Charlie Munger held court at the Daily Journal annual meeting this week. The 99-year-old answered questions for about two and a half hours.
The questions mostly revolved around investing and life. As is typical of Munger, he offered several quotable responses and lessons along the way.
I highlighted a few of the broader lessons below. You can find a link at the end to watch the annual meeting in full.
One Factor that Dominates Bad Decisions
If I had to name one factor that dominates you in bad decisions, it would be what I call denial. If the truth is unpleasant enough, people, kind of, their mind plays tricks on them… It isn’t really happening. And, of course, that causes enormous destruction of business where people go on throwing money into the way they used to do things even though it isn’t gonna work at all well in the way the world is now having changed.
If you want an example of how denial was affecting things, take the world of investment management. How many managers are going to beat the indexes, all costs considered? I would say, maybe 5%, consistently beat the averages. Everybody else is living in a state of extreme denial. They’re used to charging big fees, and so forth, for stuff that isn’t doing their clients any good. It’s a deep moral depravity…
I always quote Demosthenes…that’s more than 2,000 years ago, and he said, “What people wish is what they believe.”
Worst Mistakes Ever Made
I regard Alibaba as one of the worst mistakes I ever made. In thinking about Alibaba, I got charmed with the idea of their position on the Chinese internet. I didn’t stop to realize they’re still a goddamn retailer. It’s gonna be a competitive business, the internet, it’s not gonna be a cakewalk for everybody…
I got a little out of focus and that made me overestimate the future returns from Alibaba… I keep rubbing my own nose in my own mistakes, like I’m doing now, because I think it’s good for myself.
I don’t short. I have made three short sales in my entire life. And they’re all more than 30 years ago. One was a currency and there were two stock trades. In the two stock trades, I made a big profit on one and made a big loss on the other and they canceled out. And on my currency bet I made a million dollars, but it was a very irritating way to make a million dollars. I’ve stopped…
It was irritating. They kept asking for more margin. I kept sending over Treasury notes. It was very unpleasant. I made a profit in the end, but I never want to do it again.
Disruptive Innovation and Corporate Mistakes
Everybody makes mistakes. I’d say one of the most interesting things that happened in my lifetime was the rise of IBM and the fall of IBM. IBM was the most admired company in America for most of my young life. They just marched from triumph to triumph to triumph. And in the last 10 or 15 years, they’ve slipped. And they’re falling back in relation to other people in their field. As the Apples and the Googles, and so forth, came ahead, IBM just, they kind of missed the boat.
I think that’s almost inevitable. Kodak missed the boat with the change to digital photography, too. I’ve heard Bill Gates say that it’s almost a rule that when a really disruptive technology comes along the incumbents screw up their reaction to it. It’s hard to change your ways when they’ve been successful for a long time, and go into a totally different way of behaving.
If you have good judgment, your life will work a lot better than if you have bad judgment. And you get good judgment gradually over time, partly by making bad judgments and having them work out poorly. So my counsel has always been to start trying to be better and keep trying to improve all your life. And you got about half a chance. You don’t do that you got like no chance.
I used to say I can only teach what the other person almost knows. And I can just turn them over the brink when he’s hanging on the edge. But if the guy is not within miles of even starting, I never succeeded. So, in removing idiocy, I have a 100% failing. I’ve never succeeded…
You climb as hard as you can by advancing one inch at a time. That’s the secret of life.
The Difficulty in Finding Great Businesses
A great business would be what you’d like. And of course, you’d like great management too. And occasionally, we’ve had both right together for a long, long period.
But of course, everybody’s looking for the same thing. And the trouble with it is you will find when you get into those good businesses…you will find, by and large in America, what’s really a great business, it’s at least 25 times earnings, and maybe 30, or 35, or something. So that makes it that much harder, of course, because if something goes wrong, you can lose a lot of your investment.
Of course, that’s what makes investment so difficult is the fact that the good businesses don’t stay cheap. You have got to somehow recognize a good business before it’s recognizable as a good business. That’s very hard to do. Some people get good at it, but not many. 95% of the people who are America’s professional asset managers, I wouldn’t want working for me. I think it’s that hard. I think you need to be in the top 5% to have a reasonable chance. It’s very difficult.
Now it’s not difficult to buy an index fund and sit on your ass. That’s the great default position.
The Biology of Business
Some of the things that surprised me the most was how much dies. The business world is very much like the physical world, where all the animals die in the course of improving all the species, so they can live in niches and so forth… That’s the system. And when I was young, I didn’t realize that that same system applied to what happens in capitalism to all the businesses. They’re all on their way to dying, is the answer, so other things can replace them and live.
And it causes some remarkable deaths. Imagine having Kodak die. It was one of the great trademarks of the world. There was nobody that didn’t use film. They dominated film. They knew more about the chemistry of film than anybody else on Earth. And of course, the whole damn business went to zero. And look at Xerox once owned the world… It’s a nothing compared to what it once was.
So practically everything dies on a big enough time scale. When I was young enough, that was just as obvious then. I didn’t see it for a while. You know, things that looked eternal and been around for a long time, I thought it would likely be that way when I was old. But a lot of them disappeared. Practically everything dies in business. None of the eminence lasts forever…
Once I understood that better, I think it made me a better investor, I think.
Avoiding Crazy (Staying Rational)
If you’re just not crazy, you have a big advantage over 95% of the people, because most people have all kinds of crazy patches. And if you just are consistently not crazy, you have you get a big advantage in life.
Then if you’re patient and a gratification deferrer, in addition to being not crazy, then it’s practically a cinch. And then if you’re exceptionally good at satisfying your commitments to other people, you just automatically improved your resources and your chances in life enormously. And it’s so simple.
- All Markets Are Uncertain – Uncertainty of It All
- The ‘Berkshire System’: Life Advice From a Shareholder Letter – Neckar
- The Lethargy of Large Caps – Klement on Investing
- Data Update 5 for 2023: The Earnings Test – Musings on Markets
- Railroaded – Doomberg
- How Winning (or Losing) a Grammy Changes the Music Artists Make – Behavioral Scientist
- Is Goalscoring Natural or Can It Be Nurtured? – Guardian
- The Unknown Giants of the Deep Ocean – BBC
- Joe Montana Was Here – ESPN