Grumpy Old Men Do Have Their Uses

It is no surprise to see sections of the media working up steam about the latest comments made by Charlie Munger, the original grumpy old man of the investment world. Although best known as Warren Buffett’s long-standing business partner, Mr Munger passed out summa cum laude from Harvard Law School in 1948, and, before teaming up with Mr Buffett, had already carved out a successful career as a lawyer, property developer and investment manager.

At the age of 86 he rarely misses an opportunity to take issue with conventional wisdom and deplore the follies of those who seem to share it. The latest rumpus follows his remarks to a group of students at the University of Michigan, during which he praised the bank bail-outs of 2008 as essential to the preservation of civilisation and told those who complained that homeowners rather than banks should have been the beneficiaries of taxpayers’ money, in effect, to stop whingeing.

“There’s danger in just shovelling out money to people who say ‘My life is a little harder than it used to be’. At a certain place you’ve got to say to the people ‘Suck it in and cope, buddy. Suck it in and cope.’”

As for the bank bail-outs, he argued that they were unavoidable and necessary, making an explicit comparison to the rise of Hitler in the 1920s, which followed a period of hyperinflation and financial collapse.

“Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens,” Mr Munger said. “I think when you have troubles like that you shouldn’t be bitching about a little bail-out. You should have been thinking it should have been bigger.”

When Germany was unable to stabilise its financial system in the 1920s, he noted,“we ended up with Adolf Hitler”. (This analogy, although far from historically precise, also seems to explain the extraordinary recent success of Adam Fergusson’s reprinted account of hyperinflation in the Weimar Republic, When Money Dies).

You can see why Mr Munger would never win a prize for diplomacy. Billionaire investors who appear to be telling those who have lost their homes and jobs as a result of Wall Street excess to grin and bear it are asking for controversy.

Given that Berkshire Hathaway is a substantial shareholder in Wells Fargo and Goldman Sachs, both of which received government money during the crisis, albeit against the bank’s own wishes in the former case, it is easy to dismiss his comments as nothing more than glorified self-interest. (Berkshire Hathaway is also a large shareholder in Moody’s, one of the credit rating agencies that many, rightly, criticise for their role in enabling subprime lending to develop into a global financial crisis).

The irony is that Mr Munger, while his style of delivery may often make you wince, has for years talked as much sense as anyone about the shortcomings of Wall Street and those who work there. Many fund managers, to my knowledge, swear that the verbatim transcripts of the series of talks he has given to students on the secrets of investment and worldly success are among the best things ever written on the subject. His analysis of why the stock market most closely resembles a pari-mutuel betting exchange is an exemplary text for anyone drawn to a certain style of high conviction, value investment.

The warnings that he (and Mr Buffett) have given for years about the hidden dangers in derivatives are just the most obvious example of views that policymakers, in their wisdom, have chosen to overlook. He also criticises accountants for allowing firms such as Enron, and many banks for that matter, to book illusory profits on complex derivative transactions which should never be allowed near a published financial statement. The academics who invented and then endorsed deceptively reassuring risk models that are based on wholly impractical assumptions are another favourite target.

Nor has he been an outspoken admirer of the universal banking model. The world, he argued earlier this year “would be a better place” if investment banks such as JPMorgan were no longer allowed to run “a gambling casino alongside a legitimate business”. Investment banks “can make revenue from every which way in a legitimate manner. Why do they need every form of gambling conceivable to man? Many of these products have attributed far more damage than they have benefit.”

I have always liked also the analogy Mr Munger uses to describe the incentives that drive many firms in the investment advisory and management business. The comparison he draws is with a shopkeeper who sells exotic-coloured fishing tackle to anglers. When asked whether purple and green floats really do help to attract more fish, the salesman replies: “Mister, I don’t sell to fish.” There is no simpler way to explain why funds and structured products so often come up short of expectations. Grumpy old men who speak their mind have their uses.