Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting

This morning in Los Angeles, Charlie Munger spoke for a few minutes and then took questions for just short of
two hours. CNBC cameras were there today filming the meeting for the first time. Charlie is in great spirits and
looks great for age 93, and it was great to see him, as always.
Here are the notes I typed out on my phone apologies in advance for any errors.
-Adam Blum
[email protected]
---
Meeting
Nice to see you all.
Can you hear me? I need a script. Were going to follow the procedure of the Berkshire meetings where we go
through all the perfunctory stuff very quickly. And then well get to the other stuff for a while for the cult.
Many of you have come a long way to be here. Were happy to be here when instead we should be dead.
Gerry [Salzman, DJCOs CEO with several other listed roles] has so many titles - its like a one man show.
We like our present accountants a lot more than our old ones who made us late.
Gerry Salzman - well I wont go through all his titles - if you havent given your proxies, please give them to
somebody.
And somebody is going to give a report that its all been mailed out as it should be? And how many shares are
here? Do we have a majority?
Has everyone been elected? In response to personally getting fewer votes than some of the other directors,
Everyone likes everyone better than me. I must say weve improved this place enormously the average age
used to be 90, and now its down to 88 - weve really gone through a renewal.
All those opposed? Warren [Buffett] used to say please leave.
DJCO Commentary
The essence of whats going on here is we have a corporation that was in a branch of the newspaper business,
and our branch, like most others, has gone to hell. Almost every other branch is going to hell with no pardon -
just disappearing. But we have this computer software business where we are serving the same customers but
theyre located all over the country and other places. Our software business is of a type that its a long, tough
slog. Were slogging very well, and we love all the people in it - all the coders and them. Its amazing the things
that our happening in our little software business its a fair amount of fun to watch. The ethos of the place is
good in doing it right - its a pleasure to people like Rick [JP] Guerin and myself to watch all these people do it
when of course we should be dead. A lot of you people came into this because of Berkshires or Guerins past
success, and for some odd reason we accidentally fell into it [software/technology business]. We dont do this
venture stuff. If theres anything wrong, youre looking at the man here to blame (pointing at Guerin and
laughing); Ill take credit for the successes. Its amazing to me we are getting contracts from places like South
Australia - I hardly know where that is. I would have never imagined this as a young boy.
Ive never been able to enjoy losses like some people - Id much rather win.
Weve got all these folks in Utah who we really like and all these programmers around here, theyre great.

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Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting
Our people try to get ahead by doing the work right instead of hiring some politician like a few others. What I
learned in my career is that the best business-getter any lawyer has is the work thats already on his desk. If
we just keep doing it right, we wont have to worry about the future.
Guerin and I know practically nothing about software; we are judging people, because we dont understand
anything about what the people do. Thats what Andrew Carnegie did with steel and what Berkshire does -
judge which people are capable of running businesses I know nothing about.
Its a long, slow business with RFPs and that. The cycle can be five years. Its like prospecting for oil in
Borneo.
I love when I think were taking territory - if it makes sense in the long term, we just dont give a damn
what it looks like in the short term. After all, were running a cult, not a normal company.
I lived my whole life with people who have deferred gratification, they dont have fun, but they get wealthy.
You end up with a lot of rich dead people what good is that? But it does work. Your grave will look nice to
outsiders and incite a lot of envy.
We dont take salaries or fees - we are a peculiar example - if youre wealthy and own a share of a company
and get to decide what it does and doesnt do, maybe you shouldnt try to grab all the money. Carnegie
never to took a salary; Cornelius [Vanderbilt] lived on the dividends.
General Q&A
I dont see you very well, so Gerry or somebody, point out where they are.
On the DJCO revenue decline: Gerry - you take that one - Ill answer that its going fine (laughing).
To Gerry: [Put the microphone] closer to your mouth. Its high tech.
More on DJCO: One good thing about what were doing is that its slow, but once you succeed its very sticky
business, and the fact that its difficult to do means its difficult for people to change much - if you slog through,
its a big market and the people have no option but to charge ahead - the fact thats its so awful to grind through
means people may not want to get in.
On competitors of DJCO: If I were buying software, Id rather buy ours than theirs [Tyler Technologies]. I like
our ethos better.
On DJCO lower results: We bought a bunch of contracts, and we knew that they were gonna end, and so we
are amortizing the cost of those contracts, which was anticipated; the business is so big that there are whole
states untapped with courts and public defenders and others - everyone is scrambling in a business that is
growing bigger and bigger.
On Wells Fargos scandal: Wells Fargo had a glitch the truth of the matter is they made a business judgment
that was wrong. I dont think anything is fundamentally wrong. They got so caught up in cross-selling and
incentive systems [that] some people reacted badly and did things they shouldnt. Theres nothing wrong with
the long pull for Wells Fargo. They made a mistake. And it was an easy mistake to make. I dont regard setting
incentives aggressively as a mistake. I think the mistake was, when the bad news came, they didnt recognize it
directly. I dont think that impairs the future of Wells Fargo. Theyll be better for it. One thing about doing
something dumb is that youre unlikely to do it again. Henry Singleton was smartest man I ever knew. He made
the same mistake at Teledyne. His customer was the government, and its not hard to cheat the government.
With aggressive incentives, two or three of Henrys subsidiaries cheated the government, and he got blindsided.
It can happen to anybody. Capitalism is nice in its self-correction - make a mistake like that and pretty soon,
youre gone.

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More on the competitors of DJCO: I am not dissatisfied by Tylers trouble - I dont want to criticize them
more than I have - one of our customers is having a problem with them. You can see the tears running down my
cheeks (laughter).
On software revenue thats recurring versus non-recurring: That is so complicated that I am not even going to
try. To answer in substance, theres a lot thats recurring if we stay in there (chuckle). Our financials confuse
us a little bit theyre very complicated with all these RFPs and such.
Why is the building in Logan, Utah used by the tech business owned by the traditional business and not the tech
business? Gerry - I give you that one - thats some quirk of accounting - it doesnt really matter.
More on Wells Fargo and aggressive incentives: How do you know theyre aggressive until you try?
Incentives. They didnt react enough to the bad news fast enough. Its dangerous to do but doesnt impair their
[Wells Fargos] future. They will be better, thats the nice thing about doing something dumb - you wont do it
again.
Choosing what to do in life: In terms of picking what to do, in my whole life Ive never succeeded much in
something I wasnt interested in. Its too much to expect of human nature that youre gonna be good at
something you dislike. Play in a game where youve got unusual talents, not basketball when youre 51 going
up against someone who is 83. Of course you want to be ethical, but you cant be dreaming of how you
think the world should be run and think its too dirty to get near it and get so consumed by ideological
notions polluting you from left-wing universities that youre just not working and smoking a little pot. My
hero is Maimonides [Jewish scholar in the 1100s]. He did all his writing after working ten hours a day as
a doctor. I recommend the engaged life. Maimonides lived and worked with the people in the real world,
which informed his philosophy and work. Be more like him and less like Bernie Sanders.
On confusion about American Express future: I am going to give you an answer that will be very helpful - I
am confused too - if you think you know whats going to happen to payment systems ten years out, youre
probably under some state of delusion. If youre confused, welcome to the club; I dont know if IBM is going to
sell that much of Watson either. If you keep trying to do the right thing and playing hard, chances are better, but
these things are not knowable.
On domestic gas production: I have a different feeling than the rest of America. I wish we werent producing
all this natural gas. Id be delighted to just have it lie there untapped for decades in the future and pay extra once
Arabs use up their oil. Our reserves not going away are like retaining the topsoil of Iowa. You wouldnt ship the
topsoil to Greenland. Theres not enough deferred gratification to sell our oil. Same for chemical feedstocks -
use them slowly. I am sure I am right and the other 99% of the people are wrong. Nobody else in America
seems to feel my way, but I believe in deferred gratification. I dont think hastening to use our oil and gas is a
good idea. I dont see any advantage. People who succeed in most other businesses do more volume, but Exxon
Mobil does less volume, yet the price of oil grows faster than the volume drop, so they do better. Its very
peculiar. If I were a benign despot, I wouldnt ship any gas outside of the US.
On being a polymath: Operating over many disciplines as I do is not a good idea for most people. It was a
wonderful path for me, but the correct path for others is to specialize and get good at something that society
rewards, but spend 10-20% of time on big ideas outside the specialty. Otherwise, you become a one legged
man in an ass-kicking contest. You have to know the big ideas if you live life outside a cave.
Lollapalooza effect: I coined it when I realized I didnt know psychology. I bought three comprehensive
psychology textbooks and read through them, and like usual I thought they were doing it all wrong, and I could
do it better. When three or four tendencies were operating at once in same situation, the outcome wasnt linear,
it was straight up. The scholars were ignoring the most important thing in profession, because they couldnt do

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Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting
experiments with so many variable operating together, and then they didnt synthesize it with other disciplines,
because they didnt know squat about other disciplines. I am lonely, but I am right.
On Buffett becoming a better investor with age: If youre in a game and learning more and honing skills, of
course you do better over time. Berkshire would be a very modest company if Warren never learned anything.
We went out and bought whole entire businesses something wed not have done early on as stock investors.
And Iscar at five times book value, Ben Graham wouldve never bought that. Weve learned better over time,
and we can keep learning and are still doing it. Hes [Buffett] changed when hes buying airlines, and hes
changed when hes buying Apple. The nice thing about the game were in is that we can keep learning. Were in
the press for airline stocks when in 2013 we thought it was a joke, it was such a terrible business. Today, if you
put all our holdings together, we own a small airline. It violates the total catechism. Its the same thing for
railroads scaring us away with all this trucking competition it was a terrible business for 80 years, and then we
become a massive owner when they finally got it down to four main railroads. This morning I was with my
daughter-in-law, and she bought round trip tickets to Europe for $400 with taxes huh [aghast at how cheap it
was]? Maybe we shouldnt be in the airline stocks. I frequently talk to Warren about old days. We shot fish in
barrel. We even waited til they slowed down and used a shotgun. We get little edges now, while before had total
cinches. But it isnt any less interesting. We bought Exxon Mobil as cash substitute we thought itd do a little
better than cash at the time but early on we never wouldve done that. Think what changed when we bought
Apple with the hooting weve done about high tech. Apple and a bunch of airlines is now a lead story about us
in the press. But were just adapting to a business thats gotten a lot more difficult. I dont think weve
gone crazy. I think were adapting. Now the odds are just a little in our favor. Well take that advantage,
but its harder. You marry the best person who will have you. Be satisfied with the type of advantage we
didnt used to get, caused by getting so enormously rich its not a bad trade off.
On saying Trump wasnt morally qualified to be President: Ive gotten more mellow. Think about the good.
Reexamining tax system is constructive. All these crazy republicans and social security Trump is right in not
touching social security. I am with Donald Trump. Hes not wrong in everything, and just because he isnt
like us, roll with it. If theres a little danger, what the hell, youre not going to live forever anyway.
Most meaningful thing in life: Well, probably family and children. I was not a perfect husband but was lucky
to get as much felicity as I got. I started wrong and never quite fixed myself with the fair sex. Heres something
from the cult leader to the cult members: As a high school freshman at Omaha Central, I was a skinny
underdeveloped whatever, and I had this blond goddess I took to a dance. I pretended to smoke for some reason,
and she was wearing a net dress, and I set her on fire. Being quick-witted, I threw Coca-Cola on her to put out
the fire. And that was the last I saw of her. Later in high school I wanted to get a varsity letter to show the girls.
I thought rifle shooting was my best shot. I was so skinny that I could shoot 100 sitting cross-legged. So I got
the letter, but I was so skinny it [the letter on his letter jacket] went from one armpit to the other. The girls
noticed, alright. Howd a little skinny unattractive runt like that get a letter? Then there was Zibby Brewington.
She was a very popular senior. She agreed to go with me to a party at the country club, because she liked one of
my hunky friends. I picked her up, and it was sleeting. My 1934 car got stuck in mud, and we had to walk in the
sleet most of the way, and that was the last I saw of her. Then I didnt put antifreeze in, and the block broke, and
my father said I was so dumb, I wasnt getting another car. This is who youre coming to see at these cult
meetings. My life is a litany of mistakes. I ran for student politics in elementary school and came in second
place by miles. I know a nerd when I see one there are a lot here. I hardly succeeded about anything, so theres
hope. Max Planck gave lectures around Germany when he won the Nobel Prize. It was an incredibly boring
speech, and his chauffeur soon memorized it. One time the chauffeur gave the talk instead of Planck and got
questions from all these physics professors. The chauffeur said that he was surprised that, in an advanced city
like Munich, he was getting elementary questions like that and so he announced that since the questions were
so insulting, he was going to ask his chauffeur [Planck] to answer them (laughter). Have you heard the one
about the plane flying over the Mediterranean losing both engines? The pilot tells the people to open the door
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Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting
fast enough for people to get out and for folks who can swim, get on the right wing and for those who cant
swim to get on the left wing. For those on the right, swim 2 miles to the nearby island, and youll be fine. For
those on the left, thank you for flying Air Italia.
Index funds: Is there a point where they cant work? Of course, if everyone bought nothing but index funds.
Id buy big one, because if you buy the small one, and it gets popular, its self-defeating. JP Morgan had this
Nifty Fifty index of only 50 stocks. Due to all these people buying it, it forced the stocks up to 60x earnings, and
they lost everything. You dont see that when an index is 75% of the whole market. It cant work perfectly
forever, but for a long time it will. The index thing is absolute agony for investment professionals who have
almost no chance of beating it. Most people handle that with denial. I understand - I dont want to think about
my own death either. 95% of money managers cant beat it. Honest, sensible people know that what money
managers are selling cant be delivered. The prices for managing big sums of money are down to 20bps. People
who rose in asset management didnt do it by getting paid 20bps; its a huge problem, and it makes your
generation of money managers have way more difficulties and causes a lot of worry and fretfulness, and I think
the people who are worried and fretful are absolutely right. I would hate to manage a trillion dollars in the big
stocks and try to beat the indexes. I dont think I could do it. At Berkshire, if you take 100 decisions, a few a
year, our success came from ~two decisions a year, total, for 50 years. Its a hell of a problem for you people
who manage money, but why shouldnt life be hard? Its what had to happen. With computer algorithms playing
same game, returns went down. Its happening in the whole field, the progress of the sons is making it hard.
What would he tell his grandchildren about business opportunities? I dont spend time telling my
grandchildren what business opportunities to look for. Theres not much hope. I have trouble getting them to
work at all. Its not an easy way to handle a problem of how to continue getting better even after financial
success. If youre glued together right and honorable, you will succeed. Get in there and get rid of
stupidities and avoid bad people. Try teaching that to your grandchildren. The best way is by example.
Fix yourself.
Book recommendations: You cultists send me so many books, I can scarcely walk into my own library. I skim
all of them. The one I like recently is from [Edward] Thorp (A Man for All Markets) who beat dealers in Vegas
and then had massive Wall Street trading success. I really liked it. He had a good marriage and was a smart man.
He was a mathematician using a high IQ to beat the dealers and succeed in trading. You people may like a
buried love story. Nerds here would agree that a guy who made $40 million in a casino and $4 billion in the
market there cant be many people out there who can do this.
On filial piety: I didnt quite catch that. Oh, filial piety. I like filial piety. They worship rich old men, my
kind of system. Caring about ancestors and traditions is desirable. I admire Confucians for that notion that its
not a game in just one life and to accept the baton from predecessors. Think of how rootless wed all be with no
families, predecessors or descendants. Think what we owe to those in past who made our civilizations work.
Ideas he destroyed: Ive done so many dumb things I am busy destroying bad ideas because I keep having
them. But I like it. It is my duty. So many peoples main problem is letting old ideas displace new, better
ideas. Its like the German saying, too soon old and too late smart. It may be a good thing in marriage
but is not a good thing in most fields. It is a good habit and big advantage in life since others are so bad at it -
as they spout the bad ideas out, theyre pounding them in. All the person is really convincing is oneself. I dont
spend much time telling the world how to run things I think I can run better like the Federal Reserve, because I
know all Im doing is pounding the ideas into my head and not into others heads when I do that. Young people
who are violently convinced of anything is very bad. Some 17-year-old abortion nut or foreign policy
crazy is just pounding dumb ideas into his own head, which is bad when he has so much to learn. I pat
myself on the back when I get rid of a bad idea. If someone wont pat me on the back, then sometimes you need
to do it yourself, and sometimes several times. The price we pay for being able to accept new ideas is
awesomely large some people die for it.
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Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting
Responding to an oil and gas question about specialization: You petroleum people have to get more
specialized, because oil is harder to get. We generally have to get more specialized as a people. I am not the
example. If you want to get rich like I did, knowing a little bit about a hell of a lot, I dont recommend it.
Its like the story of the man who goes to see Mozart and says that people think the man is too young to
compose symphonies, and the man is asking Mozart for help, because Mozart composed symphonies at
age 20. Mozart says but I wasnt running around asking others how to do it. I dont encourage people to
follow my path. If I need a proctologist, I dont want one who knows Schopenhauer or astrophysics. I
want one who specializes. On the other hand, a life devoted solely to proctology isnt much of a life.
A question about where to invest small sums since Munger has said in the past he could make 50% with smaller
amounts of money: This guy really wants to learn how to get rich at a rapid rate with specifics. Thats not what
we do here. We leave mystery so you can find your own way. A few bets are all you need, but when you find
the few, act aggressively. My mothers maternal grandfather was an Iowa pioneer who fought in wars.
After hardship, he rose to be the richest man in town and owned the bank. He had just a few
opportunities that he got that allowed him to be prosperous. He couldnt lose money leasing a farm to a
German in Iowa. Today these people with computer algorithms its not that honorable to outsmart the trading
system leeching off the rest of the traders. They have the social utility of rats in a granary. They make money
but not by waiting for the precious few opportunities, so they must be very generous, because they have a lot to
atone for.
Whats your favorite industry? My favorite industry is taking care of my own affairs. Its fun, creative, and its
the job life gave me. Do the job well that life gives you. Its hard to make money in a lot of industries because of
wild enthusiasms that come into it, so I dont have a favorite.
Valeant: I am worried about monkey business, but I dont see anything today as extreme as Valeant. That
was really something. You people come so far to the cult. I probably shouldnt have done it [criticize Valeant
last year], but I just strayed into it. It was really interesting how many high-grade people that took in. It was too
good to be true and so aggressive. That they were messing with drugs people needed. Daily Journal had 80% of
the foreclosure notice business during the downturn, and we couldve raised prices when all these people were
losing their houses. The idea that in middle of that bust, wed just make all the money we could, we just didnt
do it. Capitalism is about being satisfied with less and acting with decency. Valeant was like a zero sum
chess match, not reality. All they wanted was money and glory. They didnt think about anything with decency
and stepped way over line. I dont have a new example like Valeant to share. That one got a lot of publicity out
of this meeting. I dont want this room to have twice as many people in it next year, and I dont want me not to
be here either.
Diversification: Am I comfortable investing in just three stocks? Of course. I care about the Mungers. The
Mungers own Berkshire, Costco, and a stake Li Lus fund. The rest of our stuff is dribs and drabs. What are the
chances that one of these three will fail? Almost zero. That all three will fail? None. When I started thinking
about investing what my piddly savings would be as a lawyer, I did some algebra and found that if I had comfort
that I could achieve a 10% advantage over the performance of stocks broadly, I didnt need much diversification
if I was gonna do it for 40 years and hold each position for three or four years, average. Diversification is for
people who dont know anything by definition, they just do the average. One name is enough. Paying
these professors to teach this crap to our young - the know-nothings just do the average. These professors are
paid for dispensing balderdash in corporate finance departments at universities. It helps in the market if other
people believe balderdash and you know what the hells going on. If your uncle Horace has an immense and
stable business that hes leaving it to you, you dont need any professors, you just take the damn business. When
the market comes with an Uncle Horace, you step up with the pie cart. If you have one cinch, what else do you
need in life? Imagine that I learned that from my dead great grandfather. From all the dead people, we can
learn a lot, and theyre very convenient to reach. Therere no problems with transportation to visit with

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Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting
the dead. We make friends with eminent dead, and it is enormously helpful. Some of you wouldnt have
helped me, but Adam Smith did.
Mistake Berkshire made investing in Irish banks in 2009: You cant trust figures put out by banking industry.
Its easy to report a little more earnings; the temptations are there. If youre really good at something, you can
lead others who believe in you astray. Ireland went crazy, and we did too in investing there. But this is an
English-speaking country with no taxes. And a lot of charm. It was a backward place with a 60-year internal
civil war, and the tax changes brought a lot of prosperity. Bill Gates and others were there early when the tax
regime changed. They deserve credit for the way the no-tax system advanced the country. If all countries reduce
taxes to suck in foreign investment, it wont work, sure. But Ireland got ahead of it. The Irish are like Scottish -
Gaelics are pretty unusual people, and I am very glad I had a Scotch-Irish great grandmother.
On Li Kuan Yew and comparison to India: Thats a very intelligent question and not saying others werent
Yew was the best nation builder who ever lived. He took a Malarial swamp with no resources surrounded by a
bunch of Muslims who hated him and literally spat out Singapore because they didnt want the place. There
were no assets and tons of corruption. And Yew created modern Singapore. No one has had success like it so
fast. He gets a lot of credit for creating modern China. They saw that and said the hell with this. We dont care
if the cat is black or white, we just care that it catches mice. Deng Xiaoping copied Yew. I have two busts of
someone else in my house - Yew and Ben Franklin. Now, I would rather work with the Chinese than the
Indians. The caste system, the overcrowding, there in India. Its hard to get anything done, and they have taken
the worst aspects of democracy that Yew avoided. India is a fabulous people, but the system of poverty and
corruption and the crazy democratic thing where anyone who screams can stop all progress it mires them. The
steel giant Posco takes lousy iron and coal and uses it as an input - a province in India had a bunch of lousy iron
and coal and agreed to supply Posco, and the contract was canceled because people protested and were
screaming in the streets. India is grossly defective, because they took the worst aspects of our culture, allowing a
bunch of idiots to scream and stop everything. And they copied it - Malaysia and China and Singapore wouldve
done the Posco deal. India forged its own chains and put them on themselves.
On the year 1974 where Wheeler, Munger lost 50%: I dont hear as well as I used to. What happened in 1974
when we lost 50% in 1 year? The market went down 40% that year. This has happened to me three times at
Berkshire losing 50% of value, and I regard this as part of my manhood. You better be in it for long pull and
handle declines with aplomb and grace. If it doesnt come, youre not being aggressive enough.
They think its their last chance. Charlie in response to zealous crowd, joking that it may be his last meeting.
On people: We look smart, because we pick wonderful people. Gerry is not normal. He looks it but is a damn
freak. Hes strong across two or three disciplines that are beyond human. Hes another Midwesterner. What is it
that comes out of soil there? To get wonderful people is like marriage. The best way to get good spouse is to
deserve one; our people make us look a lot better than we are. We have a first or second choice for who to hire,
usually, and then its like off a cliff. Every search is one is fine and everything else is pygmy. Youd tap dance
to work too if you were around all these people who love winning. We were a little lucky, but we cant give you
any luck.
First thing to tell Chinese who want to invest in US: If I were a Chinese person, I would invest in China and
not the US. The fruit is hanging lower, and companies are more entrenched. Its a mistake to look for a pie in
sky when you have a big piece of pie in your lap; At current prices, they would do better investing in China.
Big ideas: Be intelligent in improving yourself. Its way better to take on a big idea that comes up than tiny
ideas you wont face - why piddle around and ignore the big ones? The problem in front of you is solvable if
you reach outside your discipline over the fence into other disciplines. I shouldnt have been so brash as I was
and am now in flouting this, but I havent completed my self-improvement process (laughter). It is so much fun
to get an idea by going out of ones discipline. I dont observe professional boundaries. I am the person who
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Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting
crosses off PSA test at the doctor. I dont give opportunity for the doctor to do something dumb. If the
cancer is too early, then I can find out in three months, or too if the cancer has grown too fast, then why
tell me? I think I know better. I am always doing it and recommend getting out of your boundaries too
when youre my age with the PSA. But women, I cant help you.
Investment choice of entity: It is plumb crazy to invest in a corporation that owns common stock compared to
a partnership, which is just what Berkshire does. It is not the logical way to do it with the double tax. It is totally
asinine to invest in stocks via c-corp. Berkshires publics keep going down as a percentage of the business, so
its not as relevant going forward, but as a rule, I wouldnt even consider it. Avoid it. Youre totally right, which
you already knew>
China: What I like about China is they have some companies that are very strong and still selling at low prices.
And the Chinese are formidable workers and they make wonderful employees. The Chinese government really
tries to help its companies unlike India. I admire Chinas 1.5 billion in poverty being taken up so fast. Its an
incredible achievement. They have bullet trains to heart of city. And they didnt do it by borrowing from Europe
or how we (the US) did it. They did it by saving up as a poor country and counting on deferred gratification.
Their problem is they like to gamble, and they actually believe in luck. That is stupid. You want to believe in
odds, not luck. Too many people believe in luck and gamble, and thats a national defect.
What the world will look like in the future: What wont change about business it still wont be that damned
easy theres lot of trouble sure to come. At the end of life, you know its all over and thats the game -
knowing when you start that you have to lose - dogs dont. The law of thermodynamics should be restated to be
that you cant win or get out of game. If you do well with what you started with and help others and set a
reasonable example, you played well. In our directors meeting we were talking about glitches that lead to
reverses and troubles and scrambling. People who really love you are the ones who you scramble through
things with; adversity is the sinew of your successful relationships and personal bonds and affection and
every other damn thing; life is series of adversities and each is an opportunity to behave well or badly, and
we need techniques for welcoming adversities at old age to get through it.
On his fee structure starting out: I copied the Buffett formula for fee structure. I dont like business scraping
off the top. If youre advising others, you should be alongside investors. Like so many things I like, this is not
spreading much. My net influence in the world, like Warrens influence, is small. There may be a total of three
examples of executive compensation at companies who structure it like we did.
Agriculture: The productivity of an acre is up 300%, which has prevented starvation on earth. This started with
Rockefeller, Borlaug, and so forth, and we need another doubling and will probably get it. Its amazing how
efficient farmers are. Theyre not a mix of socialization or stupidity or inefficiency. Really theyre the glory of
civilization, except I hope they dont use up the topsoil too fast. Farm subsidies matter to farmers who get richer
and richer. Yes, it is peculiar to subsidize the filthy rich to use up topsoil faster, and converting corn to
ethanol is the stupidest idea. Id rather jump out of a 20th floor window to see if I can fly, and I am the
king of stupid ideas. But the agricultural revolution has been remarkable; if we can turn oil into food, why
produce every last drop of oil and sell it? I may have 3-4 people who agree with me in this room. In the rest of
world, I am all alone.
On spirituality: Just because you dont have a specific theology, and I dont when I learned about the talking
snake in the Garden of Eden, I knew it was fake. I was young but didnt believe the teacher at bible school and
havent changed. That doesnt mean Im not spiritual; I just dont need a talking snake to make me behave
well. Rationality is a moral duty. Rationality is a moral duty. If youre capable of being reasonable, its a
moral failing not to be. We should all take this on even if we are a little stupid. Yes, we need a social safety
net, too but not one as dumb as the one we have now.

8
Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting
On the Munger Tolles law firm office move: I was cleaning out office when moving and found these damn
things (stories) and thought my God , I will give copies to all these people coming here from India and China.
- I am just now revisiting some of my past screeds. (see attached to these notes)
Taxes: I dont know what the border adjustment tax is, and those proposing it dont know what it is either, so
stay calm. But deep revision is a good idea. We need a consumption tax. Do I really care if someone piles up a
lot of money and leaves it to some foundation? Thats not my idea of evil. But people living high should be
taxed.
Deferred gratification: Dont use your body by being stupid in handling it. Same for your money. The only
way to win is work a long time where doesnt come easily, in a long grind. Think of doctors with the night
shifts. Its an honorable activity being a doctor. I admire the life of a doctor more than I admire the life of a
derivatives trader, and I hope you do too.
Rules of thumb in complex systems change over time: You have to live with uncertainty its not bad thing
- whod want to live in sameness? We may as well be dead.

Charlie and Adam

9
Adam Blums notes from February 15, 2017 Daily Journal (DJCO) annual meeting

Li Lu

10
Wantmore, Tweakmore, Totalscum, and the Tragedy of
Boneheadia

A Parody about the Great Recession.

Posted Wednesday, July 6, 2011, at 4:57 PM ET

A Parody Describing the Contributions of Wantmore, Tweakmore, Totalscum, Countwrong, and

In the country of Boneheadia there was a man, Wantmore, who earned his income as a home
mortgage loan originator. Wantmore operated conservatively. All his home loans bore interest
rates of 6 percent or less, and he demanded of all borrowers large down payments, documented
proof of adequate income, and an immaculate credit-using history. Wantmore sold all his loans
to life insurance companies that, before closing purchases, checked loan quality with rigorthen
held all loans to maturity.

As Wantmore prospered, he eventually attracted the attention of Tweakmore, a very bold and
ingenious investment banker. There was no other investment banker quite like Tweakmore, even
in the United States.

Tweakmore had become the richest person in Boneheadia, driven by an insight that had come to
him when, as a college student, he had visited a collection of hotels that contained gambling
casinos located in a desert.

As Tweakmore saw immense amounts of cash pouring into cashiers' cages surrounded by
endless sand, in business operations that did not tie up any capital in inventories, receivables, or
manufacturing equipment, he realized immediately that he was looking at the best business
model in the world, provided one could also eliminate commitment of any capital or expense to
hotel rooms, restaurants, or facilities providing parking or entertainment.
Tweakmore also saw exactly how he could create for himself an operation that possessed all the
characteristics of his ideal business. All he had to do was add to investment banking a lot of
activities that were the functional equivalent of casino gambling, with the bank having the
traditional "house advantage." Such casino-type activities, masked by respectable-sounding
labels, Tweakmore foresaw, could easily grow to dwarf all the action in ordinary casinos.

Determined to create and own his ideal business as fast as possible, Tweakmore quit college and
entered investment banking. Within 12 years, Tweakmore was the most important investment
banker in Boneheadia. Tweakmore rose so rapidly because he was very successful in convincing
regulators and legislators to enlarge what was permissible.

Indeed, by the time Tweakmore called on Wantmore, any investment bank in Boneheadia could
invent and trade in any bets it wished, provided they were called "derivatives," designed to make
counterparties feel better about total financial risks in their lives, outcomes that automatically
happened. Moreover, an investment bank faced no limit on the amount of financial leverage it
employed in trading or investing in derivatives or anything else. Also, Tweakmore had obtained
permission to use "Mark-To-Model" accounting that enabled each bank to report in its derivative
book whatever profit it desired to report. As a result, almost every investment bank claimed ever-
growing profits and had ownership of assets totaling at least 30 times an ever-swelling reported
net worth. And despite a vast expansion of transaction-clearance risk, no big mess had so far
occurred.

Tweakmore was pleased, but not satisfied, by what he had accomplished. And he now planned to
revolutionize Boneheadia's home-mortgage loan business in a manner that would make
Tweakmore a national hero.

In his first proposal to Wantmore, Tweakmore held much of his ingenuity in reserve. All he
proposed was that Wantmore hereafter sell all his home loans to Tweakmore at a higher price
than life insurers would pay. Tweakmore said that he planned to put all loans into trusts with no
other assets. Each trust would be divided into five "tranches" with different priorities in use of
loan payments. Four tranches would use their shares of loan payments to pay off complex new
fixed-interest-bearing, freely tradable debt instruments, called CDOs. The fifth tranche got a tiny
residue in case all home loan payments were received as due. The CDOs would be sold by
Tweakmore, using a highly paid sales force, to anyone who could be induced to buy, even highly
leveraged speculators and small Scandinavian cities near the Arctic.

To Wantmore, Tweakmore's proposal at first appeared unfeasible. The planned operation seemed
to resemble the operation of a meat vendor who routinely bought 1,000 pounds of chuck roast,
sliced it up, and then sold 950 pounds as filet mignon and the balance as dog food.

But Wantmore's doubts melted away when Tweakmore revealed how much he would pay. Under
the offered terms, Wantmore would double his income, something Tweakmore could easily
afford because his own income was going to be three times that of Wantmore. After Wantmore
accepted Tweakmore's proposal, everything worked out exactly as Tweakmore had planned,
because buyers of CDOs in aggregate paid much more than the life insurers had formerly paid.
Even so, Wantmore, as he became familiar with Tweakmore's prosperity, was soon dissatisfied
with a merely doubled income. With Wantmore restive, Tweakmore now displayed the full range
of his ingenuity.

What Tweakmore next proposed was that Wantmore add to his product line a new class of
"Subprime, pay-what-you-wish" home-mortgage loans. All loans would bear interest at 7
percent or more, and borrowers would not be allowed to state anything except that they wanted
the money. There would be no down payments and no credit checks or the like. Also, each loan
would be very user-friendly in its first three years, during which the borrower could make only
tiny payments with all unpaid interest being added to principal. After three years, very onerous
loan service was required, designed to pay off the greatly swollen principal, plus all interest, over
the next five years.

This proposal would have seemed preposterous, even hilariously satirical, if it had been
presented to Wantmore when Tweakmore had first called. But by now Wantmore had doubled
his income by going along with a peculiar idea of Tweakmore's. So Wantmore's credulity was
easily stretched to allow acceptance of the new loan product, which Tweakmore projected would
triple Wantmore's already doubled income.

It is easy to see why Wantmore became a "true believer" in the new loan product. But why did
the already super-rich, prominent, and sophisticated Tweakmore believe his revised scheme
would work safely and well for him?

Well, we know the answer. As Tweakmore revealed in his prideful autobiography, his thought
process was as follows:

1. There would be no significant troubles during the first three years. Under the accounting
standards of Boneheadia, all its accountants would be required for a long time to reserve
no loan-loss provision at all against unpaid principal and unpaid interest on the new
loans. And CDOs would be valued highly in traditional markets because underlying loans
were booked at unreasonably high value. It wouldn't matter that homebuyers were
making no down payments, had no personal liability at any time, and paid only a tiny
portion of interest accrued for three years. It also wouldn't matter that any competent
inquiry would have revealed extreme past improvidence on the part of most borrowers.
2. House prices in Boneheadia would not merely rise as they had done before. Prices would
rise much faster as more and more people learned they could bid to acquire homes
without using any of their own money, no matter how poor were their credit-using
histories.
3. All the buyers of new CDOs would have a near-perfect investment experience. Ever-
rising house prices would cause full payment of all mortgage debt as due. The market for
the new CDOs would expand and expand as investors reliably earned much more and
faster as the scheme fed on itself in a runaway feedback mode.
4. True, after the first three years many overstretched homebuyers were sure to suffer
somewhat as they were forced, by threats of foreclosure, to sell their homes. This would
often cost them their credit and the respect of their children, friends, and employers, but
 that would be the only trouble, and it would prove endurable by Tweakmore and
everyone else, except the people forced out of their homes.
5. The runaway feedback mode that drove up house prices would cause no significant
trouble for decades, as had happened in Japan, where a big bust in real estate prices
occurred only after the Imperial Palace grounds in Tokyo were apparently worth more
than the market value of the entire state of California.
6. The principles of economics would give the scheme a large tailwind and considerable
popularity. As Tweakmore, a former student in elementary economics, knew from
studying Galbraith, a large undisclosed embezzlement strongly stimulates spending
because the perpetrator is much richer and the victim spends as before because he does
not yet feel poorer. And what Tweakmore was creating was the functional equivalent of a
long-running undisclosed embezzlement on steroids. The perpetrators would not be the
only ones to spend more, as typically occurs during ordinary embezzlements. The CDO-
buying victims also would spend more as they believed they were getting richer and
richer from ever-growing paper gains embodied in accrual of interest at above normal
rates.
7. To be sure, the scheme looked a little like a chain-letter scheme, and such schemes were
usually ill-regarded by prospective users, partly because the schemes were criminal and
partly because the schemes always blew up so quickly, bringing criminal troubles so
soon. Tweakmore's scheme, in contrast, would, by design, be lawful and benevolent, and
recognized as such, because it would create big macroeconomic stimulus as a public
good.
8. And should the scheme eventually blow up after decades, like the land-price bubble in
Japan, who could fairly blame Tweakmore? Nothing lasts forever. Besides, the blowup
might be lost in a miasma of other blowups like those sure to come in many irresponsible
countries and subdivisions of countries.

Tweakmore's revised scheme worked fantastically well for a considerable period. Naturally,
there were some glitches, but Tweakmore turned each glitch into an opportunity to boost profit.
For instance, when Wantmore was made nervous as hordes of scumball-salesmen were drawn
into his business by rich commissions paid for production of easy-to-sell "subprime" pay-what-
you-wish home loans, Tweakmore responded by buying Wantmore's business. Then Tweakmore
replaced Wantmore with a new CEO, Totalscum, who did not consider any business practice
optimal unless it was depraved. Totalscum soon increased loan production by 400 percent and
his success caused Tweakmore to buy five additional loan businesses and replace their CEOs
with people like Totalscum, causing profits to soar and soar, even though Tweakmore never
again found anyone else whose depraved operations could produce results that matched those of
Totalscum.

As Tweakmore's scheme went on, it was necessary for its continuing success that the accountants
of Boneheadia never stop treating as trustworthy a lot of hugely important loan-payment
promises that any sensible person would deem unreliable. However, there was almost no risk that
accountants would act otherwise than as Tweakmore desired. The accountants of Boneheadia
were not allowed to be sensible. They had to use rote "rules-based" accounting standards set by a
dominating man, Countwrong, who was head of Boneheadia's Accounting Standards Setting
Board. And Countwrong had ordained, in effect, that all loss provisions on the new loans must
remain based on the zero-loss record that had existed before Wantmore met Tweakmore. And, so
long as Countwrong was in charge, no one was going to use in accounting an understanding of
runaway feedback modes, instead of Countwrong's rules.

Of course, if Totalscum or Tweakmore ever started to have loan losses, he would have to start
making loan-loss provisions against new loans. But there weren't any meaningful loan losses for
anyone for a very long time.

Countwrong was so habit-bound as a thinker that he never recognized that his cognition was
anti-social. He had always sought simplicity of process for accountants at the expense of
"principles-based" rigor and thought that would better serve his country. He had been rewarded
in his life for his convictions, and he was now proud of his conclusions, even as they were
contributing mightily to the super-catastrophe sure to come eventually from Tweakmore's
scheme.

A large economic boom occurred in Boneheadia just as Tweakmore had expected. The boom
made the regulators of Boneheadia feel extremely good about themselves as they passively
watched the ever-enlarging operations of Tweakmore and Totalscum.

A famous regulator named Oblivious was particularly approving. He had been over-influenced in
early life by classical economics. So influenced, Oblivious loved all the new derivatives, even
those based on outcomes of parts of complex CDOs composed of parts of other complex CDOs.
And he did not believe the government should rein in any investment banker until the banker's
behavior was very much worse than Tweakmore's.

The boom initiated by Tweakmore lasted only three years. He had underestimated the boom's
strength and the power of people to understand, in due course, super-sized folly. These factors
had helped shorten the boom's duration. Also, Boneheadia had proved less like Japan than had
been hoped.

When the boom-ending bust came, it was a doozy. Almost every investment bank had been made
collapse-prone by Tweakmore's innovations before he became interested in home loans. And
now, in a huge bust, most big financial institutions were sure to disappear, causing total chaos
and another "Great Depression" unless there was super-massive intervention by the government,
financed by printing money.

Fortunately, Boneheadia did so intervene, guided by effective leaders who somehow obtained
support from politicians in both political parties. And, after this massive intervention,
Boneheadia, with doubled unemployment, is enormously worse off than if the boom and bust
had never happened. And its options in case of future trouble are greatly reduced because, after
its money-printing spree, it is nearer to facing general distrust of its money and credit.

Boneheadia's bust is now called the "Great Recession." Yet, even so, not much has been learned
by the elite in Boneheadia. Among the protagonists and too-passive types who contributed so
much to the mess, only one has expressed significant contrition. To his great credit, Oblivious
has recognized that he was grossly wrong.
The accounting profession remains unaware of its large contribution to public woe. And it does
not recognize the cognitive defects of Countwrong, which are still believed to be virtuous
qualities that reduce accountants' litigation risks and their duty to cause antagonism by opposing
the wishes of some of their best-paying clients.

The professoriate in economics has barely budged toward recognition of the importance of
optimized, more conservative accounting in both macroeconomics and microeconomics. And
economics professors, even now, do not recognize what was so easily recognized by
Tweakmore: The functional equivalent of undisclosed embezzlement can be magnified and have
massive macroeconomic consequences when the victims, as well as the perpetrators are led to
believe they are getting richer under conditions that are going to last for a long time.

How about the legislators in Boneheadia? Well, most are confused by what has happened to their
most powerful friends and draw no useful implications from the outcome of Canadia, a country
just north of Boneheadia that had no "Great Recession" because its simple laws and regulations
kept in place home loan operations much like those of Wantmore before he embraced modern
finance in the state preferred by Tweakmore.

How about the regulators? Well, very few important regulators or former regulators in all
Boneheadia have expressed really serious doubts about the status quo and interest in really
serious re-regulation of investment banking. One the doubters is Follyseer, a long-retired former
minister of finance. Follyseer has argued that all contributions of Tweakmore to investment
banking should be removed and banned, because it is now obvious that (1) augmenting casino-
type activities in investment banks was never a good idea, and (2) investment banks are less
likely to cause vast public damage when they are forbidden to use much financial leverage and
are limited to few long-traditional activities.

Regarding accounting, no regulator now in power seems to understand, in a way that has any
chance of causing effective remedial action, that the disaster triggered by Tweakmore couldn't
have happened if Boneheadia's system of accounting regulation had been more "principles-
based," with a different and less tradition-bound group creating accounting standards that were
less easy to game.

The former regulator and lifelong professor who seemed extra wise after the Great Recession
was England's John Maynard Keynes, dead for more than half a century. Keynes had predicted,
correctly, that "When the capital development of a country is a by-product of the operations of a
casino, the job is likely to be ill-done."

Afterword: The foregoing attempt is not an attempt to describe in a fair way real contributions
to the "Great Recession" in the United States. Certain characters and industries, for instance,
Tweakmore and investment banking, are grossly overdrawn as contributors to sin and mayhem,
while other contributors are not discussed at all. The whole idea was to draw attention to certain
issues in accounting, academic economics, and conceivable over-development of finance as a
percentage of the entire economy, by making the characters and the story line extreme enough to
be memorable.
 DRAFT
January 26. 1984

The practice of playing the stock market for relatively short-term gains has now reached

such a high level that it tends to give a bad name to capitalism, thus threatening the

cornucopia of goods and freedoms which only capitalism can provide. The country would

be improved by revision of its income tax law to reduce s_uch activity, instead of treating

it as a treasured national resource.

Short-tenn stockholdings are the norm for take-over arbitrageurs and now-numerous "pro-

fessional-bad-guy" investors (often called "raiders" by their detractors) who buy stock

in quantities sufficient to create or enhance take-over th rea ts and compound their stakes

and encourage imitation as they are, more often than not, bought out at a profit either

by the threatened corporation or in some forced sell-out of the corporation's enti:e busi-

ness. But the largest share of short-term stockholding now occurs i n simple super-activi t y

by securities' portfolio managers as each seeks to be better than the others in predicting

short-run changes in security prices. As large fees, commissions and othe r paper-shuffling

profits are earned in the course of increased short-term activity, the result is augmenta-

tion of a prosperous class of "new capital ists," not at all in the mold of Andrew Carneg i e ,

who tend to do for the reputation of capitalism what the court of Louis XVI did for the

reputation of monarchy.

Too much easy money is now being made by too many pie-divider types as dis t inguished from

pie-producer types. This is bound to raise anticapitalistic sentiments as ir is increas-

ingly recognized, for ins tance, (1) that the work of one good dentist does more for general

felicity t han that of thousands of investment counse lors whose clients in aggregate are

poorer for their efforts as they try to out-perform one another in hyperactive management

of pension fund. COnYnOn stock portfolios, and (2) that most of these Investment counselors

(and stockbrokers and others who service them) are honorable, energetic , often bri I liant

people who would be more useful in other employment I f not drawn by f i nancial incentives

to their present pursuits.

The problem occurs in part because the stock market provides much more than the minimun

liquidity necessary to create reasonable cash-in capacity for supp li ers of long-term

capital to corporations. The extra liquidity entices into play a huge s upplement al

group - speculators (including pension funds and other institutions with staid names)

seeking relatively short-term gains.

Our 1 iquid stock ma rke t, sheltered by gentle tax laws, has acquired a Jekyl I-and-Hyde

character and serves not only as an orderly place for transaction of essential economic

business but also as a near-idea l gambling casino. In recent years the casino part ,

with its great wealth and prominence, fascinating denizens and occasional bonanzas, has

drawn in ever-increasing cascades of short-term speculation. Current 100-Hilllon-share

days bring to mind the words of Keynes as he looked back at 1929:

"Spec.u.la.toM may do 110 haJUn a6 bubblv.. an a 1:.:t.e.ady otJt.eam 06 ente.Jtpl!Me.

whUti.poot on <ipec.ul.atimr. When .the c.a.paat development 06 a. courWt.y

becomu a by- pMdu.ct o 6 .t.he act.<.v-Ui.M o 6 a c.a.6.-i.no, .the job .-i.6 likely

.to be -i..U-do11e."

What, If anything, should be done about these developments? How much legalized gambling

shou ld our laws encourage, incident to the process of investing In stocks? These are

very difficult questions.

One way to address questions of such difficulty is by the "thought experiment" so beloved

by Albert Einstein. Suppose the la.1s were revised to discourage anything but long-term

holding of common stock. Assume, as an example, that the income tax rate on any sort of

ma r ketable-common-stock-related gain was 70% for al,l non-underwriting holders, includ ing

pension funds and charities, with 110 offsets permitted for losses, unl ess the holding

period was at least five years. Would the country be improved?

Although tinkering would be desirable to prevent fr inge inequities, it turns out that

such tax law revision would be a good thing.

The revision supposed would drastically reduce stock option trading and make the market

for conrnon stocks le.66 liquid, but liquidity would remain much better than that available

for owners of farms or industrial real estate and wou ld be good enough. Conrn i sslons on

common stock transactions would be higher, but not greatly higher, and would not impede

serious long-term investment.

Investment in common stocks would become a 1 ittl e more like real estate investment, or

the Investment made when Henry Ford received hi s grubstake. Investment in newly-issued
Opinion Piece
Page 3

convnon stock and common-stock-related securities like convertible debentures would

continue , although the first public issues of formerly private companies would create

a less liquid after-market, tend i ng to force prices tCMard level s which would attract

serious buyers planning to hold for a long time. Host expansion of business plant

would be financed , as it always has been, by retained corporate earnings and borrowings.

The potentiality for crazy, greedy, speculative stock market orgies would probably be
reduced. Such orgies are harmfu l to a country, have recently occurred in I s rael,

Kuwait and Hong Kong, and can conceivably occur here, as in 1929 or worse.

The "professional-bad-guy" gane, on balance not a good thing, would probably be dMlpened

down to some extent from its present frenzy , and what was left would provide more tax
revenue.

Long-term thinki ng would be more dominant, not only in the stock inve stment process, but

also in the cor porate management process, as the whirlpool of speculation, decried by

Keynes , was reduced. It is contrary to the national i nterest to have corporate managers

as pr e-occupied as they now are with short- tenn records and temporary stock market effects.

So pre- occupied , managers cause corpora te action too similar to that of po l iticians vot ing
to effect outcomes i n the next elect ion rather than the next generat ion.

After antl-conmon-stock-speculation revision of the income tax law, some portion of the

nation's best brain power would be diverted from stock speculation Into activities such

as creation of more efficient retailing or diese l engines. Accunul ators of capital

would tend to be a little more in the mold of Edwin Land, David Packard and Jack Nicklaus,

whose cont ributions prevent resentment of their good fortune. Aristotle rightly concluded

that power should go to people perceived as deserving power, and improvement in the

reputation for quality of society's big winners would be desirable.

There i s l i ttle to lose by shifting tax burdens to favor by a greater extent long-term Instead

of short-term Investment. The present gross excess of short-term investment, if squeezed o ut ,

would not be missed by the overwhelmi ng majority of citi zens. Pension and end()f/lllent funds

could eas i ly adapt to purchasing stocks with the same time horizons now used when pur-

chasing rea l estate and, in aggregate , woul d be richer for the change. Stockbrokers
Opinion Piece
Page 4

can reasonably be required to join independent truck drivers, unionized air line
stewardesses, etc., in adjusting to reduced incomes caused by changes made in the laws

to Improve the economic system. Moreover, even If a little pro-social activity were

eliminated along with more massive anti-social activity , that is no real objection.

The problem is like that of the cancer surgeon who wisely uses his knife despite the

inevitable destruction of a I ittle good tissue with the bad.

With gambling proclivity entrenched in the culture, it would be unwise to try to eliminate

all gambling. But it does not follow that gambling-type activity should be subject to

subnormal Instead of above-normal income tax rates and be Intermixed influentially with
the capital development of the country . While gains made in long-term common stock invest-

ment should be tax-favored as an Inducement to saving and eventua l transfer of power,

gains made in relatively short-tenn stock investment, in essence mere gambling-type

activity, should either be taxed normally, or better yet, be taxed at above-normal rates.

The rewards and penalties of the Internal Revenue Code channel the energies of the
citizenry and have a high moral content as they encourage one kind of activity over

another. Recently, Congress, at the request of commodity traders and other special

interests, has legislated in a manner e~actly opposite from right by Imposing on a

dollar earned in holding a stock index futures contract for ten minutes a tax rate l..fXilJeJL

than Is paid on a dollar earned in fanning, teaching or night work as a janitor. To

ance. The recent legislation impairs what we need , esteem for the tax law, to enhance

what we would be better off without, more trading in stock index futures.

The utility of 11 thought experiment , " for lesser mortals as well as Einstein, l ies in its
capacity to force acceptance of truths which are counter-intuitive. Counter-intuitive

as It may be for traditionalists and "free-enterprise" types, the country would work

better if the income tax law were revised to deter the short-term speculation and 11.duc.e

liquidity in the stock market. The truly productive part of "free-enterprise" and the
secur i ty of Its future would thereby be both (I) enhanced by increased emphasis on long-

term effects of investment accanpanied by diversion of talent from speculation to more

useful work and (2) less likely to be damaged by unsound future legislation attributable
to public resentment of after-effects of stock market orgies and wasteful proliferation

of "new capitalists" who produce too little for what they get.

1514 WOIWS