Notes from 2008 Wesco Shareholder Meeting

The complete notes are available at seekingalpha.com (here). I have picked a few interesting points delivered by Charlie Munger at the meeting. (My commentary in blue)

One of my favorite stories is boy in Texas, when the teacher asked the class the following question. There are nine sheep in pen, and one jumps out, how many are left? Everyone got it right, and said eight are left. The boy said none are left. The teacher said you don't understand arithmetic, and he said 'no you don't understand sheep'.

Charlie Munger here, refers to the domino effect where companies tend to imitate others (for quick gain) without an after-thought of the possible effects. This is especially true on account of the recent shakeout of financial companies across the world. In the US & UK, the sub-prime mortgage crisis (owing to mortgage-backed securities) have spelled down for Bear Sterns, Citigroup and Northern Rock (UK). In India, NBFCs like Citifinancial, GE Money (and banks like ICICI Bank) are facing peril at the hands of rising delinquencies in the small ticket segments.

If you are an investment bank and had to be rescued, there should be limits on leverage and the complications of your business. There should be qualitative limits too. By and large banks behaved well when it worked this way. When I was young, Bank of America – would not have done things they do now. Derivative trading, no good clearance, no rules, excess and craziness feeding on itself. The plain vanilla products got priced down to no profits. They wanted to do complicated stuff. Not sure if it cleared, or other side would be good for it. It didn't bother anyone since they wanted the profits .... People talk about marvels of system and risk transfer – but some of our troubles COME from having so much risk transfer.

Regulation has it's place in capitalism. To trust the market to correct by itself and letting ill-run companies die on their own is no longer an option (without jeopardizing the entire financial economy of the country). Munger also makes a point for simplicity and understanding of their actions. When financial corporations issued CDS, they assumed that the risk of default never existed. Firstly, their equity base was too small to bear this risk and secondly, unlike insurance, the risk of default on financial instruments is never random & can bankrupt companies in an instant. Munger also trackbacks to the art of value investing which is much more simpler than most of these alternate investments and often gives more value to the investor.

  
The only duty of corporate executives is to widen the moat. We must make it wider. Every day is to widen the moat. We gave you a competitive advantage, and you must leave us the moat. There are times when it is too tough. But duty should be to widen the moat. I can see instance after instance where that isn't what people do in business. One must keep their eye on ball of widening the moat, to be a steward of the competitive advantage that came to you. A General in England said, 'Get you the sons your fathers got, and God will save the Queen.'

Munger again captures the essence of value investing - "the art of finding an economic moat and widening it." From Berkshire's point of view, this is what their investments in Coca-Cola, Gillette, Disney, GEICO and NetJet have been - proof of which has been captured in the company's shareholder value.