In one sentence: Phil and Danielle continue through Munger's 2022 annual meeting: passive funds hold huge voting power with no knowledge of the companies, a board that never disagrees with the CEO is a warning, and printing money has history, from Japan to Plato's cycle of democracy.
Key ideas
- Passive funds and votes. Munger said a huge transfer of voting power to index funds will change the world and, he predicts, not for the good. Danielle's point: a passive manager matches an index and has no reason to know any company, yet votes on directors and pay. The hosts guess about $15 trillion sits there (their figure). [03:00–06:00]
- Rubber-stamp boards. Most boards are picked by the CEO and approve the CEO's pay. Phil's tool: look at who sits on the board and whether anyone would disagree. [06:00–07:30]
- Board dissent is a signal. Danielle cites Mohnish Pabrai (interview before the meeting) calling Peter Thiel's departure from Meta's board a warning sign, because a dissenting voice left. It may mean nothing, but it may mean something. [07:30–09:00]
- Rates and inflation. Munger was asked about rising rates. Phil gives history: 1950 and Volcker's near-19% in 1980, against 10-year yields near 1.6–1.8% with inflation near 7.5%. Holding money at 2% loses about 5.5% a year in buying power (Phil's numbers, as stated). [09:00–10:00]
- The Japan example. Japan printed money and its central bank bought stocks (Phil says about 30% of the market), with no runaway inflation but about 25 years of flat returns. Munger blamed export competition from China and Korea rather than policy, and credited Japanese discipline in holding government bonds. Phil says the US faces similar aging and competition, without Japan's culture. [10:00–14:00]
- Inflation and strongmen. Munger linked mega-inflation to unhappy voters who choose strongmen, a pattern Phil traces to Plato and Latin America. Phil gives Chile under Pinochet and Singapore as cases where it worked economically, but says it isn't a rule. [14:00–18:00]
- Postponed medicine. Phil compares delayed policy to chemotherapy put off for five years. The hosts add that gerrymandering and two-party extremes shut out the middle, and cite Ray Dalio's worry about a disputed next election. These are political opinions, not investment analysis. [18:00–22:00]
- What to do about it. Phil's answer: learn the method taught across 358 episodes, which is built for extremes. Next up: anti-fragility. [21:00–22:00]
- Switzerland aside. Danielle praises Switzerland's consensus-based executive, and Phil notes it is the largest producer of pharmaceuticals per head, by his recollection. [22:00–25:00]
How it maps to RuleOne
- Management screening: board independence and CEO pay belong in the management checks on /stock/TICKER/ pages. The proxy statement (DEF 14A, linked from EDGAR) is where you see who sits on the board.
- Rates and inflation feed the discount rate in valuation; see 361 and 362 for what Phil does about them.
Buffett, Munger and Graham links
- Munger's concern about governance echoes Buffett's repeated Berkshire-letter criticism of rubber-stamp boards and CEO pay; I haven't pinned a specific year here.
- Buffett and Munger have both said index funds are right for most people; Munger's point here is about governance, not returns.
Words to know
- Proxy vote: shareholders' vote on directors and company proposals.
- Rubber-stamp board: directors who approve whatever management proposes.
- Gerrymandering: drawing districts to favor one party.
Try this
Pick a holding on /holdings/. Find its latest proxy statement on EDGAR and list the board members and the CEO's total pay. Ask: has anyone left recently, and who might say no to the CEO?
Check yourself
- Why does Munger worry about passive funds?
Answer
They hold huge voting power but have no incentive to learn about the companies they vote on. - What did Pabrai see in Thiel leaving Meta's board?
Answer
The loss of a dissenting voice, which is a possible warning sign. - How did Munger explain Japan's flat decades?
Answer
As caused mainly by Chinese and Korean export competition, not by money printing.
Short quotes
"I think it's so special to find a company that has a board that might possibly disagree with the CEO." (Danielle, ~07:00, auto-transcribed)