Charlie Munger is a super smart cookie. He’s got a track record to prove it. He thinks out of the box. Sometimes he is brilliant, and sometimes he fails. He’s human. But, when you have his life story and wind up with a billion dollars in your pocket you are doing something right.
If offered the opportunity, I’d be his coffee boy for two weeks just to soak up knowledge from him.
I thought his recent comments on index funds were super interesting. Why? Because if you are a passive investor, index funds are mathematically better than trying to actively trade. Eugene Fama is correct despite all the naysayers out there. However, when you invest in an index fund, you give up your right to vote on the shares you own. Instead, the manager of the index fund votes them.
This could be fixed. Why doesn’t the SEC allow people who invest to vote the shares they own on a percentage basis? That takes fund managers out of the equation and preserves the robustness of index funds to create wealth for people that can’t actively trade and be in the market 24/7? Maybe fund managers wouldn’t get wined and dined by Wall Street, however.
For the time being, Munger said this,
“We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Mr. Munger, 98 years old, said at the annual meeting of Daily Journal Corp. , a publishing company he has chaired since the 1970s. “I think the world of Larry Fink, but I’m not sure I want him to be my emperor.”
I think the sentiment across the world is that we don’t want emperors. Most people are a little sick of being dictated to and having their rights trampled upon. I don’t care that Munger is 98. He’s right.
The problem with index funds is many can be activist-and not in the right way. I think it’s great to be an activist when the company isn’t doing well. However, a lot of fund managers today want to influence choices that aren’t quantifiable. The only thing a shareholder should really worry about is the return on equity. If a company isn’t satisfying that, then they have a complaint.
My friend who is on several boards of directors tells CEO’s this:
Rule number one is to make more money
Rule number two is to make more money
Rule number three is to look at the first two rules
Interestingly, I was at a conference when a CEO was presenting. My friend was on his board. It turns out the SEC mandates that there is a dog and pony show once a year on pressing issues like diversity and other similar topics when you are a public company. It takes a lot of money and people hours to prepare that annual report. That’s one incentive for companies to stay, or go private.
If the company is increasing return on equity and shareholders’ stakes are growing, then all the other stuff is hocus pocus dominocus. It’s imprinting the wanton desires of the activist upon the company to the detriment of the rest of the shareholders.
ESG investing is exactly that. Cliff Asness has shown that you give up equity appreciation when you stray from the core goals of building and growing a business.
What’s better? Forcing a company to undertake a climate change objective to the detriment of the company and its employees and shareholders OR an individual shareholder making money off the appreciation in the stock price, selling and then donating the money they made to the climate change project of their choice?
Blackrock CEO Larry Fink believes that people shouldn’t have choices. He wrote in his recent shareholder letter, “Capitalism has the power to shape society and act as a powerful catalyst for change.”
He is sort of correct. Give him a break. He went to school in California, no bastion of capitalism. He forgot the whole concept. Instead, Fink should have said:
Capitalism has the power to shape society and act as a powerful catalyst for change as long as the levers of capitalism aren’t impinged by artificial constraints or artificial subsidies.
Capitalism isn’t about social class, gender, diversity, or anything like that. It’s about the efficient allocation of resources to projects that will bring the most return to investors. Those investors are assumed to have freedom of choice, and investments are made at arms length.
Green energy might sound good. However, if an investor can earn more by putting money in fracking or crude oil, green energy is going to be capital starved. By the way, the only way green energy is net present value positive these days is through government subsidies. Those are artificial subsidies.
Unbridled unregulated capitalism really works. It lifts people up, inspires new innovation, and raises standards of living. It provides more services and goods at the cheapest price to the greatest amount of people. There is no race to the bottom because people are free to choose.
In Fink’s world, there are constraints and investors aren’t free to choose. So, in his world it’s not really capitalism, is it?
Terrific article. What I would really like to know is how do we find fund managers & companies that are neither 'woke' nor beholden to the climate changers, greeners, or any of the diverse crowd that wishes to restrict Capitalism? I would like to think Fidelity, Charles Schwab and Vanguard are Pro-Capitalist but with all this goose-stepping to show one's allegiance to the anti-capitalist backlash I don't know how best to root out the good guys from the bad. If you have any ideas please share them. I cannot believe it is just me wanting this information. Does anyone know where Fidelity, Schwab and Vanguard stand. Are there any concerns available to the common man who still approach markets from a Capitalist point-of-view? Obviously, BlackRock. has made their bed and I hope it sinks along with their woke theories; Thank you, Jay Foster
"This could be fixed. Why doesn’t the SEC allow people who invest to vote the shares they own on a percentage basis?" Hi Jeff! In the corporate governance/shareholder settlement world - Technically, the investors don't own the shares. The broker owns the shares and the investors are the 'beneficial shareholders'. If you look at a public company's shareholder register - the largest shareholder is either "Cede & Co" or "Depository Trust Company" (or DTC)
DTC was created in the early 70's to help centralize the processing of securities. I used to hear stories from the retirees in my rookie year ( 1981) about the "Paper Crunch" in the 60's - which forced the exchange to lengthen the settlement time from T+3 to T + 5 - in order that every security which settled was forced to include a weekend within that settlement period - so the street and transfer agents could catch up with the backlog. DTC is owned by the variety of broker firms and banks which own it. The only comparable entity I can compare it to would be MasterCard (before it went public)
So if you have shares in your fund - and say it's a fund that trades through/custodies their shares at (for example) State Street - State Street is the "owner" of the shares and does the voting.
For retail - the brokers can - upon request - send you proxy materials and let you vote - you have to change your voting status from "Objecting Beneficial Holder" to "Non-Objecting Beneficial holder" Certain matters like auditors - the brokers vote for that automatically, and the auditor matter is placed on the ballot to help a company achieve quorum for the meeting. Certain brokers - particularly those who handle retail accounts (like TD and Schwab) may employ "proportional voting" where they vote the shares of unvoted shares in the same proportion as those who voted. It is a BYZANTINE system and I have been in the securities business for many years and even I don't understand it all! So my point is that the investors recognized in the case of shares owned via a brokerage firm is that THEY are the investors. One way to combat this is to have your broker switch your shares to the transfer agent so your shares are present on the share register with you as the named owner.