Wesco's Annual Shareholder Meeting (WSC)

May 08, 2009 | By Holmes Osborne


Warren Buffett's partner, Charlie Munger, spoke at the annual Wesco Financial (NYSE:WSC) shareholders' meeting. Wesco is 80.1% owned by Berkshire Hathaway (NYSE:BRK.A) and management doesn't believe in stock splits. Currently selling at close to $300 per share, Berkshire Hathaway would buy the rest of the company, but it never drops low enough due to investor interest. Munger said that the "cultists" have bid up the stock.


Wesco is the last stop for investors who go to Omaha to hear Buffett and Munger. Approximately 700 people were in attendance in Pasadena, CA. After the perfunctory business of the meeting, Munger spoke for about an hour on various subjects.

The first topic he addressed was the seriousness of the current global financial "mess". Out of step with mainstream media reports of recession, Munger said the current financial challenges are probably as severe as the Great Depression. He expressed support for the job the government is doing to get the economy back on track and he endorsed the nationalization of Fannie Mae and Freddie Mac. (For related reading, see Warren Buffett: The Road To Riches.)

Part of the problem that led to the financial catastrophe was the abuse of consumer credit. People who should have never been given credit cards or home loans were allowed to buy things they could not afford. Mortgage brokers rejoiced in "rooking borrowers with flim-flam tricks." Wall Street went crazy. And any way to earn money was rationalized.

Economic Situation
The regulatory apparatus was foolish. Some legislatures thought it was a good idea to lend to the poor. The Democrats wanted Fannie Mae and Freddie Mac to lend to everyone and to Republicans who "overdosed on Ayn Rand."

Munger advised his children never to buy an investment if the broker was paid a huge commission. Brokers would be enticed to sell "toxic sludge" if they earned a 9% commission.

In past speeches, he has railed against modern-day accounting. He said that both sides of a credit default swap would claim that they profited from a transaction. In accounting, that's impossible. But Alan Greenspan said that it was best for everyone.

The bank situation is complicated. Munger said that he is dubious of solvency tests. He doesn't like what is going to happen to Wells Fargo (NYSE:WFC). Berkshire and Wesco are long-time shareholders. He would give Wells Fargo a "flaming pass" on stress tests.

In regards to the long-term consequences of the economy on Wesco, there probably were none. Its businesses were gaining market share.


The Energy Opportunity
Munger spoke at length about global energy. In past meetings, he has said that he is not concerned about global warning and that society would learn to deal. A few years ago, he said that if water levels rose in Florida, people would merely move inland.

According to Munger, ethanol is one of the "stupidest" ideas ever. It causes a rise in food costs, which hurts the poor. Cap & trade is "insane". The Chinese "spew" out more hydrocarbons and won't stop. He is afraid we will use hydrocarbons too quickly. They are also important in the use of fertilizers.

What he is bullish on is solar and wind energy. According to Munger, Iowa gets 20% of its energy from wind. He said that people should listen to Freeman Dyson and not Al Gore. Freeman Dyson is a famous physicist who is skeptical of man's affect on global warming. (For more, see Go Green With Socially Responsible Investing.)

Long, Slow Road To Recovery
So how fast will the economic solution come? He harkened back to what Japan attempted. Deficit spending and 0% interest rates left the Japanese economy in stasis. Japan's stimulus was useless, requiring its government to fill the same pothole three times. Munger is a proponent of using the stimulus to fix the power grid, however.

As for stock prices, he thinks they will go up from this point. He said that Buffett's best year ever was during a recession. Stocks went up before the economy recovered. He is willing to buy stocks like Coca-Cola (NYSE:KO) and Wells Fargo for the longer term. (For more, see Warren Buffett's Bear Market Maneuvers.)

Banks that are too big to fail are boring and only should only do market making, stock brokering and stock issuance. Massive leverage is bad. We don't need credit default swaps. If you want to use leverage, use two-times leverage and do it in a hedge fund.

Our economy is like a huge poker game. It's not pretty to lure money away from others. We need to protect the body politic. Munger said that if you were at a country club and introduced your daughter's new fiancé and said that he is a hedge fund manager, you'd probably be embarrassed.

He ended his speech and opened up the floor to questions from reporters. In the past, the questions from the audience became stranger and stranger by the year. Munger said that journalists were smarter than the average hero, but poorer.

Bottom Line
Munger sticks to ethics and sound business practices. That's what he has spoken about at every shareholders' meeting. The stock hasn't done anything in ten years, but maybe 0% is good for a financial. He has been talking about the global economy's problems for years and, in 2008, his predictions came to fruition.

By Holmes Osborne

At the time of writing, Holmes Osborne did not own shares in any of the companies mentioned in this article.