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Before Talk

Charlie was just in a hurry, and the customary pleasantries of the classroom were of little concern to him.

His adored son, Teddy, was terminally ill with leukemia.
Charlie’s affinity for Benjamin Franklin’s expansive career in government, business, finance, and industry can be found in his many speeches and whenever he holds an audience, large or small.

Charlie admires that trait in his mentor and strives to emulate Franklin.

Throughout the book, Charlie reveals his intellect, wit, values, and no end of rhetorical flair.
Using self-deprecation and imagination to great effect, Charlie cheerfully compares himself to a counting horse, proposes “Glotz’s Sugared, Caffeinated Water” as a marketing-bereft label for Coca-Cola, and attests, “At least when I was young, I wasn't a total klutz."
Inversion.
He regales his audience with humorous anecdotes and poignant tales rather than with a blizzard of facts and figures. He well knows, and wisely exploits, the traditional role of the storyteller as a purveyor of complex and detailed information.
human foibles.
Charlie has purposefully sidestepped the limelight, choosing relative anonymity instead.
Charlie’s formal education began at Dundee Elementary School, where he and his younger sisters, Mary and Carol, were indoctrinated with ethical homilies.

Charlie’s teachers remember a smart kid who was also inclined to be a bit of a wiseacre.
Today, he can’t remember the first time he was exposed to the aphorisms of Ben Franklin, but they fueled an ineffaceable admiration for the eclectic and eccentric statesman and inventor.
By the time he was 14, the precocious learner had also become one of the doctor’s best friends.
Even at an early age, Charlie showed a sagacious negotiating ability and usually gained a bigger specimen or one with unusual coloring.
One of his sisters remembered years later that the family had to endure the incessant squeaking of hungry hamsters until Charlie arrived home from school to feed them.
Kids played kick the can on warm summer evenings and went to Saturday matinees to see the latest talkies, such as King Kong, a favorite of 8-year-old Charlie.
hobos.

His lack of an undergraduate degree threatened to derail him, but a family friend, former Harvard Law School dean Roscoe Pound, interceded on Charlie’s behalf.

winnow.
Charlie detests placer mining, the process of sifting through piles of sand for specks of gold.
Charlie refers to a company’s competitive advantage as its moat: the virtual physical barrier it presents against incursions.

While poor outcomes are excusable in the Munger–Buffett world—given the fact that some outcomes are outside of their control—sloppy preparation and decision-making are never excusable because they are controllable.

Such behavior implies uncertainty, and Charlie’s moves, few as they are, are anything but uncertain.
When this theme is extrapolated into investment selection, the preferred Munger business emerges: some thrive by outcompeting (à la Selfish Gene) and others by out-cooperating (à la Darwin’s Blind Spot).
Rather, each must be considered as part of the complex whole or gestalt of the investment analysis process, in much the same way that an individual tile is integral to the larger mosaic in which it appears.

Avoid big mistakes; shun permanent capital loss.

Mimicking the herd invites regression to the mean.

Like his hero, Benjamin Franklin, Charlie Munger painstakingly developed and perfected unique approaches to personal and business endeavors.

The fact that my father shares many of these qualities, even if he’s not known for his discernment about produce, does not fully explain my attachment to this light, deft, and anecdotal little book.

He had told us often funny stories of people who either followed the group too blindly or lashed out too reflexively. “Crazy,” “maladjusted,” “pompous,” “self-satisfied”—we knew from his adjectives what he thought we should avoid.

In both instances, he appears blunt and avuncular—that inimitable Charlie—but at the card table, he uses a lack of indirection for harmless ribbing, and at the dinner table, he uses indirection
Even if he didn’t recognize himself in it, I figured he would enjoy the book’s Midwestern milieu, the immigrant striving of the Trillin family, and the humor.
He once said that he was nonconformist enough in his behavior and opinions that it made sense to chart a very straight course in attire.
His going along with normal social customs and his sense of humor, he said, were what allowed his otherwise sometimes prickly temperament to harmonize with other people.

sartorial
As I walked home from the Bodleian Library each night, that nasty, damp, penetrating English cold would not get through.

It marks an inflection point in Bitcoin’s adoption. For the first time ever, millions of investors will now have access to Bitcoin in traditional brokerage accounts and large institutions like financial advisors, pension funds, and endowments will now be able to gain exposure to the asset.

Charlie is content to swim imperturbably against the tide of popular opinion.
Most especially his appetite for hard work, but also his insatiable curiosity and patient demeanor.
Charlie’s approach to investing is quite different from the more rudimentary systems used by most investors.
The unassailable logic of Charlie’s ecosystem approach to investment analysis.
Other times the factors employed combine to create enormous “lollapalooza-level” results, good or bad.
It is this signature approach, backed by Charlie’s formidable intellect, temperament, and decades of relevant experience, that have made him the virtuoso of business pattern recognition so valued by Buffett.
His clarity is hard-won, the product of a lifetime of studying the patterns of human behavior, business systems, and a myriad of other scientific disciplines.

few investors share Charlie’s willingness to appear foolish by not following the herd.

As we shall witness throughout the remainder of this book, the right kind of genetically predetermined wiring is needed as well.
Charlie generally focuses first on what to avoid—that is, on what not to do—before he considers the affirmative steps he will take in a given situation.
“All I want to know is where I’m going to die, so I’ll never go there” is one of his favorite quips.
chessboard.

his carefully identified circles of competence.

To stay within these circles, he first applies a basic, overall screen, designed to limit his investment field to only “simple, understandable candidates.” As he says, “We have three baskets for investing: yes, no, and too tough to understand.”

It’s kind of fun to sit there and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience.

Talk 1

In a vow that students the world over may hope he renounces, Charlie delivered “the one and only graduation speech I will ever make” in 1986 at the Harvard School in Los Angeles.

The occasion was the graduation of Philip Munger, the last of five Munger family sons to matriculate at this prep school (originally an all-boys institution and now the coeducational school called Harvard-Westlake).

Despite Charlie’s self-effacing protestations.
For those of you who want to remain unenlightened and mirthless, do not, under any circumstances, read this selection.

But whatever the topic, Charlie is apt to tell it like it is, which is exactly what he has done in over two decades of public speaking.
Now that Headmaster Berrisford has selected one of the oldest and longest-serving trustees to make a commencement speech, it behooves the speaker to address two questions in every mind.

Benjamin Disraeli,78 as he rose to become one of the greatest prime ministers, learned to give up vengeance as a motivation for action, but he did retain some outlet for resentment by putting the names of people who wronged him on pieces of paper in a drawer.

Then, from time to time, he reviewed these names and took pleasure in noting the way the world had taken his enemies down without his assistance.

once the richest king in the world. Later, in ignominious captivity, as he prepared to be burned alive, he said, “Well now do I remember the words of the historian Solon: ‘No man’s life should be accounted a happy one until it is over.’ (盖棺定论)

My second prescription for misery is to learn everything you possibly can from your own experience, minimizing what you learn vicariously from the good and bad experiences of others, living and dead. This prescription is a sure-shot producer of misery and second-rate achievement.
How little originality there is in the common disasters of mankind: drunk driving deaths, reckless driving maimings, incurable venereal diseases.
The other aspect of avoiding vicarious wisdom is the rule of not learning from the best work done before yours.
Because there is so much adversity out there, even for the lucky and wise, this will guarantee that, in due course, you will be permanently mired in misery.
If my experience is any guide, the rustic’s approach is to be avoided at all cost by someone bent on misery.

as Carson and was known for his constant repetition of one phrase: “Invert, always invert.”

To the class of 1986: Gentlemen, may each of you rise by spending each day of a long life aiming low.

Talk 2

Dissecting business management, he brilliantly describes psychological impacts that can damage or benefit a firm.

So, emphasizing what I sometimes waggishly call remedial worldly wisdom, I’m going to start by waltzing you through a few basic notions.
I don’t think it’s necessary for most people to be terribly facile in statistics.
The notion of a critical mass—that comes out of physics—is a very powerful model.
It’s just been dolled up a little bit with fancy lingo.
Then, when you get into psychology, of course, it gets very much more complicated. But it’s an ungodly important subject if you’re going to have any worldly wisdom.

He also had a very interesting competitive strategy in the early days. He was like a prizefighter who wanted a great record so he could be in the finals and make a big TV hit. So what did he do? He went out and fought 42 palookas. Right? And the result was knockout, knockout, knockout—42 times.
But it just wasn’t as lean and mean and shrewd and effective as Sam Walton. And, in due time, all Sears’s advantages of scale were not enough to prevent it from losing heavily to Walmart and other, similar retailers.
He was thinking, “It’s a lousy business. We’re earning substandard returns and keeping it open just to be nice to the elderly workers. But we’re not going to put huge amounts of new capital into a lousy business.”
However, Berkshire Hathaway, by and large, does not invest in these people who are surfing on complicated technology. After all, we’re cranky and idiosyncratic, as you may have noticed.
efficient market theory.

If you play games where other people have the aptitudes and you don’t, you’re going to lose.

The model I like—to sort of simplify the notion of what goes on in a market for common stocks—is the pari-mutuel system122 at the racetrack.

But it is given to human beings who work hard at it—who look and sift the world for a mispriced bet—that they can occasionally find one.

They tried everything—moral suasion, threats, you name it.

We didn’t have any clients who could fire us at Berkshire Hathaway. So we didn’t have to be governed by any such construct. And we came to this notion of finding a mispriced bet and loading up when we were very confident that we were right. So we’re way less diversified. And I think our system is miles better.

Getting the incentive right is a very very important lesson.

He also had a concept that management would often couch the information very shrewdly to mislead. Therefore, it was very difficult. And that is still true, of course, human nature being what it is.

Talk 3

It can’t be emphasized too much that issues of morality are deeply entwined with worldly wisdom considerations involving psychology.

It’s very, very important to create human systems that are hard to cheat. Otherwise, you’re ruining your civilization, because these big incentives will create incentive-caused bias and people will rationalize that bad behavior is okay

The reason we’re not in high-tech businesses is that we have a special lack of aptitude in that area. And yes—a low-tech business can be plenty hard. Just try to open a restaurant and make it succeed.

Disney is an amazing example of autocatalysis. They had all those movies in the can.
They owned the copyright. And just as Coke could prosper when refrigeration came, when the videocassette was invented, Disney didn't have to invent anything or do anything except take the thing out of the can and stick it on the cassette.

On the other hand, in copying Jack Welch, I am trying to teach you something. When you don’t know and you don’t have any special competence, don’t be afraid to say so.

But I’m always asked this question: “Spoon-feed me what you know.” And, of course, what they’re often saying is “Teach me how to get rich with soft white hands faster. And not only let me get rich faster, but teach me faster, too.”

But it’s a screaming opportunity for somebody. I’d provide funds to support the writing of an appropriate book if I found someone with the wisdom and the will to do the job right.

Talk 4

You will also suffer from the reality evoked by the Shavian character who said, “In the last analysis, every profession is a conspiracy against the laity.

The dollar, like the Roman drachma,214 will almost surely suffer monetary depreciation. Concurrently, real purchasing power of the average beverage consumer in the world will go way up. His proclivity to inexpensively improve his experience while ingesting water will go up considerably faster

pavlovian conditioning.
We will make a big hoopla over our secrecy, which will enhance Pavlovian effects.
Eventually, food chemical engineering will advance so that our flavor can be copied with near exactitude.
And if I am right in these two ways, this would indicate that our civilization now keeps in place a great many educators who can’t satisfactorily explain Coca-Cola, even in retrospect, and even after watching it closely all their lives. This is not a satisfactory state of affairs.

In short, academic psychology departments are immensely more important and useful than other academic departments think. And at the same time, the psychology departments are immensely worse than most of their inhabitants think.

Indeed, a problem of this sort may have given you your speaker today. But the size of this psychology department gap is preposterously large

If, in many high places, a universal product as successful as Coca-Cola is not properly understood and explained, it can’t bode well for our competency in dealing with much else that is important.

If academia and business functioned with best practicable results, most denizens would be able to explain the success of the Coca-Cola Company through parsimonious use of basic concepts and problem-solving techniques.

This was logically sound. But if psychological ignorance is widespread, why would most of my hearers recognize that my version of psychology was correct?

And this was not the outer limit of my teaching folly.

Talk 5

Having ranted in the previous speech about all that is wrong in academia, Charlie holds forth here on the solutions. After months of imprisonment, he was condemned for heresy, strangled to death, and publicly cremated.
But Shaw plainly understates the problem in implying that a conscious, self-interested malevolence is the main culprit.

Even in our youth, some of the best professors were horrified by bad effects from the balkanization of academia into insular, turf-protecting enclaves, wherein notions were maintained by leaps of faith plus exclusion of nonbelievers.

one of whom kept explaining Berkshire Hathaway’s investing success by adding standard deviations of luck until, at six standard deviations, he encountered enough derision to force a change in explanation.
business periodicals, like the Wall Street Journal, Forbes, Fortune .

“There is an old two-part rule that often works wonders in business, science, and elsewhere: 1) Take a simple, basic idea and 2) take it very seriously.”

I came to Harvard Law School very poorly educated, with desultory work habits and no college degree.
What I found, in my extended attempts to complete by informal means my stunted education, was that, plugging along with only ordinary will but with the fundamental organizing ethos as my guide, my ability to serve everything I loved was enhanced far beyond my deserts.
while everything I have said is non-original and has long been obvious to the point of banality to many sound and well-educated minds, all the evils I decry remain grossly over-present in the best of our soft-science educational domains .

To me, this ridiculous outcome implies that the soft-science departments tolerate perverse incentives.

truth is hard to assimilate in any mind when opposed by interest.

Talk 6

In the talk, he attacks the accepted and practiced orthodoxy of his audience with sharp humor, though always without malice.
Charlie has a deep and abiding belief in philanthropy, as is demonstrated by his own generous giving, and he seeks here to save the philanthropic community from itself.
If Charlie can emerge from that state successfully, he seems to be saying, so can the wayward foundation managers in his audience.

There is one thing sure about all this complexity, including its touches of behavior lacking the full punctilio of honor. - easily reach 3 percent of foundation net worth per annum

And people who are successfully selling something, as investment counselors do, make Swedish drivers sound like depressives. Virtually every investment expert’s public assessment is that he is above average, no matter what the evidence to the contrary.

This leaves for extensive discussion only foundation choice 2, more imitation of the investment practices of Berkshire Hathaway in maintaining marketable equity portfolios with virtually zero turnover and with only a very few stocks chosen.

Talk 7 Breakfast Meeting of the Philanthropy Roundtable

First, spending proclivity is influenced in an upward direction when stock prices go up, and in a downward direction when stock prices go down. Second, the proclivity to spend is terribly important in macroeconomics.

Then, asset values crashed, and the Japanese economy stalled out at a very suboptimal level.

This Japanese experience is a disturbing example for everyone, and if something like it happened here, it would leave shrunken charitable foundations feeling clobbered by fate.

But Galbraith did not push his insight on. He was content to stop with being a stimulating gadfly.

After all, the Scottish enthusiastically accepted the idea of preordained, unfixable infant damnation. But the rest of us don’t like Galbraith’s insight.