Practice Evolution

"This is really important. For example, Hertz and Enterprise Rent-a-Car through practice evolution have developed personnel systems, etc. that work for them. They are like different species in similar ecological niches." by Charlie Munger (May 15, 2000)

"Common stock investors can make money by predicting the outcomes of practice evolution. You can't derive this by fundamental analysis -- you must think biologically.” by Charlie Munger (May 15, 2000)

"Another example is Tupperware, which developed what I believe to be a corrupt system of psychological manipulation. But the practice evolution worked and had legs. Tupperware parties sold billions of dollars of merchandise for decades.” by Charlie Munger (May 15, 2000)

"We wouldn't have bought CORT if we didn't like the culture, which resulted from long practice evolution." by Charlie Munger (May 15, 2000)

Derivatives

"Originally, there were interest rate swaps. If you did them naked, you could lose or make an enormous amount. But there wasn't enough money for traders, so they adopted mark-to-market accounting. Everyone caved, adopted loose [accounting] standards and created exotic derivatives linked to theoretical models. As a result, all kinds of earnings, blessed by accountants, are not really being earned. When you reach for the money, it melts away. It was never there." by Charlie Munger (May 15, 2002)

Expect the unexpected (Japan example)

"Warren has said that over 40 years, a lot of surprising things will happen." by Charlie Munger (May 15, 2002)

"What's interesting in Japan is that every life insurance company is essentially insolvent because they promised to pay 3%. Who'd have thought that this could lead to insolvency, but interest rates went to zero and stayed there for years. They tried to invest in equities, but got negative returns. Can you imagine 13 years with negative equity returns and interest rates below 1%?" by Charlie Munger (May 15, 2002)

"Is it inconceivable that it could ever happen here? I don't think so. Strange things happen." by Charlie Munger (May 15, 2002)

"Anyone has to be flabbergasted by Japan's recession, which has endured for 10 years, despite interest rates below 1%. The government is playing all the monetary games, but it's not working. If you had described this situation to Harvard economists, they would have said it's impossible. Yet at the same time, there's an asset bubble in Hong Kong. Why? Because Japan and China are two vastly different cultures. The Chinese are gamblers.” by Charlie Munger (May 15, 2000)

Risk of the unexpected

"A lot of things happen that you can't predict. Who would have predicted the war on terrorism, government spending increasing 10% each of the past two years, etc.?" by Charlie Munger (May 15, 2002)

"We try to run our companies so there's no chance of going back to Go. I think we're way more aware of that possibility [the risk of going back to Go], but that's no guarantee [that it can't happen to us]. In our insurance underwriting, we put in more clauses [limiting our risk] and are more aware of aggregate risks." by Charlie Munger (May 15, 2002)

USG

"[Our investment in] USG obviously hasn't worked out very well. It wasn't just asbestos -- the market for wallboard went to hell. We missed that too. What can I say? It reminds me of a story about a man who had a wife and three kids. He conceived an illegitimate child with a woman he'd just met. When asked why he did it, he said, 'It seemed like a good idea at the time.'" by Charlie Munger (May 15, 2002)

Financial industry

"The financial industry has become so big. We keep pushing it further and further and further. For example, we now lease new autos for 36 months and guarantee a high residual value. How much further can you push consumer credit? We don't like it. We don't like pushing credit to extremes. We don't like daisy chain stock promotion. However, one of Berkshire's largest holdings is American Express, so we think it has a great future." by Charlie Munger (May 8, 2001)

Wrigley

"Wrigley is a great business, but that doesn't solve the problem. Buying great businesses at advantageous prices is very tough." by Charlie Munger (May 8, 2001)

Insurance risk

"We write huge policies or ones with unusual limits, but never ones with unlimited liability. The biggest risks are [assumed by] those who write lots of homeowner's policies." by Charlie Munger (2001 Annual Meeting)

How to detect bad reserving

"If [an insurance company's] combined ratio is wonderfully regular, then it's probably crooked. It's also a bad sign if a company is consistently under-reserving." by Charlie Munger (May 8, 2001)

"Sometimes you can tell by the people that the numbers are good. For example, George Joseph of Mercury General is a genius and you know his numbers are right." by Charlie Munger (May 8, 2001)

State Farm

"State Farm is one of the very richest insurance companies in the world. It's an honorable, old fashioned, high-grade place. They have integrity and skill. In condominium insurance, for example, they're the best. They're in Indiana, don't have elaborate compensation schemes, no stock options, and no high-falutin' advisors -- and they've blown by competitors. We admire them." by Charlie Munger (May 8, 2001)

"They're enormously rich, so if they decide to keep a lid on auto insurance, I can't predict when they might stop. We [at GEICO] have a better model though." by Charlie Munger (May 8, 2001)