Wednesday, May 15, 2013

Charlie Munger: What Buying a Housing and Rabbit Hunting Have in Common

Charlie Munger recently weighed in on this past decade's boom and bust in the housing market during an interview with CNBC's Becky Quick.

In the interview, Charlie Munger took some time to use rabbit hunting as a way to help explain what happened during the housing crisis:

"Partly there was a time you felt foolish you didn't buy a house because you weren't making all the money everybody else was making, so it was a typical crazy boom. Now people have learned house prices can go down as well as up."

Munger then added this:

"It's like a fella who goes rabbit hunting and thoroughly enjoys himself. And then the rabbits haul out guns and start firing back. It would dim your enthusiasm for rabbit hunting, and that's what happened in the housing market."

For another good example of a "typical crazy boom",and the "rabbits" eventually "firing back", consider long ago what happened to Sir Isaac Newton during the South Sea Bubble.

Chart: Isaac Newton's Nightmare

Anyone who thinks that a high IQ is protection against foolish investing behavior should consider what happened to the otherwise often brilliant Sir Isaac.

The exchange about housing and rabbits starts at around the 24:12 point in the video. Check it out. Munger's delivery often adds a bit of an edge to the words.

Here's my summary of some of the other points that Charlie Munger made about what contributed to the real estate boom and subsequent crisis:

- We were building more houses than we needed leading inevitably to a glut driven by unwise home lending and bond financing. It was a combination of extreme stupidity and extreme immorality. This all led to what should not be considered an unexpected result (Munger also described it as "craziness and crookedness").

- Both the government and private sector had a role in it. Stupidity, incompetence, and venality behind it.

"We were exceptional in stupidity and immorality and we paid the price."

- We've learned our lesson either not at all or only somewhat. The new rules meant to reign in the worst behavior aren't strong enough. Take the easy money out of the system.

"The people who used to make the money they can hardly wait to start doing it again. The rest of us are going to have to curtail them."

- There's nothing wrong with pro-housing policies. We just don't need housing loans that aren't sound. We don't need a policy that leads to building lots of unneeded houses. We don't need the "fraud and folly" in the business of issuing securities who'll unload them on whoever will buy them.

These sorts of things combined with excess leverage (much of it via cheap and what probably seemed at the time like reliably available short-term funding) and insufficient liquidity among other things was just asking for trouble.

There needs to be stronger limits in place to prevent the same set of behaviors that got us into trouble from re-emerging. Maybe this has been accomplished to some degree, but Charlie Munger seems far from convinced of this. Some of the excesses -- probably in some creative new form -- seem certain to come back if we aren't careful to prevent it.

The interview is well worth listening to in its entirety. As is often the case, Charlie Munger had many other useful and insightful things to say.

Adam

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