Berkshire's Munger says investors should lower expectations

Berkshire Hathaway Inc.'s vice chairman also predicted that the derivative contracts companies use to hedge against risk will one day cause widespread problems in financial markets.

Munger spoke at the annual meeting of Wesco Financial Corp., a Berkshire subsidiary he runs.

He said investors should expect annual returns of 4-to-5 percent going forward because many stocks are priced high and bonds are offering meager returns.

"It's going to be difficult for people to have high real returns," Munger said.

Plus, Munger said he believes "a lot of rot" has gotten into financial markets, and more scandals, like the current subprime mortgage mess, are likely.

"There will be a hell of a mess in these derivative books eventually," he said.

The Wesco meeting is held each year in Pasadena a few days after thousands of Berkshire shareholders descend upon Omaha, Neb., to hear chairman and CEO Warren Buffett and Munger spend most of a Saturday answering any and all questions.

Berkshire owns 80.1 percent of Wesco, but the company has its own publicly traded stock so it is required to hold annual meetings.

Munger is chairman, CEO and president of Wesco, but he consults with Buffett on Wesco's investment decisions and major capital allocations, much like Buffett consults with Munger about Berkshire decisions.