By JOSH FUNK, Businessweek,
May 7, 2008, 8:58PM ET
Billionaire Charlie Munger said Wednesday investors should lower their expectations because the economic conditions many people used to build wealth over the past three decades aren't likely to be repeated.
Berkshire Hathaway Inc.'s vice chairman also predicted that the derivative contracts companies use to hedge against risk will one day cause widespread problems in financial markets.
Munger spoke at the annual meeting of Wesco Financial Corp., a Berkshire subsidiary he runs.
He said investors should expect annual returns of 4-to-5 percent going forward because many stocks are priced high and bonds are offering meager returns.
"It's going to be difficult for people to have high real returns," Munger said.
Plus, Munger said he believes "a lot of rot" has gotten into financial markets, and more scandals, like the current subprime mortgage mess, are likely.
"There will be a hell of a mess in these derivative books eventually," he said.
Munger said better accounting standards are needed and banks should not be allowed to put money into risky and complicated investments.
"These people wouldn't get away with this horrible behavior if the accountants didn't bless it," he said.
Munger said the testosterone-driven, competitive executives heading most investment banks are partly to blame for the current financial problems.
"I do not think we'd have this mess if women were running all the financial institutions," he said.
Munger said that in many ways the period between 1981 and today was "hog heaven" for investors who could simply put their money into sensible stocks and other investments and wait for a number of years to become rich.
"Such a world is by no means guaranteed," he said.
The Wesco meeting is held each year in Pasadena a few days after thousands of Berkshire shareholders descend upon Omaha, Neb., to hear chairman and CEO Warren Buffett and Munger spend most of a Saturday answering any and all questions.
Berkshire owns 80.1 percent of Wesco, but the company has its own publicly traded stock so it is required to hold annual meetings.
Munger is chairman, CEO and president of Wesco, but he consults with Buffett on Wesco's investment decisions and major capital allocations, much like Buffett consults with Munger about Berkshire decisions.
At Berkshire meetings, Buffett does most of the talking while Munger answers most questions, often with a pointed remark that cuts to the heart of what Buffett just spend 10 minutes explaining.
But sometimes he offers only "I have nothing more to add" after one of Buffett's more long-winded responses.
Munger didn't envision the Wesco meeting becoming much of an event until some members of the crowd started to look familiar.
"These Berkshire groupies started flying in from all over the world," he said. "And you naturally feel an obligation when people fly in from all over the world to give them what they want, which is conversation about the current business scene and investment process and so on and so on."
On Saturday, about 31,000 Berkshire shareholders filled the Qwest Center Omaha for that meeting. About 1,000 people came to Pasadena for the Wesco meeting and a chance to hear Munger alone.
"It's really a rare treat hearing a mind like that operate for a number of hours," said investment fund manager Whitney Tilson, who regularly attends both meetings.
Wesco shares gained $5 to close, or 1.2 percent, at $430 Wednesday. Berkshire's Class A shares lost $1,800, or 1.4 percent, to close at $128,400.
Wesco includes a reinsurance division, Kansas Bankers Surety Company, which offers specialized insurance to banks; CORT Business Services, which rents furniture to companies; Precision Steel, which buys scrap metal, cuts it to order and resells it.
In 2007, Wesco generated about $109 million profit for Berkshire.
Wesco is one of Berkshire's more than 60 subsidiaries that range from insurance to clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.Visit Share Investor Blog