Charlie Munger on firm dynamics (and Piketty)

From the Daily Journal meeting:

If you take the whole history of businesses that make a fair amount of money and have a little surplus but their basic business goes to hell based on technological developments, the results are lousy. The normal result is Kodak. Imagine having a business like Kodak and having it go all the way to bankruptcy. That’s the normal occurrence: technological obsolescence. 

There are few exceptions in the history of the world. One of them is Thompson Reuters. They were a newspaper company with a few television stations added and they basically milked them as long as they could, sold them for high prices, and went into a different business – online information – and they successfully made the transition.  That is really rare. 

The other rare example, of course, is Berkshire Hathaway. Berkshire started with three failing companies: a textile business in New England that was totally doomed because textiles are congealed electricity and the power rates were way higher in New England than they were down in TVA country in Georgia. A totally doomed, certain-to-fail business.  We had one of four department stores in Baltimore [Hochschild Kohn], absolutely certain to go broke, and of course it did in due course, and a trading stamp company [Blue Chip Stamps] absolutely certain to do nothing which it eventually did. Out of those three failing businesses came Berkshire Hathaway. That’s the most successful failing business transaction in the history of the world. We didn't have one failing business – we had three. Out of that little nothing, the excess capital that we took out and put somewhere else did better than anybody’s ever done. As a matter of fact, we recently passed General Electric in terms of market capitalization, and GE was founded by Thomas Edison himself in 1892, and one of the most powerful companies in the world. 

It was a considerable stunt. But the normal result is more like Kodak. Xerox is an interesting case. They went to the brink of extinction and then came back, but they are a pale shadow of their former greatness. They actually invented most of the stuff other people made so much money out of, and they still failed. Bill Gates is a big student of this subject, and he says that the standard result is failure. Imagine General Motors who went bankrupt. Can you imagine how they towered over the economy when I was young? It was the biggest, more valuable, most admired company, and it took the shareholders to zero.

Like everyone, I have read a fair amount about Buffett (recommended) and Berkshire (recommended), and it is indeed a pretty amazing story. Buffett has said many times that the Berkshire purchase was a terrible decision. It threw off enough money to buy some insurance companies then it went under. He kept it open for some time as a favor to its employees and the New England economy. The insurance businesses generated enough float to buy some other businesses. Blue Chip Stamps didn't seem to do much after he bought it, but it also generated some float and was holding Sees when it came into Berkshire. He made some other mistakes; reading about his shoe investments in the late 80s/early 90s makes the reader cringe. But his insurance companies enabled him to purchase some big winners, like Washington Post, Geico, and Coke. Reinsurance has done great. He's a testament to the ability of markets. through all of their churning, to gradually move capital to the places where it can accomplish the most. There's a lot of trial and error, but the job gets done. A lot of it gets done by entrepreneurs, but not all:

In the whole history of Berkshire Hathaway, I can only think of one new business that we started by ourselves at headquarters, and that was the reinsurance department. Now, that is a huge business, and it’s made an enormous amount of money. Berkshire Hathaway, for all its glorious achievement, started one new business. Everything else we bought.

Could the secular decline in entrepreneurship reflect a growing propensity of existing businesses to innovate and reallocate resources appropriately without the need for entrepreneurial disruption? It's worth thinking about.

Munger also has this to say:

Mr. Piketty is a little daft. Put me down as hoping the Pikettys don’t marry into my family. It isn’t that some of his numbers aren’t correct, but he just doesn't interpret them correctly. Of course if a place as big as China gets really good at manufacturing it’s going to reduce some union jobs in the rest of the world in every trade. But they have a right to succeed. The rest of us can be mature enough to adjust instead of bitching about the fact that the world is occasionally a little tougher than we would have chosen. Of course there are going to be parts of the economy that do better or worse over a twenty- or forty-year period. It’s not some malevolent outcome. It’s a huge change, and in terms of world equality it’s enormously improved. To sit in a very rich country with a 36-hour week and complain about the fact that all the other people are coming up just doesn't strike me as a very mature or noble way to behave.

Probably Munger already knows this, but pointing out that growing inequality is a classic first-world problem isn't going to win him many friends.