Fan of Charlie Munger?
Munger’s speech on “The Psychology of Human Misjudgment” is a masterclass in decision-making.
So I’ve made an email course on the 25 Tendencies of Human Misjudgment.
>> Click here to access the email course for free
Todd Combs and Charlie Munger had a fireside chat last year. You’ll be able to find the recording here.
Munger talked about a great range of topics—lessons from Henry Singleton & Benjamin Franklin, irrationality, investing and more.
Here are my notes:
The Buffett & Singleton advantage: Decentralization
Getting out of people’s way and letting them do their magic.
A lot of CEOs can’t stand not being in control of everything.
Not Buffett, and certainly not Henry Singleton.
They adopted a decentralized approach.
“But the world that Henry was in, it was not at all common for the guy who was the C.E.O. to say, “Get out of the way.” Because he did it way better than them. However, because they had so many rules and conventions. He paid no attention to those. Nothing he did was, and Berkshire’s done the same thing. He was loyal to them. And he was quite comfortable when he walked into things. Many C.E.O.s can’t stand having anything around they haven’t dominated. But that’s not Henry, and that’s not Warren Buffett.”
Buying back shares only when it is value-accretive.
Most companies are buying back shares nowadays, regardless of valuation.
Back in the days, Henry Singleton would buy back stocks in large volumes.
But only when it’s undervalued & unwanted by everyone else.
“The thing that’s interesting about it is, when Henry was buying stock in gobs, that was a very uncommon thing to do. And now, of course, it’s very common. You could say Henry has triumphed. But Henry wouldn’t be buying in a lot of the stock. A lot of people are buying stock now, but after it’s selling for more than it’s worth. They like growing their stock, no matter what its value. And people like Henry and Berkshire would buy their stock on the cheap. It’s amazing, we haven’t had another Henry in a long time.”
The Wooden lesson:
Keep doing what you’re good at until you become the best.
John Wooden concentrated 100% of the playing time on his top 7 players.
Over time, they became better and better.
“The Wooden Lesson. And Wooden had the best basketball coaching record in the world, and nobody else was even close. How did he do it? The answer was, he concentrated almost 100% of the playing time on his top seven players. And of course, they got better and better during all the extra playing time. And that’s what happens when you give so much power to a Wooden or a Buffett or something. You’re doing the Wooden system, and it works like gangbusters, and as an investor, if you can find somebody, even as a mini-Wooden or a mini-Singleton or a mini-Buffett, and play them, and when they have a hell of a run, certainly that can be a very good way to invest.
What would Charlie have done if he didn’t discover investing?
If Charlie hadn’t met Warren, he would have opened a law practice.
But!
He will likely branch into what his clients were doing.
And be better at them.
“Well, I think I would have opened a law practice, because I understood my legal income, when I was a lawyer, and I was shrewd in investing my little pittance and I was saving. I actually had quite a bit of money back the time when I was in my mid-30s, and I think I would have, just as Henry Singleton would look at things and say “I think I can do better than that. Why am I the subordinate?””
The secret to life
Munger figured out the secret to life at 7.
His experience with his Dad’s friend, who was a genius.
But he too was subjected to irrationality.
That was when he figured out that he didn’t need to be a genius to do okay in this world.
“My father had a great friend whose father had been the chief mathematician at the University of Nebraska, and he played the violin. He was mechanically gifted. He was an enormously talented man. But he’d been very poor, because in those days, a mathematics professor of a university got paid practically nothing. And this man had conquered poverty all those years of scholarship, working 90-hours weeks. I loved him and admired him. His house was an alternative house for me. I went back and forth because he had children my age. And one day, the man got a leak in his house that caused some extra cost. And he practically went berserk. All that power he had, he took extra care of the home. Things like leaks — Of course, a surgeon would be very fanatic about leaks, too. Anyway, he went berserk. And I thought, God Almighty, here’s this genius going berserk. A world where even geniuses are that nuts, I have a chance…”
What it takes to be a good investor…
You don’t need to be very smart to be a good investor.
But you must have the right temperament.
“Warren was around me and he used to say, “You really don’t need to be very smart to be a very successful investor.” And I think Warren was right. It’s a field where the temperament is, it’s good to have the extra mental horsepower that Henry Singleton had. That is helpful, but it’s perfectly possible to do splendidly well if you have the right temperament. Just go at it over a long time. You talked about me. I’m not a polymath. What I am is a guy who has been able to take moderate obsession and a long attention span and turn them into pretty good results. Of course, a long attention span will help you a lot if you’re reasonably smart.”
Good businesses are rare
Good businesses are rare, don’t expect to find too many of them.
You’ll only need 1 or 2 to make a big difference to your life.
“But I think the people who tend to get the best results are these fanatics who just keep searching for the great businesses. And the best of them don’t expect to find 10 or 20 or 30. They find one or two. And that’s the right way to do it — but all you need are one or two.”
Your advantage over institutional investors
Institutional investors are handicapped.
Because they can’t withstand volatility.
And they end up becoming closet indexers with huge fees.
“My Berkshire stock has gone down 50% three times in my lifetime. That’s one of the most successful gambles — you can find something that works, but it still… And of course, can you imagine an ordinary investment management firm saying, “We don’t mind going down 30%”? They’d be in terror or they’ll be fired. And that means that 95% of the big-time national investing, they’re closet indexers.”
Delaying gratification
Why don’t more people take advantage of compounding?
We like to do what other people are doing.
Everybody likes to compare and one-up their neighbors.
“Of course, there’s use potential if you can do the compounding correctly, but it’s very hard to do. The competition is very, very intense. You have to stay out of the seductive craziness that goes on around you all the time, when there are huge incentive pressures. And they aren’t just incentive pressures. We all like to do what other people are doing. None of us wants to move to the North Pole and sit there for awhile with making one hundred million dollars. We all like to be in pleasant places like Beverly Hills, having an expensive breakfast.”
If you’re looking to absorb more Charlie Munger wisdom…
I’ve prepared a free email course based on Charlie Munger’s speech:
The Psychology of Human Misjudgment