Adam Blum’s notes from February 15, 2017 Daily Journal ......Adam Blum’s notes from February 15, 2017 Daily Journal (DJCO) annual meeting 1 This morning in Los Angeles, Charlie

Adam Blum’s notes from February 15, 2017 Daily Journal (DJCO) annual meeting

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This morning in Los Angeles, Charlie Munger spoke for a few minutes and then took questions for just short of two hours. CNBC cameras were there today filming the meeting for the first time. Charlie is in great spirits and looks great for age 93, and it was great to see him, as always.

Here are the notes I typed out on my phone – apologies in advance for any errors.

-Adam Blum [email protected]

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Meeting

“Nice to see you all.”

“Can you hear me? I need a script. We’re going to follow the procedure of the Berkshire meetings where we go through all the perfunctory stuff very quickly. And then we’ll get to the other stuff for a while for the cult. Many of you have come a long way to be here. We’re happy to be here when instead we should be dead.”

Gerry [Salzman, DJCO’s CEO with several other listed roles] has so many titles - it’s like a one man show.”

“We like our present accountants a lot more than our old ones who made us late.”

“Gerry Salzman - well I won’t go through all his titles - if you haven’t given your proxies, please give them to somebody.”

“And somebody is going to give a report that it’s all been mailed out as it should be? And how many shares are here? Do we have a majority?”

“Has everyone been elected?” In response to personally getting fewer votes than some of the other directors, “Everyone likes everyone better than me. I must say we’ve improved this place enormously – the average age used to be 90, and now it’s down to 88 - we’ve really gone through a renewal.”

“All those opposed? Warren [Buffett] used to say ‘please leave.’”

DJCO Commentary

“The essence of what’s going on here is we have a corporation that was in a branch of the newspaper business, and our branch, like most others, has gone to hell. Almost every other branch is going to hell with no pardon - just disappearing. But we have this computer software business where we are serving the same customers but they’re located all over the country and other places. Our software business is of a type that it’s a long, tough slog. We’re slogging very well, and we love all the people in it - all the coders and them. It’s amazing the things that our happening in our little software business – it’s a fair amount of fun to watch. The ethos of the place is good in doing it right - it’s a pleasure to people like Rick [JP] Guerin and myself to watch all these people do it when of course we should be dead. A lot of you people came into this because of Berkshire’s or Guerin’s past success, and for some odd reason we accidentally fell into it [software/technology business]. We don’t do this venture stuff. If there’s anything wrong, you’re looking at the man here to blame (pointing at Guerin and laughing); I’ll take credit for the successes. It’s amazing to me we are getting contracts from places like South Australia - I hardly know where that is. I would have never imagined this as a young boy.”

“I’ve never been able to enjoy losses like some people - I’d much rather win.”

“We’ve got all these folks in Utah who we really like and all these programmers around here, they’re great.”


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“Our people try to get ahead by doing the work right instead of hiring some politician like a few others. What I learned in my career is that the best business-getter any lawyer has is the work that’s already on his desk. If we just keep doing it right, we won’t have to worry about the future.”

“Guerin and I know practically nothing about software; we are judging people, because we don’t understand anything about what the people do. That’s what Andrew Carnegie did with steel and what Berkshire does - judge which people are capable of running businesses I know nothing about.”

“It’s a long, slow business with RFPs and that. The cycle can be five years. It’s like prospecting for oil in Borneo.”

“I love when I think we’re taking territory - if it makes sense in the long term, we just don’t give a damn what it looks like in the short term. After all, we’re running a cult, not a normal company.”

“I lived my whole life with people who have deferred gratification, they don’t have fun, but they get wealthy. You end up with a lot of rich dead people – what good is that? But it does work. Your grave will look nice to outsiders and incite a lot of envy.”

“We don’t take salaries or fees - we are a peculiar example - if you’re wealthy and own a share of a company and get to decide what it does and doesn’t do, maybe you shouldn’t try to grab all the money. Carnegie never to took a salary; Cornelius [Vanderbilt] lived on the dividends.”

General Q&A

“I don’t see you very well, so Gerry or somebody, point out where they are.”

On the DJCO revenue decline: “Gerry - you take that one - I’ll answer that it’s going fine (laughing).”

To Gerry: “[Put the microphone] closer to your mouth. It’s high tech.”

More on DJCO: “One good thing about what we’re doing is that it’s slow, but once you succeed it’s very sticky business, and the fact that it’s difficult to do means it’s difficult for people to change much - if you slog through, it’s a big market and the people have no option but to charge ahead - the fact that’s it’s so awful to grind through means people may not want to get in.”

On competitors of DJCO: “If I were buying software, I’d rather buy ours than theirs [Tyler Technologies]. I like our ethos better.”

On DJCO lower results: “We bought a bunch of contracts, and we knew that they were gonna end, and so we are amortizing the cost of those contracts, which was anticipated; the business is so big that there are whole states untapped with courts and public defenders and others - everyone is scrambling in a business that is growing bigger and bigger.”

On Wells Fargo’s scandal: “Wells Fargo had a glitch – the truth of the matter is they made a business judgment that was wrong. I don’t think anything is fundamentally wrong. They got so caught up in cross-selling and incentive systems [that] some people reacted badly and did things they shouldn’t. There’s nothing wrong with the long pull for Wells Fargo. They made a mistake. And it was an easy mistake to make. I don’t regard setting incentives aggressively as a mistake. I think the mistake was, when the bad news came, they didn’t recognize it directly. I don’t think that impairs the future of Wells Fargo. They’ll be better for it. One thing about doing something dumb is that you’re unlikely to do it again. Henry Singleton was smartest man I ever knew. He made the same mistake at Teledyne. His customer was the government, and it’s not hard to cheat the government. With aggressive incentives, two or three of Henry’s subsidiaries cheated the government, and he got blindsided. It can happen to anybody. Capitalism is nice in its self-correction - make a mistake like that and pretty soon, you’re gone.”


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More on the competitors of DJCO: “I am not dissatisfied by Tyler’s trouble - I don’t want to criticize them more than I have - one of our customers is having a problem with them. You can see the tears running down my cheeks (laughter).”

On software revenue that’s recurring versus non-recurring: That is so complicated that I am not even going to try. To answer in substance, there’s a lot that’s recurring if we stay in there (chuckle). Our financials confuse us a little bit – they’re very complicated with all these RFPs and such.”

Why is the building in Logan, Utah used by the tech business owned by the traditional business and not the tech business? “Gerry - I give you that one - that’s some quirk of accounting - it doesn’t really matter.”

More on Wells Fargo and aggressive incentives: “How do you know they’re aggressive until you try? Incentives. They didn’t react enough to the bad news fast enough. It’s dangerous to do but doesn’t impair their [Wells Fargo’s] future. They will be better, that’s the nice thing about doing something dumb - you won’t do it again.”

Choosing what to do in life: “In terms of picking what to do, in my whole life I’ve never succeeded much in something I wasn’t interested in. It’s too much to expect of human nature that you’re gonna be good at something you dislike. Play in a game where you’ve got unusual talents, not basketball when you’re 5’1 going up against someone who is 8’3. Of course you want to be ethical, but you can’t be dreaming of how you think the world should be run and think it’s too dirty to get near it and get so consumed by ideological notions polluting you from left-wing universities that you’re just not working and smoking a little pot. My hero is Maimonides [Jewish scholar in the 1100s]. He did all his writing after working ten hours a day as a doctor. – I recommend the engaged life. Maimonides lived and worked with the people in the real world, which informed his philosophy and work. Be more like him and less like Bernie Sanders.”

On confusion about American Express’ future: “I am going to give you an answer that will be very helpful - I am confused too - if you think you know what’s going to happen to payment systems ten years out, you’re probably under some state of delusion. If you’re confused, welcome to the club; I don’t know if IBM is going to sell that much of Watson either. If you keep trying to do the right thing and playing hard, chances are better, but these things are not knowable.”

On domestic gas production: “I have a different feeling than the rest of America. I wish we weren’t producing all this natural gas. I’d be delighted to just have it lie there untapped for decades in the future and pay extra once Arabs use up their oil. Our reserves not going away are like retaining the topsoil of Iowa. You wouldn’t ship the topsoil to Greenland. There’s not enough deferred gratification to sell our oil. Same for chemical feedstocks - use them slowly. I am sure I am right and the other 99% of the people are wrong. Nobody else in America seems to feel my way, but I believe in deferred gratification. I don’t think hastening to use our oil and gas is a good idea. I don’t see any advantage. People who succeed in most other businesses do more volume, but Exxon Mobil does less volume, yet the price of oil grows faster than the volume drop, so they do better. It’s very peculiar. If I were a benign despot, I wouldn’t ship any gas outside of the US.”

On being a polymath: “Operating over many disciplines as I do is not a good idea for most people. It was a wonderful path for me, but the correct path for others is to specialize and get good at something that society rewards, but spend 10-20% of time on ‘big ideas’ outside the specialty. Otherwise, you become a one legged man in an ass-kicking contest. You have to know the ‘big ideas’ if you live life outside a cave.”

Lollapalooza effect: “I coined it when I realized I didn’t know psychology. I bought three comprehensive psychology textbooks and read through them, and like usual I thought they were doing it all wrong, and I could do it better. When three or four tendencies were operating at once in same situation, the outcome wasn’t linear, it was straight up. The scholars were ignoring the most important thing in profession, because they couldn’t do


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experiments with so many variable operating together, and then they didn’t synthesize it with other disciplines, because they didn’t know squat about other disciplines. I am lonely, but I am right.”

On Buffett becoming a better investor with age: “If you’re in a game and learning more and honing skills, of course you do better over time. Berkshire would be a very modest company if Warren never learned anything. We went out and bought whole entire businesses – something we’d not have done early on as stock investors. And Iscar at five times book value, Ben Graham would’ve never bought that. We’ve learned better over time, and we can keep learning and are still doing it. He’s [Buffett] changed when he’s buying airlines, and he’s changed when he’s buying Apple. The nice thing about the game we’re in is that we can keep learning. We’re in the press for airline stocks when in 2013 we thought it was a joke, it was such a terrible business. Today, if you put all our holdings together, we own a small airline. It violates the total catechism. It’s the same thing for railroads scaring us away with all this trucking competition – it was a terrible business for 80 years, and then we become a massive owner when they finally got it down to four main railroads. This morning I was with my daughter-in-law, and she bought round trip tickets to Europe for $400 with taxes – huh [aghast at how cheap it was]? Maybe we shouldn’t be in the airline stocks. I frequently talk to Warren about old days. We shot fish in barrel. We even waited til they slowed down and used a shotgun. We get little edges now, while before had total cinches. But it isn’t any less interesting. We bought Exxon Mobil as cash substitute – we thought it’d do a little better than cash at the time – but early on we never would’ve done that. Think what changed when we bought Apple with the hooting we’ve done about high tech. ‘Apple and a bunch of airlines’ is now a lead story about us in the press. But we’re just adapting to a business that’s gotten a lot more difficult. I don’t think we’ve gone crazy. I think we’re adapting. Now the odds are just a little in our favor. We’ll take that advantage, but it’s harder. You marry the best person who will have you. Be satisfied with the type of advantage we didn’t used to get, caused by getting so enormously rich – it’s not a bad trade off.”

On saying Trump wasn’t morally qualified to be President: “I’ve gotten more mellow. Think about the good. Reexamining tax system is constructive. All these crazy republicans and social security – Trump is right in not touching social security. I am with Donald Trump. He’s not wrong in everything, and just because he isn’t like us, roll with it. If there’s a little danger, what the hell, you’re not going to live forever anyway.

Most meaningful thing in life: “Well, probably family and children. I was not a perfect husband but was lucky to get as much felicity as I got. I started wrong and never quite fixed myself with the fair sex. Here’s something from the cult leader to the cult members: As a high school freshman at Omaha Central, I was a skinny underdeveloped whatever, and I had this blond goddess I took to a dance. I pretended to smoke for some reason, and she was wearing a net dress, and I set her on fire. Being quick-witted, I threw Coca-Cola on her to put out the fire. And that was the last I saw of her. Later in high school I wanted to get a varsity letter to show the girls. I thought rifle shooting was my best shot. I was so skinny that I could shoot 100 sitting cross-legged. So I got the letter, but I was so skinny it [the letter on his letter jacket] went from one armpit to the other. The girls noticed, alright. ‘How’d a little skinny unattractive runt like that get a letter?’ Then there was Zibby Brewington. She was a very popular senior. She agreed to go with me to a party at the country club, because she liked one of my hunky friends. I picked her up, and it was sleeting. My 1934 car got stuck in mud, and we had to walk in the sleet most of the way, and that was the last I saw of her. Then I didn’t put antifreeze in, and the block broke, and my father said I was so dumb, I wasn’t getting another car. This is who you’re coming to see at these cult meetings. My life is a litany of mistakes. I ran for student politics in elementary school and came in second place by miles. I know a nerd when I see one – there are a lot here. I hardly succeeded about anything, so there’s hope. Max Planck gave lectures around Germany when he won the Nobel Prize. It was an incredibly boring speech, and his chauffeur soon memorized it. One time the chauffeur gave the talk instead of Planck and got questions from all these physics professors. The chauffeur said that he was surprised that, in an advanced city like Munich, he was getting “elementary questions” like that and so he announced that since the questions were so insulting, he was going to ask his chauffeur [Planck] to answer them (laughter). Have you heard the one about the plane flying over the Mediterranean losing both engines? The pilot tells the people to open the door


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fast enough for people to get out and for folks who can swim, get on the right wing and for those who can’t swim to get on the left wing. ‘For those on the right, swim 2 miles to the nearby island, and you’ll be fine. For those on the left, thank you for flying Air Italia.’”

Index funds: “Is there a point where they can’t work? Of course, if everyone bought nothing but index funds. I’d buy big one, because if you buy the small one, and it gets popular, it’s self-defeating. JP Morgan had this Nifty Fifty index of only 50 stocks. Due to all these people buying it, it forced the stocks up to 60x earnings, and they lost everything. You don’t see that when an index is 75% of the whole market. It can’t work perfectly forever, but for a long time it will. The index thing is absolute agony for investment professionals who have almost no chance of beating it. Most people handle that with denial. I understand - I don’t want to think about my own death either. 95% of money managers can’t beat it. Honest, sensible people know that what money managers are selling can’t be delivered. The prices for managing big sums of money are down to 20bps. People who rose in asset management didn’t do it by getting paid 20bps; it’s a huge problem, and it makes your generation of money managers have way more difficulties and causes a lot of worry and fretfulness, and I think the people who are worried and fretful are absolutely right. I would hate to manage a trillion dollars in the big stocks and try to beat the indexes. I don’t think I could do it. At Berkshire, if you take 100 decisions, a few a year, our success came from ~two decisions a year, total, for 50 years. It’s a hell of a problem for you people who manage money, but why shouldn’t life be hard? It’s what had to happen. With computer algorithms playing same game, returns went down. It’s happening in the whole field, the progress of the sons is making it hard.”

What would he tell his grandchildren about business opportunities? “I don’t spend time telling my grandchildren what business opportunities to look for. There’s not much hope. I have trouble getting them to work at all. It’s not an easy way to handle a problem of how to continue getting better even after financial success. If you’re glued together right and honorable, you will succeed. Get in there and get rid of stupidities and avoid bad people. Try teaching that to your grandchildren. The best way is by example. Fix yourself.”

Book recommendations: “You cultists send me so many books, I can scarcely walk into my own library. I skim all of them. The one I like recently is from [Edward] Thorp (A Man for All Markets) who beat dealers in Vegas and then had massive Wall Street trading success. I really liked it. He had a good marriage and was a smart man. He was a mathematician using a high IQ to beat the dealers and succeed in trading. You people may like a buried love story. Nerds here would agree that a guy who made $40 million in a casino and $4 billion in the market – there can’t be many people out there who can do this.”

On filial piety: “I didn’t quite catch that. Oh, filial piety. I like filial piety. They worship rich old men, my kind of system. Caring about ancestors and traditions is desirable. I admire Confucians for that notion that it’s not a game in just one life and to accept the baton from predecessors. Think of how rootless we’d all be with no families, predecessors or descendants. Think what we owe to those in past who made our civilizations work.”

Ideas he destroyed: “I’ve done so many dumb things – I am busy destroying bad ideas because I keep having them. But I like it. It is my duty. So many people’s main problem is letting old ideas displace new, better ideas. It’s like the German saying, ‘too soon old and too late smart.’ It may be a good thing in marriage but is not a good thing in most fields. It is a good habit and big advantage in life since others are so bad at it - as they spout the bad ideas out, they’re pounding them in. All the person is really convincing is oneself. I don’t spend much time telling the world how to run things I think I can run better like the Federal Reserve, because I know all I’m doing is pounding the ideas into my head and not into others’ heads when I do that. Young people who are violently convinced of anything is very bad. Some 17-year-old abortion nut or foreign policy crazy is just pounding dumb ideas into his own head, which is bad when he has so much to learn. I pat myself on the back when I get rid of a bad idea. If someone won’t pat me on the back, then sometimes you need to do it yourself, and sometimes several times. The price we pay for being able to accept new ideas is awesomely large – some people die for it.


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Responding to an oil and gas question about specialization: “You petroleum people have to get more specialized, because oil is harder to get. We generally have to get more specialized as a people. I am not the example. If you want to get rich like I did, knowing a little bit about a hell of a lot, I don’t recommend it. It’s like the story of the man who goes to see Mozart and says that people think the man is too young to compose symphonies, and the man is asking Mozart for help, because Mozart composed symphonies at age 20. Mozart says ‘but I wasn’t running around asking others how to do it.’ I don’t encourage people to follow my path. If I need a proctologist, I don’t want one who knows Schopenhauer or astrophysics. I want one who specializes. On the other hand, a life devoted solely to proctology isn’t much of a life.”

A question about where to invest small sums since Munger has said in the past he could make 50% with smaller amounts of money: “This guy really wants to learn how to get rich at a rapid rate with specifics. That’s not what we do here. We leave mystery so you can find your own way. A few bets are all you need, but when you find the few, act aggressively. My mother’s maternal grandfather was an Iowa pioneer who fought in wars. After hardship, he rose to be the richest man in town and owned the bank. He had just a few opportunities that he got that allowed him to be prosperous. He couldn’t lose money leasing a farm to a German in Iowa. Today these people with computer algorithms – it’s not that honorable to outsmart the trading system leeching off the rest of the traders. They have the social utility of rats in a granary. They make money but not by waiting for the precious few opportunities, so they must be very generous, because they have a lot to atone for.”

What’s your favorite industry? “My favorite industry is taking care of my own affairs. It’s fun, creative, and it’s the job life gave me. Do the job well that life gives you. It’s hard to make money in a lot of industries because of wild enthusiasms that come into it, so I don’t have a favorite.”

Valeant: “ I am worried about monkey business, but I don’t see anything today as extreme as Valeant. That was really something. You people come so far to the cult. I probably shouldn’t have done it [criticize Valeant last year], but I just strayed into it. It was really interesting how many high-grade people that took in. It was too good to be true and so aggressive. That they were messing with drugs people needed. Daily Journal had 80% of the foreclosure notice business during the downturn, and we could’ve raised prices when all these people were losing their houses. The idea that in middle of that bust, we’d just make all the money we could, we just didn’t do it. Capitalism is about being satisfied with less and acting with decency. Valeant was like a zero sum chess match, not reality. All they wanted was money and glory. They didn’t think about anything with decency and stepped way over line. I don’t have a new example like Valeant to share. That one got a lot of publicity out of this meeting. I don’t want this room to have twice as many people in it next year, and I don’t want me not to be here either.”

Diversification: “Am I comfortable investing in just three stocks? Of course. I care about the Mungers. The Mungers own Berkshire, Costco, and a stake Li Lu’s fund. The rest of our stuff is dribs and drabs. What are the chances that one of these three will fail? Almost zero. That all three will fail? None. When I started thinking about investing what my piddly savings would be as a lawyer, I did some algebra and found that if I had comfort that I could achieve a 10% advantage over the performance of stocks broadly, I didn’t need much diversification if I was gonna do it for 40 years and hold each position for three or four years, average. Diversification is for people who don’t know anything – by definition, they just do the average. One name is enough. Paying these professors to teach this crap to our young - the know-nothings just do the average. These professors are paid for dispensing balderdash in corporate finance departments at universities. It helps in the market if other people believe balderdash and you know what the hell’s going on. If your uncle Horace has an immense and stable business that he’s leaving it to you, you don’t need any professors, you just take the damn business. When the market comes with an Uncle Horace, you step up with the pie cart. If you have one cinch, what else do you need in life? Imagine that I learned that from my dead great grandfather. From all the dead people, we can learn a lot, and they’re very convenient to reach. There’re no problems with transportation to visit with


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the dead. We make friends with eminent dead, and it is enormously helpful. Some of you wouldn’t have helped me, but Adam Smith did.”

Mistake Berkshire made investing in Irish banks in 2009: “You can’t trust figures put out by banking industry. It’s easy to report a little more earnings; the temptations are there. If you’re really good at something, you can lead others who believe in you astray. Ireland went crazy, and we did too in investing there. But this is an English-speaking country with no taxes. And a lot of charm. It was a backward place with a 60-year internal civil war, and the tax changes brought a lot of prosperity. Bill Gates and others were there early when the tax regime changed. They deserve credit for the way the no-tax system advanced the country. If all countries reduce taxes to suck in foreign investment, it won’t work, sure. But Ireland got ahead of it. The Irish are like Scottish - Gaelics are pretty unusual people, and I am very glad I had a Scotch-Irish great grandmother.”

On Li Kuan Yew and comparison to India: “That’s a very intelligent question and not saying others weren’t – Yew was the best nation builder who ever lived. He took a Malarial swamp with no resources surrounded by a bunch of Muslims who hated him and literally spat out Singapore because they didn’t want the place. There were no assets and tons of corruption. And Yew created modern Singapore. No one has had success like it so fast. He gets a lot of credit for creating modern China. They saw that and said ‘the hell with this. We don’t care if the cat is black or white, we just care that it catches mice.’ Deng Xiaoping copied Yew. I have two busts of someone else in my house - Yew and Ben Franklin. Now, I would rather work with the Chinese than the Indians. The caste system, the overcrowding, there in India. It’s hard to get anything done, and they have taken the worst aspects of democracy that Yew avoided. India is a fabulous people, but the system of poverty and corruption and the crazy democratic thing where anyone who screams can stop all progress – it mires them. The steel giant Posco takes lousy iron and coal and uses it as an input - a province in India had a bunch of lousy iron and coal and agreed to supply Posco, and the contract was canceled because people protested and were screaming in the streets. India is grossly defective, because they took the worst aspects of our culture, allowing a bunch of idiots to scream and stop everything. And they copied it - Malaysia and China and Singapore would’ve done the Posco deal. India forged its own chains and put them on themselves.”

On the year 1974 where Wheeler, Munger lost 50%: “I don’t hear as well as I used to. What happened in 1974 when we lost 50% in 1 year? The market went down 40% that year. This has happened to me three times at Berkshire – losing 50% of value, and I regard this as part of my manhood. You better be in it for long pull and handle declines with aplomb and grace. If it doesn’t come, you’re not being aggressive enough.”

“They think it’s their last chance.” Charlie in response to zealous crowd, joking that it may be his last meeting.

On people: “We look smart, because we pick wonderful people. Gerry is not normal. He looks it but is a damn freak. He’s strong across two or three disciplines that are beyond human. He’s another Midwesterner. What is it that comes out of soil there? To get wonderful people is like marriage. The best way to get good spouse is to deserve one; our people make us look a lot better than we are. We have a first or second choice for who to hire, usually, and then it’s like off a cliff. Every search is ‘one is fine and everything else is pygmy.’ You’d tap dance to work too if you were around all these people who love winning. We were a little lucky, but we can’t give you any luck.”

First thing to tell Chinese who want to invest in US: “If I were a Chinese person, I would invest in China and not the US. The fruit is hanging lower, and companies are more entrenched. It’s a mistake to look for a pie in sky when you have a big piece of pie in your lap; At current prices, they would do better investing in China.

Big ideas: “Be intelligent in improving yourself. It’s way better to take on a big idea that comes up than tiny ideas you won’t face - why piddle around and ignore the big ones? The problem in front of you is solvable if you reach outside your discipline over the fence into other disciplines. I shouldn’t have been so brash as I was and am now in flouting this, but I haven’t completed my self-improvement process (laughter). It is so much fun to get an idea by going out of one’s discipline. I don’t observe professional boundaries. I am the person who


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crosses off PSA test at the doctor. I don’t give opportunity for the doctor to do something dumb. If the cancer is too early, then I can find out in three months, or too if the cancer has grown too fast, then why tell me? I think I know better. I am always doing it and recommend getting out of your boundaries too when you’re my age with the PSA. But women, I can’t help you.”

Investment choice of entity: “It is plumb crazy to invest in a corporation that owns common stock compared to a partnership, which is just what Berkshire does. It is not the logical way to do it with the double tax. It is totally asinine to invest in stocks via c-corp. Berkshire’s publics keep going down as a percentage of the business, so it’s not as relevant going forward, but as a rule, I wouldn’t even consider it. Avoid it. You’re totally right, which you already knew>“

China: “What I like about China is they have some companies that are very strong and still selling at low prices. And the Chinese are formidable workers and they make wonderful employees. The Chinese government really tries to help its companies unlike India. I admire China’s 1.5 billion in poverty being taken up so fast. It’s an incredible achievement. They have bullet trains to heart of city. And they didn’t do it by borrowing from Europe or how we (the US) did it. They did it by saving up as a poor country and counting on deferred gratification. Their problem is they like to gamble, and they actually believe in luck. That is stupid. You want to believe in odds, not luck. Too many people believe in luck and gamble, and that’s a national defect.”

What the world will look like in the future: “What won’t change about business it still won’t be that damned easy – there’s lot of trouble sure to come. At the end of life, you know it’s all over and that’s the game - knowing when you start that you have to lose - dogs don’t. The law of thermodynamics should be restated to be that you can’t win or get out of game. If you do well with what you started with and help others and set a reasonable example, you played well. In our directors meeting we were talking about glitches that lead to reverses and troubles and scrambling. People who really love you are the ones who you scramble through things with; adversity is the sinew of your successful relationships and personal bonds and affection and every other damn thing; life is series of adversities and each is an opportunity to behave well or badly, and we need techniques for welcoming adversities at old age to get through it.

On his fee structure starting out: “I copied the Buffett formula for fee structure. I don’t like business scraping off the top. If you’re advising others, you should be alongside investors. Like so many things I like, this is not spreading much. My net influence in the world, like Warren’s influence, is small. There may be a total of three examples of executive compensation at companies who structure it like we did.”

Agriculture: The productivity of an acre is up 300%, which has prevented starvation on earth. This started with Rockefeller, Borlaug, and so forth, and we need another doubling and will probably get it. It’s amazing how efficient farmers are. They’re not a mix of socialization or stupidity or inefficiency. Really they’re the glory of civilization, except I hope they don’t use up the topsoil too fast. Farm subsidies matter to farmers who get richer and richer. Yes, it is peculiar to subsidize the filthy rich to use up topsoil faster, and converting corn to ethanol is the stupidest idea. I’d rather jump out of a 20th floor window to see if I can fly, and I am the king of stupid ideas. But the agricultural revolution has been remarkable; if we can turn oil into food, why produce every last drop of oil and sell it? I may have 3-4 people who agree with me in this room. In the rest of world, I am all alone.”

On spirituality: “Just because you don’t have a specific theology, and I don’t – when I learned about the talking snake in the Garden of Eden, I knew it was fake. I was young but didn’t believe the teacher at bible school and haven’t changed. That doesn’t mean I’m not spiritual; I just don’t need a talking snake to make me behave well. Rationality is a moral duty. Rationality is a moral duty. If you’re capable of being reasonable, it’s a moral failing not to be. We should all take this on even if we are a little stupid. Yes, we need a social safety net, too but not one as dumb as the one we have now.”


9

On the Munger Tolles law firm office move: “I was cleaning out office when moving and found these damn things (stories) and thought ‘my God , I will give copies to all these people coming here from India and China.’ - I am just now revisiting some of my past screeds.” (see attached to these notes)

Taxes: “I don’t know what the border adjustment tax is, and those proposing it don’t know what it is either, so stay calm. But deep revision is a good idea. We need a consumption tax. Do I really care if someone piles up a lot of money and leaves it to some foundation? That’s not my idea of evil. But people living high should be taxed.”

Deferred gratification: “Don’t use your body by being stupid in handling it. Same for your money. The only way to win is work a long time where doesn’t come easily, in a long grind. Think of doctors with the night shifts. It’s an honorable activity being a doctor. I admire the life of a doctor more than I admire the life of a derivatives trader, and I hope you do too.”

Rules of thumb in complex systems change over time: “You have to live with uncertainty – it’s not bad thing - who’d want to live in sameness? We may as well be dead.”

Charlie and Adam


10

Li Lu

Wantmore, Tweakmore, Totalscum, and the Tragedy of

Boneheadia

A Parody about the Great Recession.

By Charles Munger

Posted Wednesday, July 6, 2011, at 4:57 PM ET

A Parody Describing the Contributions of Wantmore, Tweakmore, Totalscum, Countwrong, and

Oblivious to the Tragic "Great Recession" in Boneheadia and the Thoughts of Some People

Relating to This Disaster.

In the country of Boneheadia there was a man, Wantmore, who earned his income as a home

mortgage loan originator. Wantmore operated conservatively. All his home loans bore interest

rates of 6 percent or less, and he demanded of all borrowers large down payments, documented

proof of adequate income, and an immaculate credit-using history. Wantmore sold all his loans

to life insurance companies that, before closing purchases, checked loan quality with rigor—then

held all loans to maturity.

As Wantmore prospered, he eventually attracted the attention of Tweakmore, a very bold and

ingenious investment banker. There was no other investment banker quite like Tweakmore, even

in the United States.

Tweakmore had become the richest person in Boneheadia, driven by an insight that had come to

him when, as a college student, he had visited a collection of hotels that contained gambling

casinos located in a desert.

As Tweakmore saw immense amounts of cash pouring into cashiers' cages surrounded by

endless sand, in business operations that did not tie up any capital in inventories, receivables, or

manufacturing equipment, he realized immediately that he was looking at the best business

model in the world, provided one could also eliminate commitment of any capital or expense to

hotel rooms, restaurants, or facilities providing parking or entertainment.

http://www.slate.com/authors.charles_munger.html

http://www.slate.com/id/2298637/

Tweakmore also saw exactly how he could create for himself an operation that possessed all the

characteristics of his ideal business. All he had to do was add to investment banking a lot of

activities that were the functional equivalent of casino gambling, with the bank having the

traditional "house advantage." Such casino-type activities, masked by respectable-sounding

labels, Tweakmore foresaw, could easily grow to dwarf all the action in ordinary casinos.

Determined to create and own his ideal business as fast as possible, Tweakmore quit college and

entered investment banking. Within 12 years, Tweakmore was the most important investment

banker in Boneheadia. Tweakmore rose so rapidly because he was very successful in convincing

regulators and legislators to enlarge what was permissible.

Indeed, by the time Tweakmore called on Wantmore, any investment bank in Boneheadia could

invent and trade in any bets it wished, provided they were called "derivatives," designed to make

counterparties feel better about total financial risks in their lives, outcomes that automatically

happened. Moreover, an investment bank faced no limit on the amount of financial leverage it

employed in trading or investing in derivatives or anything else. Also, Tweakmore had obtained

permission to use "Mark-To-Model" accounting that enabled each bank to report in its derivative

book whatever profit it desired to report. As a result, almost every investment bank claimed ever-

growing profits and had ownership of assets totaling at least 30 times an ever-swelling reported

net worth. And despite a vast expansion of transaction-clearance risk, no big mess had so far

occurred.

Tweakmore was pleased, but not satisfied, by what he had accomplished. And he now planned to

revolutionize Boneheadia's home-mortgage loan business in a manner that would make

Tweakmore a national hero.

In his first proposal to Wantmore, Tweakmore held much of his ingenuity in reserve. All he

proposed was that Wantmore hereafter sell all his home loans to Tweakmore at a higher price

than life insurers would pay. Tweakmore said that he planned to put all loans into trusts with no

other assets. Each trust would be divided into five "tranches" with different priorities in use of

loan payments. Four tranches would use their shares of loan payments to pay off complex new

fixed-interest-bearing, freely tradable debt instruments, called CDOs. The fifth tranche got a tiny

residue in case all home loan payments were received as due. The CDOs would be sold by

Tweakmore, using a highly paid sales force, to anyone who could be induced to buy, even highly

leveraged speculators and small Scandinavian cities near the Arctic.

To Wantmore, Tweakmore's proposal at first appeared unfeasible. The planned operation seemed

to resemble the operation of a meat vendor who routinely bought 1,000 pounds of chuck roast,

sliced it up, and then sold 950 pounds as filet mignon and the balance as dog food.

But Wantmore's doubts melted away when Tweakmore revealed how much he would pay. Under

the offered terms, Wantmore would double his income, something Tweakmore could easily

afford because his own income was going to be three times that of Wantmore. After Wantmore

accepted Tweakmore's proposal, everything worked out exactly as Tweakmore had planned,

because buyers of CDOs in aggregate paid much more than the life insurers had formerly paid.

Even so, Wantmore, as he became familiar with Tweakmore's prosperity, was soon dissatisfied

with a merely doubled income. With Wantmore restive, Tweakmore now displayed the full range

of his ingenuity.

What Tweakmore next proposed was that Wantmore add to his product line a new class of

"Subprime, pay-what-you-wish" home-mortgage loans. All loans would bear interest at 7½

percent or more, and borrowers would not be allowed to state anything except that they wanted

the money. There would be no down payments and no credit checks or the like. Also, each loan

would be very user-friendly in its first three years, during which the borrower could make only

tiny payments with all unpaid interest being added to principal. After three years, very onerous

loan service was required, designed to pay off the greatly swollen principal, plus all interest, over

the next five years.

This proposal would have seemed preposterous, even hilariously satirical, if it had been

presented to Wantmore when Tweakmore had first called. But by now Wantmore had doubled

his income by going along with a peculiar idea of Tweakmore's. So Wantmore's credulity was

easily stretched to allow acceptance of the new loan product, which Tweakmore projected would

triple Wantmore's already doubled income.

It is easy to see why Wantmore became a "true believer" in the new loan product. But why did

the already super-rich, prominent, and sophisticated Tweakmore believe his revised scheme

would work safely and well for him?

Well, we know the answer. As Tweakmore revealed in his prideful autobiography, his thought

process was as follows:

1. There would be no significant troubles during the first three years. Under the accounting

standards of Boneheadia, all its accountants would be required for a long time to reserve

no loan-loss provision at all against unpaid principal and unpaid interest on the new

loans. And CDOs would be valued highly in traditional markets because underlying loans

were booked at unreasonably high value. It wouldn't matter that homebuyers were

making no down payments, had no personal liability at any time, and paid only a tiny

portion of interest accrued for three years. It also wouldn't matter that any competent

inquiry would have revealed extreme past improvidence on the part of most borrowers.

2. House prices in Boneheadia would not merely rise as they had done before. Prices would

rise much faster as more and more people learned they could bid to acquire homes

without using any of their own money, no matter how poor were their credit-using

histories.

3. All the buyers of new CDOs would have a near-perfect investment experience. Ever-

rising house prices would cause full payment of all mortgage debt as due. The market for

the new CDOs would expand and expand as investors reliably earned much more and

faster as the scheme fed on itself in a runaway feedback mode.

4. True, after the first three years many overstretched homebuyers were sure to suffer

somewhat as they were forced, by threats of foreclosure, to sell their homes. This would

often cost them their credit and the respect of their children, friends, and employers, but

that would be the only trouble, and it would prove endurable by Tweakmore and

everyone else, except the people forced out of their homes.

5. The runaway feedback mode that drove up house prices would cause no significant

trouble for decades, as had happened in Japan, where a big bust in real estate prices

occurred only after the Imperial Palace grounds in Tokyo were apparently worth more

than the market value of the entire state of California.

6. The principles of economics would give the scheme a large tailwind and considerable

popularity. As Tweakmore, a former student in elementary economics, knew from

studying Galbraith, a large undisclosed embezzlement strongly stimulates spending

because the perpetrator is much richer and the victim spends as before because he does

not yet feel poorer. And what Tweakmore was creating was the functional equivalent of a

long-running undisclosed embezzlement on steroids. The perpetrators would not be the

only ones to spend more, as typically occurs during ordinary embezzlements. The CDO-

buying victims also would spend more as they believed they were getting richer and

richer from ever-growing paper gains embodied in accrual of interest at above normal

rates.

7. To be sure, the scheme looked a little like a chain-letter scheme, and such schemes were

usually ill-regarded by prospective users, partly because the schemes were criminal and

partly because the schemes always blew up so quickly, bringing criminal troubles so

soon. Tweakmore's scheme, in contrast, would, by design, be lawful and benevolent, and

recognized as such, because it would create big macroeconomic stimulus as a public

good.

8. And should the scheme eventually blow up after decades, like the land-price bubble in

Japan, who could fairly blame Tweakmore? Nothing lasts forever. Besides, the blowup

might be lost in a miasma of other blowups like those sure to come in many irresponsible

countries and subdivisions of countries.

Tweakmore's revised scheme worked fantastically well for a considerable period. Naturally,

there were some glitches, but Tweakmore turned each glitch into an opportunity to boost profit.

For instance, when Wantmore was made nervous as hordes of scumball-salesmen were drawn

into his business by rich commissions paid for production of easy-to-sell "subprime" pay-what-

you-wish home loans, Tweakmore responded by buying Wantmore's business. Then Tweakmore

replaced Wantmore with a new CEO, Totalscum, who did not consider any business practice

optimal unless it was depraved. Totalscum soon increased loan production by 400 percent and

his success caused Tweakmore to buy five additional loan businesses and replace their CEOs

with people like Totalscum, causing profits to soar and soar, even though Tweakmore never

again found anyone else whose depraved operations could produce results that matched those of

Totalscum.

As Tweakmore's scheme went on, it was necessary for its continuing success that the accountants

of Boneheadia never stop treating as trustworthy a lot of hugely important loan-payment

promises that any sensible person would deem unreliable. However, there was almost no risk that

accountants would act otherwise than as Tweakmore desired. The accountants of Boneheadia

were not allowed to be sensible. They had to use rote "rules-based" accounting standards set by a

dominating man, Countwrong, who was head of Boneheadia's Accounting Standards Setting

Board. And Countwrong had ordained, in effect, that all loss provisions on the new loans must

remain based on the zero-loss record that had existed before Wantmore met Tweakmore. And, so

long as Countwrong was in charge, no one was going to use in accounting an understanding of

runaway feedback modes, instead of Countwrong's rules.

Of course, if Totalscum or Tweakmore ever started to have loan losses, he would have to start

making loan-loss provisions against new loans. But there weren't any meaningful loan losses for

anyone for a very long time.

Countwrong was so habit-bound as a thinker that he never recognized that his cognition was

anti-social. He had always sought simplicity of process for accountants at the expense of

"principles-based" rigor and thought that would better serve his country. He had been rewarded

in his life for his convictions, and he was now proud of his conclusions, even as they were

contributing mightily to the super-catastrophe sure to come eventually from Tweakmore's

scheme.

A large economic boom occurred in Boneheadia just as Tweakmore had expected. The boom

made the regulators of Boneheadia feel extremely good about themselves as they passively

watched the ever-enlarging operations of Tweakmore and Totalscum.

A famous regulator named Oblivious was particularly approving. He had been over-influenced in

early life by classical economics. So influenced, Oblivious loved all the new derivatives, even

those based on outcomes of parts of complex CDOs composed of parts of other complex CDOs.

And he did not believe the government should rein in any investment banker until the banker's

behavior was very much worse than Tweakmore's.

The boom initiated by Tweakmore lasted only three years. He had underestimated the boom's

strength and the power of people to understand, in due course, super-sized folly. These factors

had helped shorten the boom's duration. Also, Boneheadia had proved less like Japan than had

been hoped.

When the boom-ending bust came, it was a doozy. Almost every investment bank had been made

collapse-prone by Tweakmore's innovations before he became interested in home loans. And

now, in a huge bust, most big financial institutions were sure to disappear, causing total chaos

and another "Great Depression" unless there was super-massive intervention by the government,

financed by printing money.

Fortunately, Boneheadia did so intervene, guided by effective leaders who somehow obtained

support from politicians in both political parties. And, after this massive intervention,

Boneheadia, with doubled unemployment, is enormously worse off than if the boom and bust

had never happened. And its options in case of future trouble are greatly reduced because, after

its money-printing spree, it is nearer to facing general distrust of its money and credit.

Boneheadia's bust is now called the "Great Recession." Yet, even so, not much has been learned

by the elite in Boneheadia. Among the protagonists and too-passive types who contributed so

much to the mess, only one has expressed significant contrition. To his great credit, Oblivious

has recognized that he was grossly wrong.

The accounting profession remains unaware of its large contribution to public woe. And it does

not recognize the cognitive defects of Countwrong, which are still believed to be virtuous

qualities that reduce accountants' litigation risks and their duty to cause antagonism by opposing

the wishes of some of their best-paying clients.

The professoriate in economics has barely budged toward recognition of the importance of

optimized, more conservative accounting in both macroeconomics and microeconomics. And

economics professors, even now, do not recognize what was so easily recognized by

Tweakmore: The functional equivalent of undisclosed embezzlement can be magnified and have

massive macroeconomic consequences when the victims, as well as the perpetrators are led to

believe they are getting richer under conditions that are going to last for a long time.

How about the legislators in Boneheadia? Well, most are confused by what has happened to their

most powerful friends and draw no useful implications from the outcome of Canadia, a country

just north of Boneheadia that had no "Great Recession" because its simple laws and regulations

kept in place home loan operations much like those of Wantmore before he embraced modern

finance in the state preferred by Tweakmore.

How about the regulators? Well, very few important regulators or former regulators in all

Boneheadia have expressed really serious doubts about the status quo and interest in really

serious re-regulation of investment banking. One the doubters is Follyseer, a long-retired former

minister of finance. Follyseer has argued that all contributions of Tweakmore to investment

banking should be removed and banned, because it is now obvious that (1) augmenting casino-

type activities in investment banks was never a good idea, and (2) investment banks are less

likely to cause vast public damage when they are forbidden to use much financial leverage and

are limited to few long-traditional activities.

Regarding accounting, no regulator now in power seems to understand, in a way that has any

chance of causing effective remedial action, that the disaster triggered by Tweakmore couldn't

have happened if Boneheadia's system of accounting regulation had been more "principles-

based," with a different and less tradition-bound group creating accounting standards that were

less easy to game.

The former regulator and lifelong professor who seemed extra wise after the Great Recession

was England's John Maynard Keynes, dead for more than half a century. Keynes had predicted,

correctly, that "When the capital development of a country is a by-product of the operations of a

casino, the job is likely to be ill-done."

Afterword: The foregoing attempt is not an attempt to describe in a fair way real contributions

to the "Great Recession" in the United States. Certain characters and industries, for instance,

Tweakmore and investment banking, are grossly overdrawn as contributors to sin and mayhem,

while other contributors are not discussed at all. The whole idea was to draw attention to certain

issues in accounting, academic economics, and conceivable over-development of finance as a

percentage of the entire economy, by making the characters and the story line extreme enough to

be memorable.

DRAFT January 26. 1984

The practice of playing the stock market for relatively short-term gains has now reached

such a high level that it tends to give a bad name to capitalism, thus threatening the

cornucopia of goods and freedoms which only capitalism can provide. The country would

be improved by revision of its income tax law to reduce s_uch activity, instead of treating

it as a treasured national resource.

Short-tenn stockholdings are the norm for take-over arbitrageurs and now-numerous "pro-

fessional-bad-guy" investors (often called "raiders" by their detractors) who buy stock

in quantities sufficient to create or enhance take-over threa ts and compound their stakes

and encourage imitation as they are, more often than not, bought out at a profit either

by the threatened corporation or in some forced sell-out of the corporation's enti:·e busi-

ness. But the largest share of short-term stockholding now occurs i n simple super-activi t y

by securities' portfolio managers as each seeks to be better than the others in predicting

short-run changes in security prices. As large fees, commissions and othe r paper-shuffling

profits are earned in the course of increased short-term activity, the result is augmenta-

tion of a prosperous class of "new capital ists," not at all in the mold of Andrew Carneg i e ,

who tend to do for the reputation of capitalism what the court of Louis XVI did for the

reputation of monarchy.

Too much easy money is now being made by too many pie-divider types as dist inguished from

pie-producer types. This is bound to raise anticapitalistic sentiments as ir is increas-

ingly recognized, for ins tance, (1) that the work of one good dentist does more for general

felicity t han that of thousands of investment counse lors whose clients in aggregate are

poorer for their efforts as they try to out-perform one another in hyperactive management

of pension fund. COnYnOn stock portfolios, and (2) that most of these Investment counselors

(and stockbrokers and others who service them) are honorable, energetic , often bri I liant

people who would be more useful in other employment I f not drawn by f i nancial incentives

to their present pursuits.

The problem occurs in part because the stock market provides much more than the minimun

liquidity necessary to create reasonable cash-in capacity for supp li ers of long-term

capital to corporations. The extra liquidity entices into play a huge s upplement al

group - speculators (including pension funds and other institutions with staid names)

seeking relatively short-term gains.

Opinion Piece Page 2

Our 1 iquid stock ma rket, sheltered by gentle tax laws, has acquired a Jekyl I-and-Hyde

character and serves not only as an orderly place for transaction of essential economic

business but also as a near-idea l gambling casino. In recent years the casino part ,

with its great wealth and prominence, fascinating denizens and occasional bonanzas, has

drawn in ever-increasing cascades of short-term speculation. Current 100-Hilllon-share

days bring to mind the words of Keynes as he looked back at 1929:

"Spec.u.la.toM may do 110 haJUn a6 bubblv.. an a 1:.:t.e.ady otJt.eam 06 ente.Jtpl!Me.

But .the. po6ai.011 (,~ 6e/Uouo when en;teJt.p!U.6e becomu .the bu.bbte. 011 .the

whUti.poot on <ipec.ul.atimr. When .the c.a.paat development 06 a. courWt.y

becomu a by- pMdu.ct o 6 .t.he act.<.v-Ui.M o 6 a c.a.6.-i.no, .the job .-i.6 likely

.to be -i..U-do11e."

What, If anything, should be done about these developments? How much legalized gambling

shou ld our laws encourage, incident to the process of investing In stocks? These are

very difficult questions.

One way to address questions of such difficulty is by the "thought experiment" so beloved

by Albert Einstein. Suppose the la.1s were revised to discourage anything but long-term

holding of common stock. Assume, as an example, that the income tax rate on any sort of

mar ketable-common-stock-related gain was 70% for al,l non-underwriting holders, includ ing

pension funds and charities, with 110 offsets permitted for losses, unl ess the holding

period was at least five years. Would the country be improved?

Although tinkering would be desirable to prevent fr inge inequities, it turns out that

such tax law revision would be a good thing.

The revision supposed would drastically reduce stock option trading and make the market

for conrnon stocks le.66 liquid, but liquidity would remain much better than that available

for owners of farms or industrial real estate and wou ld be good enough. Conrn i sslons on

common stock transactions would be higher, but not greatly higher, and would not impede

serious long-term investment.

Investment in common stocks would become a 1 ittl e more like real estate investment, or

the Investment made when Henry Ford received hi s grubstake. Investment in newly-issued


convnon stock and common-stock-related securities like convertible debentures would

continue , although the first public issues of formerly private companies would create

a less liquid after-market, tend i ng to force prices tCMard level s which would attract

serious buyers planning to hold for a long time. Host expansion of business plant

would be financed , as it always has been, by retained corporate earnings and borrowings.

The potentiality for crazy, greedy, speculative stock market orgies would probably be

reduced. Such orgies are harmfu l to a country, have recently occurred in I s rael,

Kuwait and Hong Kong, and can conceivably occur here, as in 1929 or worse.

The "professional-bad-guy" gane, on balance not a good thing, would probably be dMlpened

down to some extent from its present frenzy , and what was left would provide more tax

revenue.

Long-term thinki ng would be more dominant, not only in the stock investment process, but

also in the cor porate management process, as the whirlpool of speculation, decried by

Keynes , was reduced. It is contrary to the national i nterest to have corporate managers

as pre-occupied as they now are with short- tenn records and temporary stock market effects.

So pre- occupied , managers cause corpora te action too similar to that of po l iticians vot ing

to effect outcomes i n the next elect ion rather than the next generat ion.

After antl-conmon-stock-speculation revision of the income tax law, some portion of the

nation's best brain power would be diverted from stock speculation Into activities such

as creation of more efficient retailing or diese l engines. Accunul ators of capital

would tend to be a little more in the mold of Edwin Land, David Packard and Jack Nicklaus,

whose cont ributions prevent resentment of their good fortune. Aristotle rightly concluded

that power should go to people perceived as deserving power, and improvement in the

reputation for quality of society's big winners would be desirable.

There i s l i ttle to lose by shifting tax burdens to favor by a greater extent long-term Instead

of short-term Investment. The present gross excess of short-term investment, if squeezed o ut ,

would not be missed by the overwhelmi ng majority of citi zens. Pension and end()f/lllent funds

could eas i ly adapt to purchasing stocks with the same time horizons now used when pur-

chasing rea l estate and, in aggregate , woul d be richer for the change. Stockbrokers


can reasonably be required to join independent truck drivers, unionized air line

stewardesses, etc., in adjusting to reduced incomes caused by changes made in the laws

to Improve the economic system. Moreover, even If a little pro-social activity were

eliminated along with more massive anti-social activity , that is no real objection.

The problem is like that of the cancer surgeon who wisely uses his knife despite the

inevitable destruction of a I ittle good tissue with the bad.

With gambling proclivity entrenched in the culture, it would be unwise to try to eliminate

all gambling. But it does not follow that gambling-type activity should be subject to

subnormal Instead of above-normal income tax rates and be Intermixed influentially with

the capital development of the country . While gains made in long-term common stock invest-

ment should be tax-favored as an Inducement to saving and eventua l transfer of power,

gains made in relatively short-tenn stock investment, in essence mere gambling-type

activity, should either be taxed normally, or better yet, be taxed at above-normal rates.

The rewards and penalties of the Internal Revenue Code channel the energies of the

citizenry and have a high moral content as they encourage one kind of activity over

another. Recently, Congress, at the request of commodity traders and other special

interests, has legislated in a manner e~actly opposite from right by Imposing on a

dollar earned in holding a stock index futures contract for ten minutes a tax rate l..fXilJeJL

than Is paid on a dollar earned in fanning, teaching or night work as a janitor. To

the extent the income tax law differs from norms of social value judgment, it becomes

less respected, a serious thing when tax collection depends largely on voluntary comp~l-

ance. The recent legislation impairs what we need , esteem for the tax law, to enhance

what we would be better off without, more trading in stock index futures.

The utility of 11 thought experiment , " for lesser mortals as well as Einstein, l ies in its

capacity to force acceptance of truths which are counter-intuitive. Counter-intuitive

as It may be for traditionalists and "free-enterprise" types, the country would work

better if the income tax law were revised to deter the short-term speculation and 11£.duc.e

liquidity in the stock market. The truly productive part of "free-enterprise" and the

secur i ty of Its future would thereby be both (I) enhanced by increased emphasis on long-

term effects of investment accanpanied by diversion of talent from speculation to more


useful work and (2) less likely to be damaged by unsound future legislation attributable

to public resentment of after-effects of stock market orgies and wasteful proliferation

of "new capitalists" who produce too little for what they get.

1514 WOIWS

Documents

Adam Blum’s notes from February 15, 2017 Daily Journal ......Adam Blum’s notes from February 15, 2017 Daily Journal (DJCO) annual meeting 1 This morning in Los Angeles, Charlie