or when i get to about 11 000 words uh but occasionally you know we do make an editorial decision the look through earnings for example didn't seem that important and there's and they're fairly easy to roughly calculate for anybody that's interested but but you know they are they are something that if i wrote for 15 000 words i would have included so i i appreciate the suggestion on it and and uh i don't think anybody's accused me of writing too short a report yet but but i i'll i'll take it certainly on the plot it's possible on the internet to put up anything and we'll put up any material we've given you here before the opening on monday morning so that nobody has a a jump on any information uh we try to make it i mean i really want to cover the things that would be important to me if i were hearing about them on the other end and and we try to keep it to some some number of pages but uh i'm glad you i'm glad you want more well the third point is uh with the first of march the wall street journal analyzed or compared the auditing fees by the fees related to audit services and other audit services for the 30 stocks in the dow jones industrial average and there seems to be an inverse relation between the amount of non-audit fees with respect to market capitalization inverse correlation with that factor to the five-year compound growth of earnings or the five-year total return for the companies and for the top for the companies with the lowest ratio of of non-audit fees to market capitalization the increase in earnings was 10 annually the total return was 18 annually for the other for the other for the total it was 5.2 return annually uh on increase in earnings and 11 increase in total return is it because these non-audit fees are non-productive that it has this result or is it a chance of just a spurious fluctuation or is there something to to the relation i don't know the answer to that and i hadn't seen what you are referring to but it doesn't totally surprise me because uh we like places that care about expenses and and you know i've never i think jack welch had something in his book about no you know no company ever getting going broke from cutting expenses too rapidly and and when you see managements that are pretty lavish in what they toss around you know i i think on balance that group doesn't do as well for shareholders the other but i have no statistical way of proving that uh and i don't know a way that i don't know how you would set up a sample that would really be valid in terms of one kind versus the other kind but uh but what you say doesn't doesn't shock me we we try to watch all expenses around berkshire uh and i think that at our subsidiaries we generally speaking we have managers that are very very good about that and i think that our audit costs relative to the size of the enterprise and all of that i think are fairly low although they're not as low as they were a few years back but it's something that that we care about i can assure you that i i i don't i don't know how to i wouldn't want to buy stocks though or sell stocks based on any kind of statistical uh measure like that even though it looks good on what they call a back test and charlie well one of the reasons our audit costs are so low is we have this passion for keeping everything simple we don't want to be difficult to audit and uh and we prefer activities that are simple if you think the seas candy company the whole company goes to cash at the end of december every year as if it were a farm where the crop came in and was sold in december i mean an idiot could audit the see's candy company without getting into trouble and and there's a lot in berkshire that's like the seas candy company it would be it would be really hard to screw up we don't like complicated accounting i mean it we really do like things that produce cash and uh and and enron is a good example and enron's grotesque in in what happened but there's no question in my mind that auditors have been unduly compliant to client wishes over the last few decades and more so as they went along even to the point where they started suggesting what i would consider quite doubt quite dubious accounting to people in mergers and so on so as to make their figures look better later on and i've seen it firsthand so i i just i think that although the auditors are supposed to work for the shareholders that they got too much so they were working for management but i think that enron may push them back significantly even in the other direction i i think i think enron will have a distinct beneficial effect on on on on auditing and it was needed it's going to have a distinct beneficial effect on one fewer auditors yeah although you know it's an interesting question and charlie and i may differ on this i mean i don't think that i don't know how many people anderson employ but it was a a huge number and i certainly it's clear that the weaknesses and and and and culpability at anderson goes far beyond anything remotely we saw solomon but it would have been a shame for solomon with 8 000 people to have actually the bad acts of one guy and the the lapse in terms of reporting and all of that which was a big mistake but by a few other people cause a thousand people to get dislocated in their lives and lose their jobs i i don't know how do you feel charlie about you know the bottom forty thousand people that anderson who really didn't have a damn thing to do with shredding or the houston office or anything of the sort i mean their lives are really getting changed in many cases i regard it as very unfair and totally undeserved in all those cases yet even so i think that the capitalism without failure somebody once said it's like religion without sin or religion without hell never religion religion without hell i think when it gets this bad and the lack of adequate control mechanism throughout the system i mean anderson plainly didn't have a good total system of control and uh i i think that it may be that capitalism should just accept this kind of unfairness in all these individual cases and and let the firms go down well let's say you and i did something really terrible charlie at berkshire how do you feel about the other 130 000 people then i mean should they you'd feel terrible about them and there's no question about it and but i'll tell you something they wouldn't go down the way we're organized they wouldn't go down warns there's nothing you can do that is going to destroy the the uh value of the subsidiaries and the careers within the subsidiaries you can blow your own reputation you can blow the reputation at the holding company level but but you can't destroy their livelihood that is a good uh well we could a good way to be organized we could mess up their lives though i mean if they they lost their funding or i mean i i i i agree with you about their viability but not anderson was particularly vulnerable being a professional partnership but maybe you should be extraordinarily careful with your professional partnership you know with what clients you take on and how far you go for them the law firms that i admire most have fairly strict cultures of of risk control i think it's crazy in the kind of world we inhabit to operate in any other way okay number seven [Applause]

Channel: The Financial Review

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Length: 10min 53sec (653 seconds)

Published: Fri Sep 17 2021