Should we just let all the immigrants in?

My girlfriend and I recently moved from my home town of Seattle, Washington to northern California. In the Bay Area, even more so than in Seattle, immigrants of all kinds, but especially Hispanics, dominate the human landscape. I already had a pro-immigrant bias before moving here, but I’d like to share a few observations that have made me even more in favor of working out a way for as many foreigners as possible to come to the United States to live, work, and enrich their lives and our society with their contributions.

I rented a 15′ Uhaul truck with a tow dolly for my car, and with the help of my power-lifting girlfriend and a few friends, loaded all our worldly possessions into it and drove the 850 miles to our two-bedroom apartment in Palo Alto.

Not wanting to saddle my hapless love with yet another day of carrying heavy things, I drove to Home Depot the next morning to hire some help. A couple of middle-aged Hispanic guys were chatting together in the parking lot, and I asked if they new anyone who’d be willing to help unload a moving truck for $20/hour for what I estimated would be a 3 – 4 hour job. One of them asked what I was moving, and after I described the two queen beds, couch, and other assorted furniture, he said he was game, and I drove us back to the apartment.

Jose, I’ll call him, worked tirelessly with me, hauling everything up carefully, only accepting some bottled water as a benefits package, and politely declining my invitation for lunch. He said little, but worked hard and continuously, clearly having done this before, and offered wise, laconic advice on the proper way to turn a chest of drawers, or to rotate a box spring into the house. We finished in record time, about 2 hours, after which I drove him back to Home Depot and rounded up his wages to $80 as a token of his industriousness (and with admonitions of my girlfriend not to ‘exploit’ our new worker ringing in my ears. She is less enthusiastic of being a part of the job-creating class than I am.) Jose gave me the first smile of the day, thanked me, shook my hand, and went on his way.

Jose spoke English decently, and told me in our brief conversations to and from his erstwhile job site that he had lived in East Palo Alto for 10 years in a bedroom he rented for $1,000 a month; it was $500 only 4 years ago, but inflation has crept up everywhere in the Bay. Jose did mostly carpentry and other construction work, and sent money back to his family in Mexico. He indicated it was too dangerous for him to be in Mexico, but said his family was safe when I asked about them.

I have no idea whether Jose is here legally or not, and frankly I don’t really care. I needed someone to do tough, brief work with me ASAP for a reasonable price, and Jose came through in spades. This was the first time I’d ever hired a day laborer, and it worked out wonderfully.

This story illustrates what I’ve observed from varying distances hundreds of times: most immigrants to the United States work honestly, intelligently, and hard, often harder than native-borns like myself, either because they have to or because the ones who attempt to come here are more motivated and skilled than those who don’t.

The immigrants I know in America include:

  • The Hispanic yard maintenance guys shoveling dirt out of a pickup truck on Thanksgiving day while I strolled by leisurely after eating a gut-busting turkey dinner with my family.
  • My very bright and thoughtful Indian data analyst colleague who earned his Masters in the midwest, studies American politics more closely than I do, and told me about his trip with his friends to Glacier National park, describing a spot that was the “most beautiful place in the world” that he’d ever seen. He fortunately beat the odds in the H1-B visa lottery, managing to win a 3-year extension to his visa, despite only a 40% chance. I feel bad for the other 60% working just as hard and intelligently as him, and contributing just as much in economic surplus and taxes, who had to disrupt their productive lives and relationships in the US and return home through no fault of their own.
  • The Mexicans migrants in wide-brimmed hats picking strawberries in the 100 F heat with while I roadtripped in air-conditioned comfort down to Monterrey Bay to enjoy a county fair last weekend, stopping at a farm stand to buy some of the delicious, hand-picked fruit for a song.
  • Countless other other coworkers, neighbors, restaurateurs, Uber drivers, friends, and friend’s parents, all of whom came to the US seeking a better life for themselves and their families, and most of whom found it.

I also think about the would-be immigrants whom I’ve had less contact with, but whose stories are even more poignant in their rejection. I met a thin, boyish-faced man of about 40 in a rural village in the Philippines who was the youngest son of a mother who emigrated to the east coast of the US 15 years ago to work as a nurse. His dream all these years had been to join her there and live and work in America. He worked in construction and carpentry in the Philippines where wages are about $6 per day for unskilled day laborers, and stressed how he could have, and would have, done nearly any type of work in the US in order to move there. After finishing his story, he stared off wistfully for a few seconds, and then stated simply that he’d given up on his American Dream. His annual visa applications had been rejected year after year, despite his mother and her stateside friends’ entreaties on his behalf, and he had decided that fate–or more likely God; the Philippines is very Catholic–clearly did not intend for him to make the move.

My weekend to the Monterrey fair ended with a rodeo. The audience was probably 80% Hispanic. One announcer narrated in English, and the other in Spanish. Both the Mexican and American flags were presented, and both national anthems were played. The bronco riders were a mix of brown and white faces, and were cheered by all. Four white US servicemen performed a bull-dodging stunt while surrounded by rings of fire, and a European bullfighter had been flown in to leap impressively over a charging bull (three times!) It was the only US spectator event in my memory where as a white person I’ve been in the racial minority, but I felt perfectly welcome. The mariachi bands, elephant ears, tacos, 4-H exhibits, crowds of happy families, and the mix of languages all blended together for a uniquely enjoyable American experience.

That fair was a microcosm of how I view immigration to America: there are many pillars of the American system that people come here for and that are mostly enjoyed and revered by all of us. The elephant ears, corn dogs and wooden roller coasters are the rule of law, freedom of, or from, religion, and a peaceful political process. Other things that immigrants bring to America may not be for everyone (spicy salsa, or burkas, say), but as long as they don’t violate the rights of others living in American, we tolerate them peaceably, even if we view them with suspicion (deep-friend Twinkies, say.)

The real win is when immigrants bring something new and valuable to this country, as they have done for hundreds of years. Just consider food and drink alone, which I’m prone to do…:

The Germans brought beer (God bless them!), the Italians pizza and pasta, the Scottish whiskey, the Jews, in league with the Irish, corned beef and cabbage. More recently the Japanese brought sushi to our collective table, the Chinese gave us dim sum as a hangover-curing brunch alternative, and from Mexicans we obtained the taco, which is probably the most revolutionary thing to come out of Central America since Pancho Villa.

I rest my case: Viva la inmigración!

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All of Jeff Bezos’ Amazon Letters to Shareholders together in one PDF

For your reading pleasure and business edification, here’s the complete set of Amazon Shareholder Letters penned by CEO and founder Jeff Bezos in one handy PDF file:

Jeff Bezos – Compilation of Amazon Shareholder Letters 1997-2016 – FINAL.pdf

This volume starts with the classic and first 1997 letter to the 2016 letter, which just came out. Bezos is known for his clear and profound thinking about business generally, how to delight customers, and how to build and sustain an incredibly innovative enterprise.

(Special thanks go to the good people that maintain the free version of PDF Split and Merge which I used to compile this, and to whomever already did the work for letters from 1997 – 2012.)

Ward’s 2016 Washington State, King County, and Seattle voter’s guide

Washington State’s November 2016 election ballot is chalk-full of important initiatives that require careful consideration.  I’ve given them that, and give you my recommendations below.  With one exception, this guide will NOT cover individual candidates, as I believe that territory is too divided along partisan lines.

5 minute voting guide

Seattle

WA State

  • STRONG YES on Measure 732 – Make polluters pay their fair share for putting our collective home, Earth, in jeopardy via a proven and effective carbon tax. 732 reduces taxes on non-polluting things to boot!
  • NO on Measure 1433 – $15 minimum wage for WA state: This one requires a lesson in microeconomics that is not easy to deliver in a couple sentences: High minimum wages cause the least-skilled & most vulnerable (poorer, younger, less-educated) workers to lose jobs. This isn’t just theory, it’s already happening in Seattle due to the jump to $11 per hour. I discuss this one more below.
  • YES on Measure 1464 – Campaign finance reform with restrictions on lobbying by former politicians. Also restricts donations from potential state contractors and others with sleazy, non-democratic interests.
  • YES on Measure 1491 – Reasonable tool to try to reduce firearms access for those in imminent danger  of hurting themselves or others, complete with constitutional protections based on existing legislation for restraining orders. Don’t worry, the state can’t simply walk into your house and take your guns on a whim, I promise.
  • STRONG NO on Measure 1501 – Don’t believe the title of this bill; it’s a misleading scare entirely bankrolled by a very strong union (the SEIU) to hide its public employees from public record to keep these employees for learning about their rights. Seriously. It’s ugly. The Seattle Times explains.
  • STRONG NO on Measure 735 – Does nothing regarding Citizens United/corporate influence in politics, but has some harmful suggestions such as removing non-profits from lobbying. The Seattle Times explains.
  • YES on the Advisory votes 14 and 15 – Doesn’t do anything binding. Recommends maintaining consistent, already-passed tax policies.
  • STRONG YES on Senate Joint Resolution No. 8210 – A governance ‘good house-keeping’ bill with no one opposed to it.

King County

  • YES on both Charter Amendments 1: make Prosecuting Attorney a nonpartisan office, and 2: update the 1950’s-era Charter language to make it gender-neutral: councilmember instead of councilman, etc. Turns out women serve in government too.

STRONG recommendations are based on how clear the evidence & likely outcomes of a decision are to me. They have nothing to do with how important the measure is.

Candidate Recommendation

I STRONGLY RECOMMEND Brady Walkinshaw for US Representative in District 7. He’s for 732, speaks intelligently and correctly on a wide range of issues, is whip-smart (Fulbright scholar, Princeton alum), has made big impacts in local government around improving the lot of the mentally ill, reducing our prison population, and improving the environment. He’s also 32, and would be the youngest member of congress, and might actually know how to use the internet.

Brady worked for the Bill and Melinda Gates Foundation for several years, which is know for its rigorous, evidence-based approach to uplifting people. He also seems humble, pragmatic, and especially willing and able to work with Republicans–both candidates in this district are Democrats– to get things done. I also had the pleasure of meeting Mr. Walkinshaw at a “town hall” event, and was extremely impressed.

More thoughts on the initiatives

YES YES A THOUSAND TIMES YES on 732 – carbon tax

Carbon taxes, along with ‘cap and trade’, are the smartest kind of global climate change legislation. A similar carbon tax has been working successfully already in British Columbia. This bill is also revenue-neutral, which means no extra taxes, and no budget cuts either (or at least very small ones either way, depending on how the math works out.) Businesses will now pay for their pollution costs, but they and their consumers (read: us!) will get a break on producing and buying pollution-free goods. Those on the left that oppose this are either fools or hypocrites, or both.

NO on 1443 – $15 minimum wage in Washington state

Don’t, through good intentions, close the door on the lowest-skilled folks in society by forcing their cost above what businesses would pay. High minimum wages cause the least-skilled & most vulnerable (poorer, younger, less-educated) workers to lose jobs because they can’t get jobs at the (lower-than-new-minimum) wages that employer’s would be willing to pay them. Thus, these folks lose, and employers hire a few less workers, who are more skilled, at the higher minimum wage. Employers might also automate a little more and do other things to reduce their labor needs.

This is happening in Seattle already, as explained here.

Help the working poor instead by improving their skills (education, job-training & vocational programs), providing cost-effective services (health & child care, which might also make poor children more socially mobile), and allowing the poor to keep more of what they make (income tax reductions for the poor & things like the Earned Income Tax Credit.)

Another overly-simplistic way of looking at this is that I’d rather pay 10 people $9/hour then 9 people at $10 per hour and have the least skilled guy be unemployed.

My background and biases

I have an MBA from the University of Washington, focusing on economics & finance, and two degrees in Physics. I’ve worked as a financial advisor, data analyst, and engineer. I’ve researched each measure thoroughly, spending about 12 hours total on the entire process, and have consulted several sources*.

What I believe in

Utilitarianism: I believe every individual’s well-being is of equal intrinsic value, be it a Washington voter, a felon, or an African living halfway across the world. The goal of policy should be to promote the greatest happiness across the greatest number of people**.

Libertarian paternalism: I also believe that individuals themselves are usually the best judge of what will make them better off, and that ‘freedom’ (bounded by laws to protect others’ liberty) and markets (i..e: collective free choice) are the defaults that usually lead to the best outcomes.  That said, institutions can improve humanity’s collective lot further by shaping choices to help individuals in areas where we know humans do badly for themselves, including cases of addiction, mental illness, or more mundane mental problems like laziness or poor statistical reasoning (automatic 401k contributions are brilliant, for example.) Also, there is room for governments to engage in wealth redistribution or other measures that boost the total world’s well-being, after adding up the social costs & benefits.

I generally favor more choices for people as opposed to fewer. I also believe society should often reallocate its resources to the people who have the least in the world, being careful not to create bad incentives that decrease our prosperity net of distributive benefits. The simple fact is that the amounts given up by the well-off often does much more good when received by the worse-off. For example, $3,500 can save a life in Africa, but will barely get you a college quarter’s tuition in the United States.

Footnotes

*Credit for my conviction, or rather conversion, against high minimum wages goes to my microeconomics & finance Professor Edward Rice, who held a riveting lecture on Seattle’s $15 minimum wage law prior to that vote last year. He and the majority, but certainly not entirety, of economists and their studies on the subject finally convinced me that high minimum wage laws (defined as, say, > 50% of the poverty level), well-intentioned as they might be, actually hurt the working poor, and society as a whole.

**Technically, I would amend this to ‘the greatest well-being for the greatest number of sentient beings’, which would include animals that can suffer/feel pain. As Jeremy Bentham said, “the question is not, Can they reason? nor, Can they talk? but, Can they suffer?”

***A good explanation of how inefficient & costly rail, and unfortunately, other public transit systems are, can be found here, and light rail specifically here. My one criticism of this analysis is that the author doesn’t account for global climate change externalities (which he DOES incorporate others), but I suspect that would make little difference in the calculations and conclusions. All hail the carbon tax & flexible, cheaper bus system instead!

How does your credit score stack up against the average for your age group?

I ran across this article while trying to find some data on average/median credit scores by age group.  They had a handy graph (see below), courtesy of my favorite free FICO-like credit score site, Credit Karma.

Why should you care about your credit score?

As financial writers like Ramit Sethi have pointed out, your credit score is crucial when it comes to saving BIG BUCKS on loans (via a lower interest rate) for items like cars & homes.  Additionally, folks ranging from landlords to employers to cable companies are using credit score to evaluate you, so keep your credit score high!

What the data says

As you might expect, credit scores tend to increase with age.  Those aged 25 – 34 have an average credit score of about 650, while those over 55 have an average of about 725.

Another useful metric is the FICO median credit score for the US, which is 723.  (‘Median’ means 50% of people have a score below 723, and 50% have one above, whereas average just combines everyone’s score & divides by the total population, which allows really bad, or really good, scores to move the average a lot more than they’d move the median.)

Since the median method of calculation keeps terrible scores from dragging down the average (which is probably why it’s higher than the average score shown in the chart below), this is probably a better measure to benchmark yourself against if you’ve never had any terrible credit history (default, bankruptcy, foreclosure, etc.)

So, where do you rank?

I recommend you get your credit score by signing up (quickly, and with no hassles or gimmicks!) for a free account at creditkarma.com.  (I’ve used them to check my score every year or so for the past few years, and have been very happy with their site.)

Anything over 750 range is good, with a good goal being around 780 or above.

Check out the above-linked article from Ramit Sethi on how to improve your credit score if it needs a boost!

2013 retirement account updates – IRS contribution limits increase for IRAs and 401ks!

IRS contribution limits for 401ks/403b plans will increase to $17,500 in 2013 (up from $17,000 in 2012).   The 50+ age group can contribute an additional ‘catch up’ amount that will remain at $5,500 for 2013.

Additionally, Roth IRA contributions will increase from $5,000 in 2012 to $5,500 for 2013 for those under 50, and $6,500 in 2013 for those 50+.

For those boss ballers making six figures (nice work!), the Roth IRA contribution phase-out range is Adjusted Gross Income (AGI) of $112,000 to $127,000 for single tax filers, and $178,000 – $188,000 for married filers.  This basically means you can’t make ANY Roth IRA contributions if your income is at or above those levels.  If you’re close, check with your accountant, or crunch your AGI numbers in a program like Turbo Tax come January/February to determine if you can make any contributions for tax year 2012.

Keep stashing as much cash as you can in those tax-advantaged retirement vehicles!

Details: http://www.irs.gov/uac/2013-Pension-Plan-Limitations

Ward’s 2012 Washington State, King County, and Seattle voter’s guide to the issues

Washington State’s November 2012 election ballot is chalk-full of important initiatives that you have a duty (that’s right) to vote intelligently on.  To help with that, I’m going to go over my recommendations below.  With one notable exception this year, this guide will NOT cover individual candidates, as I believe that territory is too fraught with political biases to be worthwhile to an unsympathetic reader.

Why should you give any credence to what I say?  Because I’ve researched each measure carefully, consulting several sources, am highly educated (two college diplomas and an MBA, with a solid background in economics, finance and even some philosophy), reasonably intelligent, and thoroughly rationale and critical.

My biases: I take it as given that each individual’s happiness is equally important (be it a Washington voter, felon, or Chinese guy), and that the goal of good policy should be to promote the greatest happiness across the greatest number of people.  (I.e.: I’m a died-in-the-wool Utilitarian after the fashion of Jeremy Bentham.)

These positions follow from the above philosophy:  I generally favor more choices for people as opposed to fewer (because people are usually made better off with more choice, except in certain cases.)  I believe society should often reallocate its resources to the people who have the least in the world (being careful not to create bad incentives that decrease our prosperity), as the amount given up by the well-off often does more good as an amount received by the worse-off.

As a simple example, Bill Gates wouldn’t miss $20 (and nor would most of us), but that same $20 can buy vaccines in Africa that could save a life.

Without further ado, here’s how you should vote (and why)!

State issues:

Ref 74 – Allow the gays to get marriedAPPROVE.  (Note that this bill preserves the right of religious organizations to refuse to perform, recognize, or accommodate any marriage ceremony, like that of a same-sex couple.)

502 – Legalize, regulate & tax marijuana – APPROVE.

Marijuana doesn’t appear to be particularly harmful.  Let’s let adults make adult decisions about what (at worst) mildly harmful substances they choose to ingest of their own free will.  Furthermore, policing marijuana has been largely a failure, and is extremely costly.  Instead, this bill will stop treating ADULT (21+) casual weed users as criminals, and turn weed use into a profitable source of state revenue for education, etc.

1240 – Public charter schools in WA state: APPROVE.  We need to explore more options in improving public education in WA state (and nationally), and allowing freer rein to nonprofit school administrators in a select group of 40 public charter schools seems like a very reasonable way to try some new things in education.

These charter schools are still publicly-funded & publicly-accountable schools (read the description of the bill before you go spouting off misleading WEA-influenced rhetoric willy nilly.)  They’re open to everyone, regardless of income (there’s no tuition, overflow applications will be handled by an impartial lottery), and they don’t ‘take money from public schools’ in the sense that they ARE public schools, run by a nonprofit org, and therefore get money from existing public school sources.  They are simply ALTERNATIVES to existing public schools.  They have to maintain the same hiring & educational standards as all other WA state schools.

Charter schools may not end up being the ‘answer’ to our less-than-stellar education system, but let’s please at least explore the possibility (and then measure & analyze the results), rather than being defeatist by opposing any new innovations in public education.  THINK OF THE CHILDREN! J

8221 & 8223: APPROVE each – Take a look at the 2012 Legislative voting: hardly anyone on either side of the political aisle opposed these bills of fiscal reasonableness, which is a good sign that we should pass them.

Advisory 1 – MAINTAINED – Recommend to the legislature to maintain the closure of a business tax deduction (aka, a tax ‘loophole’!)  I’m all for eliminating deductions favoring silly things, even when popular (I’d LOVE to see the homeowner’s mortgage interest deduction go away, but it’ll never happen.)  In economic theory, such loopholes distort incentives, and are bad for economic efficiency (unless they’re correcting/promoting for negative/positive externalities, like taxes on gasoline, which are a good thing, and should be higher!)  Plus, WA need revenue, so let’s close this and collect some.

Advisory 2 – MAINTAINED – See above rationale.  This time we’re taxing a negative externality-causing thing, petroleum, and perhaps correcting for subsidizing of negative externalities).

BTW, neither of these advisory votes matter that much since they won’t change the law by themselves!

Seattle & King County

APPROVE both Prop 1 in King County (fingerprinting levy to aid law enforcement) and Prop 1 in Seattle to rebuild the crumbling Alaskan Way seawall.

2012 Bonus recommendation – Ward’s votin’ Republican in the Governor’s Race

WA State governor:  I normally don’t post any of my partisan (Dem vs Republican) recommendations, since I want to restrict this guide to a non-partisan review of issues, vs politicians, but I’m going to break this rule for this notable reason: for the first time in my (relatively short) electoral life, I’m voting for a Republican, Rob McKenna, for WA state governor.  (The Seattle Times also recommends Mr. McKenna, along with a few other Republicans, as well as Democrats, that I will be voting for in large part due to their recommendation rationales.)

In short, McKenna seems to be more thoughtful and have more detailed, practical plans on tackling tough issues like education & health care costs in WA state than his opponent, Democrat Jay Inslee.  Inslee seems mostly full of hot, nice-guy-that-you’d-have-a-drink-with political air, spouting vague platitudes which I generally agree with in principle, but that don’t seem to have any practical implementation behind them.

While I disagree with McKenna’s backing of Eyman’s initiative to prevent the legislature from passing taxes without a 2/3s majority (because I think it will hamstring our legislature’s ability to close loopholes & properly fund voter-approved measures, and puts us on a road to major fiscal problem similar to places like California that have tried such a thing), I think McKenna is the best choice for governor of the two.  He has the strongest plan & apparent commitment to fund higher education (he wants to increase state funding from 30% to 50% of the cost of tuition), and he also seems serious about introducing measures to reduce the cost of health care at the state level (by favoring Health Savings Accounts & increased competition in state health care plans.)

You can find a comparison of McKenna & Inslee on the issues here: http://seattletimes.com/html/localnews/2019488749_govissues21m.html

And also here, which includes a video of the first gubernatorial debate: http://www.diffen.com/difference/Jay_Inslee_vs_Rob_McKenna

Highlights from the Berkshire Hathaway shareholder’s meeting 2012

I finally got around to visiting Omaha to hear superinvestor & ‘world’s 3rd richest man’ Warren Buffett and his business partner Charlie Munger hold forth at the annual Berkshire Hathaway shareholder’s meeting on May 5th, 2012.  For those of you who aren’t Buffett fanatics (you should be; start with this, then this, and then read these), Berkshire Hathaway is a conglomerate of insurance companies & other businesses that Warren Buffett has presided over for some 35+ years, and has returned ludicrous results to its investors (which are NOT likely to be repeated, mind you!)

Every year, thousands (about 35,000 this year) flock to Omaha to hear about the condition of their beloved company, to shop at Berkshire subsidiaries like See’s candies and GEICO, and to catch the pearls of wit & wisdom that drop from the mouths of Buffett and Munger.

Watching the dynamic of Buffett & Munger as they each added their ‘2 cents’ to the varied discussions was highly entertaining, and often elucidating.  Buffett, long-spoken, friendly, upbeat, and literary, was contrasted and complimented by Munger’s laconic, pessimistic (he might say realistic), and sharp-tongued (and often hilarious) responses.

My notes

Lest such pearls escape me, I furiously scibbled notes during the 5 hour question & answer session during which Buffett and Munger deftly responded to questions from investors, media, and analysts on a host of topics ranging from investing to politics to ethics.

Here’s the ‘best of’ what I was able to catch and jot down.  Please note that while I often tried to capture exact quotes, a good deal of even the quoted material may not be ‘word perfect.’

The newspaper business

One shareholder asked Buffett about the recent purchase of a (print) newspaper, the Omaha-World Herald.  Given the declining economics of print media, the shareholder was (quite rightly) concerned about the future of newspapers.  Buffett responsed that he “believes in newspapers where there’s a sense of community.”  And explained that papers must have “primacy” (primary importance) in an area that the people who read it are interested in.

He described how traditional domains of newspapers (stock prices, classified ads, real estate listings) no longer have ‘primacy’ for their readership, who have largely moved on to the internet as the primary source for such info.  However, Buffett believes that community papers with local issues (like obituaries) can still thrive in the digital age, so long as those papers can remain as the most important source of that community-centric information for the paper’s readers.

Management of Berkshire’s businesses

Buffett often talks about the quality of management hired to run Berkshire’s subsidiaries.  Buffett claims to do nothing more than 1) make capital allocation decisions with the cash that Berkshire’s subsidiaries create and 2) create an environment (including compensation arrangements) to retain and attract top-quality managers.

Commenting on how independently competent Berkshire’s managers must be when it comes to running their operations, Buffett commented that “if we thought the success of our investment [in a subsidiary] depended on our advice [to management], we wouldn’t make the investment.”  In describing the work environment for managers that he tries to create, Buffett noted that he “can’t create passion in someone, but he can take it away [through a bad management structure.]”

One aspect of creating a good management structure is appropriate compensation. Berkshire has hired two former hedge fund managers to invest funds for Berkshire’s own portfolio.  These managers will receive 10% of any 3-year rolling gains above the S&P 500, incentivizing them to beat the stock market average, but also making sure they have to do it on a long-term basis.  Additionally, 80% of each individual’s bonus will come from his own efforts, but 20% will come from that of the other guy’s performance, as an incentive for them to work together and share investment ideas.

Munger added that “90% of those in the investment business would starve to death on that [compensation] formula.”  (Although I’ll add that each of those two Berkshire investment managers also receive a ‘base’ salary of $1 million per year, so ‘starvation’ probably shouldn’t be taken literally.  Interestingly, any employees or other expenses that these managers create must come out of that $1 million, which I thought was a nice way to sync incentives between the managers and Berkshire.)

Buffett also talked about how Berkshire didn’t use ‘compensation consultants’, who, in Buffett’s opinion, generally just tell CEOs and boards what they want to hear anyway.  In straight-faced monotone, Munger opined that “prostitution would be a step up” from compensation consultant, to which Buffett quickly added “Charlie’s in charge of diplomacy at Berkshire too.”

Creating shareholder value

When asked why Berkshire wasn’t paying a dividend, Buffett answered that “we feel we can create more than $1 of present value per $1 retained.”  Munger said he thought that “Warren’s learned new things each decade, resulting in much better results” at Berkshire than expected at the outset of their venture.  Munger, 88 years old & 7 years Buffetts senior, then added wryly, “but he’s getting old; I’m worried about him.”

Competitive advantages

“We sort of buy[s] barriers to entry; we don’t build them”, said Munger.  Buffett gave the example of the brand strength of Coca Cola, and how virtually impossible it would be to take away their market power.  Richard Branson, found of Virgin Airlines, and other Virgin companies, started ‘Virgin Cola’, which failed.  Buffett made the remark that “people say a brand is a promise.  I’m not sure what [Branson] was promising” with his cola brand.

Gold

Buffett noted that “if you caress an ounce of gold for 100 years, you’ll still have one ounce of gold”, and then compared that to the huge growth in what you’d have from growing businesses that pay out and reinvest cash, or to farmland that produces valuable crops every year.

This fundamental principle, that gold doesn’t actually ‘produce’ anything, is behind the fact that only periodic and unanticipated demand for it can drive the price up.  This also explains why, despite the last several years of the run up in gold prices, gold’s real return (after inflation) has only been slightly positive.

If one compares that to the massive growth of stocks, and even the modest growth of bonds, over long periods of time (not to mention the price swings of precious metals), it’s clear that gold is a very poor investment in itself.

Politics

When asked about the prevalence of the corporate political fundraising vehicles called ‘Super PACs’, Buffett stated that, even if donations to such a vehicle would increase Berkshire’s profits, he was morally opposed to it, and wouldn’t do it: “The whole idea of Super PACs is wrong, and relatively huge money [going to politicians] from a few people is wrong.”  While he acknowledged that others might defend their contributions to Super PACs by pointing out that their corporate competitors are doing it, Buffett asserted that “you have to take a stand somewhere.”

Munger added that he might consider giving to a Super PAC if he actually thought he could stop something really bad, and gave legalized gambling as an example of something that “does us no good” as a society.  And that “making the securities market more like gambling” was also going on, and also bad.

Taxes

Buffett said that the tax code is important in sharing wealth, and that it may be the case that the natural “trend in democracy that pushes toward plutocracy.”  Therefore, we should use the tax code as a “countervailing balance” against this anti-democratic, and yet perhaps expected, outcome of our market-based economy and its liberal principles (I mean ‘liberal’ in the free sense, not in the left-wing sense.)

On corporate taxes, actual taxes paid by corporations were 13% of revenues in 2011, versus the marginal rate of 35%.  Despite the play that US corporate tax rates get in the press, Buffett stated that neither corporate tax rates nor balance sheets nor liquidity were holding back the US economy.  Buffett called medical costs the “tape worm” of American business, and noted that they composed about 17% of GDP, versus a mere 2% for corporate taxes.  Munger also added that he thought a Value Added Tax should probably come into play in the US.

Munger thinks that “Paul Krugman is a genius” but that he maybe too optimistic about “Keynesian economic tricks.”  He also asserted that, in the US (and presumably around the world), we’ve lost a good deal of our “fiscal virtue”.  “Everybody wants fiscal virtue, but not yet.  Like [Saint Augustine], who was willing to give up sex, but not quite yet.”

Energy policy

Munger said he supports subsidies for wind and electric cars “to wean us off oil and gas.”  It “would’ve been better to use up other [countries’] oil” and to have kept our own in the US as a “strategic reserve” over the past decades, said Buffett.  Munger agreed with this, saying “I’m a puritan and believe in suffering now and making the future better.  That’s how I believe grown people should behave.”

I thought this was a great quote, and that it bears on several issues facing the US, such as the ballooning debt that’s being placed on the backs of young people in America.  I personally feel that too much is being done in the US to avoid short-term sacrifice at the expense of future prosperity.

Recent market crises (Europe & also 2007-2008 in the US)

“Alan Greenspan overdosed on Ayn Rand as a youth…  Greenspan was really wrong [on his actions that helped precipitate the 2007-2008 US recession.]  He’d think an ax murder was okay if it happened in a free market.”  Harsh, and humorous, words from Charlie Munger on the former US Federal Reserve chairman.

Due presumably to the low interest-rate environment*, and the fact that yields aren’t significantly higher (in Buffett’s opinion) for long-term vs short-term bonds, Buffett noted that he’d “avoid medium and long-term [US] government bonds.”

* Bond prices move inversely with interest rates, so if rates go up, the prices of existing bonds go down (and vice versa.)  The longer-term a bond is, the more its price is affected by interest-rate changes, hence Buffett’s shyness about longer-term bonds.

Risk

Both Buffett and Munger dismissed the investment risk ‘measurements’ used today by many large money managers like sigma (standard deviation, generally of a normal distribution), beta, and value at risk (VaR).  According to Munger, ‘value at risk and such are … some of the dumbest ideas ever’.  They criticized heavily the ‘precise’ (but not necessarily accurate or even useful) mathematical models used by finance and math PhDs to try to predict various events with many decimal places of certainty (think of Long-term Capital Management to understand where Buffett & Munger are coming from.)

Munger repeated a story of investor Sandy Gottesman firing a young man who was a major ‘producer’ (i.e.: money maker) at Gottesman’s investment firm.  The producer objected to being fired on the grounds that, despite the alleged riskiness of his investments, he had made a lot of money for Gottesman’s firm.  Gottesman replied “yes, but I’m a rich old man and you make me nervous!”

Buffett equated much of the failure of math-heavy risk management with a poor grasp of history, and of the many investing blow ups of the past.  He said that he keeps copies of newspaper articles from market crashes as a reminder of worst-case scenarios, including one about a man who killed himself in a boiling vat of beer during the May 1901 crash!

Buffett noted in this year’s annual shareholder letter that risk is not the volatility of an asset, but rather the chances of a decline (or unsatisfactory gain, I would say) in purchasing power as the result of an investment.  As a financial advisor that helps clients reach specific goals that rely on the purchasing power of their investments, I agree that this is the only meaningful way to think about financial risk.

He also noted that you shouldn’t “risk what you have & need to get what you don’t have & don’t need.”  Wise words, and applicable to more than just investing.

Avoiding mistakes

“We’re always thinking about worst case scenarios”, said Buffett.  Munger adding “studying other people’s mistakes” was key as well, and that both Buffett & himself were keen students of “folly”.  “People with 180 IQs didn’t have an understanding of human behavior”, noted Buffett when describing the causes of recent blow ups around the turn of the 21st century.

Business schools and how to think about investing

Buffett criticized business schools for teaching ‘fads’, and also suggested he didn’t put much stock (no pun intended) in ‘finance theory’, like that of efficient markets or modern portfolio theory.  Charlie Munger commented that while there was some rationale for these topics, business school teachings on investing were ‘a considerable sin’.  (Despite this, I’d argue from other things each have said that Buffett & Munger do acknowledge some of the more general points of modern finance theory like market efficient MOST of the time.  They take issue with the ‘semi-strong form’ of market efficiency, arguing that publicly available information can be used to make profitable (after controlling for volatility) investments.  I think they also take issue with the use of finance theory as a tool with high predictive value in, say, valuing businesses and stocks.)

Buffett stated that he would have two courses taught to teach students about investing: one on how to value businesses (which I would assume would be done using accounting statements & other means to approximate future cash flows, and then discount those cash flows back to the present.)  The other class would be how to think about markets (e.g.: read Chapter 8 of Benjamin Graham’s ‘The Intelligent Investor‘.)  By thinking about markets, Buffett means that you should treat market prices as random fluctuations that are there to serve you (by sometimes offering prices that are lower than the value of what you are buying), not to guide you (i.e.: causing you to panic and sell when prices fall, or become gleeful when prices rise.)

The result of this business valuation would be to ‘understand’ a business.  To wit: “understanding a business means having a good idea around 1) its competitive position and 2) its earnings power 5 years from now”, said Buffett.

Munger added that if you receive any offer to buy an investment product with a large commission, “don’t read it.”  Instead, he suggested “looking at things other smart people are buying.”  That said, you must make sure you use others’ ideas only as starting points, and do all of your homework to ensure you understand the business, and can value it against its current price, factoring in some ‘margin of safety‘ in case your estimates are wrong.

More

If you just can’t get enough Buffett/Munger action, or else want to compare the validity of my ‘journalism’ to that of other sources, here’s some alternative coverage of the 2012 Berkshire meeting, along with some other related links:

NY Times considers Buffett’s politics: http://dealbook.nytimes.com/2012/05/07/reflecting-on-buffett-business-and-politics/

Highlights from the meeting from Reuters: http://www.reuters.com/article/2012/05/05/berkshire-meeting-highlights-idUSL1E8G52T920120505

Munger-mania! (Highlights from an awesome 2-hour U of Michigan speech, also available on YouTube) ‘The Motley Fool’: http://www.fool.com/investing/general/2012/05/04/charlie-munger-on-communism-botox-and-goldbug-jerk.aspx

Buffett talks to MBA students at Florida U in 1998 (great talk in 10 parts): http://www.youtube.com/watch?v=ogAxzPaU5H4&feature=relmfu

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