Sunday, October 12, 2014

Charlie Munger on firm dynamics (and Piketty)

From the Daily Journal meeting:

If you take the whole history of businesses that make a fair amount of money and have a little surplus but their basic business goes to hell based on technological developments, the results are lousy. The normal result is Kodak. Imagine having a business like Kodak and having it go all the way to bankruptcy. That’s the normal occurrence: technological obsolescence. 
There are few exceptions in the history of the world. One of them is Thompson Reuters. They were a newspaper company with a few television stations added and they basically milked them as long as they could, sold them for high prices, and went into a different business – online information – and they successfully made the transition.  That is really rare. 
The other rare example, of course, is Berkshire Hathaway. Berkshire started with three failing companies: a textile business in New England that was totally doomed because textiles are congealed electricity and the power rates were way higher in New England than they were down in TVA country in Georgia. A totally doomed, certain-to-fail business.  We had one of four department stores in Baltimore [Hochschild Kohn], absolutely certain to go broke, and of course it did in due course, and a trading stamp company [Blue Chip Stamps] absolutely certain to do nothing which it eventually did. Out of those three failing businesses came Berkshire Hathaway. That’s the most successful failing business transaction in the history of the world. We didn't have one failing business – we had three. Out of that little nothing, the excess capital that we took out and put somewhere else did better than anybody’s ever done. As a matter of fact, we recently passed General Electric in terms of market capitalization, and GE was founded by Thomas Edison himself in 1892, and one of the most powerful companies in the world. 
It was a considerable stunt. But the normal result is more like Kodak. Xerox is an interesting case. They went to the brink of extinction and then came back, but they are a pale shadow of their former greatness. They actually invented most of the stuff other people made so much money out of, and they still failed. Bill Gates is a big student of this subject, and he says that the standard result is failure. Imagine General Motors who went bankrupt. Can you imagine how they towered over the economy when I was young? It was the biggest, more valuable, most admired company, and it took the shareholders to zero.

Like everyone, I have read a fair amount about Buffett (recommended) and Berkshire (recommended), and it is indeed a pretty amazing story. Buffett has said many times that the Berkshire purchase was a terrible decision. It threw off enough money to buy some insurance companies then it went under. He kept it open for some time as a favor to its employees and the New England economy. The insurance businesses generated enough float to buy some other businesses. Blue Chip Stamps didn't seem to do much after he bought it, but it also generated some float and was holding Sees when it came into Berkshire. He made some other mistakes; reading about his shoe investments in the late 80s/early 90s makes the reader cringe. But his insurance companies enabled him to purchase some big winners, like Washington Post, Geico, and Coke. Reinsurance has done great. He's a testament to the ability of markets, through all of their churning, to gradually move capital to the places where it can accomplish the most. There's a lot of trial and error, but the job gets done. A lot of it gets done by entrepreneurs, but not all:

In the whole history of Berkshire Hathaway, I can only think of one new business that we started by ourselves at headquarters, and that was the reinsurance department. Now, that is a huge business, and it’s made an enormous amount of money. Berkshire Hathaway, for all its glorious achievement, started one new business. Everything else we bought.

Could the secular decline in entrepreneurship reflect a growing propensity of existing businesses to innovate and reallocate resources appropriately without the need for entrepreneurial disruption? It's worth thinking about.

Munger also has this to say:

Mr. Piketty is a little daft. Put me down as hoping the Pikettys don’t marry into my family. It isn’t that some of his numbers aren’t correct, but he just doesn't interpret them correctly. Of course if a place as big as China gets really good at manufacturing it’s going to reduce some union jobs in the rest of the world in every trade. But they have a right to succeed. The rest of us can be mature enough to adjust instead of bitching about the fact that the world is occasionally a little tougher than we would have chosen. Of course there are going to be parts of the economy that do better or worse over a twenty- or forty-year period. It’s not some malevolent outcome. It’s a huge change, and in terms of world equality it’s enormously improved. To sit in a very rich country with a 36-hour week and complain about the fact that all the other people are coming up just doesn't strike me as a very mature or noble way to behave.

Probably Munger already knows this, but pointing out that growing inequality is a classic first-world problem isn't going to win him many friends.


  1. I'm going to put this down here, since I had to reread and get pissed off about your work on startups, firm dynamicism, and the data behind it.

    Start with... 6M+ monthly Jolts turns isn't a "nice thing to have" it should be the ACTUAL POLICY TARGET. (think of DC like the Fed, and 6M+ turns is 5% NGDPLT).

    If DC doesn't hit that number, we need less DC.

    This is part of the only answer you need to rely on for all your work: We have too much govt. We have more govt. than we have ever had before, and what is AMAZING, is that in the face of all this govt. Internet tech has systematically "disrupted" (the word you don't understand) every sector except govt.

    Note: It doesn't matter if large firms acquire startups, that's not surviving disruption, that is disgorging a large amount of cash to the rightful owner - the entrepreneur, to go disrupt someone else from their cash. Each disruption, remakes the firm / industry in the image or the entrepreneur's mind.

    Worrying about "creating jobs" is also the wrong way to view newcos. As I said above, the HEALTH of the system is judged on 6M turns.

    We want churn FOR ITS OWN SAKE, not because it just so happens that when we have 6M+ turns we gain far more jobs than we lose.

    Instead forget unemployment. Employment is not an issue. GICYB (Uber for Welfare) clearly can employ everyone who is able to work - and generally put the poor and low skilled to work for each other - Minimum Wage and Safety Net do not work together. Period. MW raises the prices for poor people (where they are all unemployed) which means their welfare check buys less.

    Another note: LET GO OF the desire to have everyone be able to earn their own way. The only way that happens is to reduce in our mindseye, what a decent life should be like. Reduce it enough, and most everyone can pay their own way. To repeat myself: Unless you want to accept that people deserve less stuff, DO NOT wish and hope that people can earnt their own way.

  2. You shouldn't freak out about a system in future where only the top 20%, go thru life covering their own nut, and another 25% cover their nut most of the time, 25% some of the time, and 30% never cover their own nut.

    One more note: Stop saying "productivity" and say "digital deflation" - it helps to clarify where our current situation. It's not robots taking jobs, it's labor choosing to be consumers > labor. As long as real consumption measured in frames of video, photos, words, (cost of) calories, cost of clothing, continues to soar while consumption of electricity continues to fall... we're experiencing massive invisible growth.

    ok, so govt is whats holding us back...

    Right now it accounts for 33% of GDP, and is the ONLY sector of the economy that hasn't been remade top to bottom by the tech guys.

    Guess what? Here it comes...

    And as all of govt is turned into a software platform, and law itself is replaced by code, and the productivity levels of govt soar, and then settle in at a nice clip of 2-3% YOY like every other sector...

    You'll see the public sector first mirror Manufacturing, and then mirror Agriculture for size of workforce.

    The 15M, then 10M, then 5M govt jobs will be GREAT JOBS... done almost entirely by the top 20%, but Baumol is a joke, and technology has it's own path.

    The point is that the slowdown we are seeing is based on this:

    Take 75% of economy and digitally deflate the bejeezus out of it for 15 years.

    Take 25% of economy and resist all digital deflation and grow it to 33% of economy over that same time...

    That's what has happened since Clinton.

    If we took public sector compensation and just grew it at inflation since 1998 for F, S and L employees... wed have NO deficit this year (save more than $610B in 2014) AND we've have only half our current national debt.

    That $610B this year? if tech guys simply deliver the lowest hanging fruit to GaaP, they'll keep 20-40% of that $610B as public sector shrinks.

    We're talking $150B-$300B annually in new tech revenue, 8X size of online ad revenue (Google / Facebook).

    $50 Smartphones and $200 Touchscreen TV's are going to be a civil right. You won't be able to access govt unless you have them.

    Much of public sector will work from home or out of cars.

    So please, stop noodling in your head that maybe we don't need as many startups, instead recognize that tech wants what tech wants, and it will always find a way to digitally deflate everything.

    1. I don't know who you're arguing with. I don't recognize any arguments I've made in your screed.

  3. Berkshire is a funny example of r>g. Currently, Berkshire's $350 market cap is about 1.5% of the total US stock market of $22 trillion. Suppose Berkshire continues its current policy of no dividends and successful reinvestment, while the total stock market rises with GDP. Berkshire might then grow at 12%/year indefinitely, while total stock market grows at only 3%. In 50 years, according to this logic, Berkshire will be the entire US stock market.

    1. ha! Yeah. Buffett hints at this in letters sometimes with the general equilibrium notion that he can't keep beating the market as he gets closer to owning the whole market.

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