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The Gospel According to Charlie
Munger has never been afraid to tell it like it is, in a manner more akin to a fire-and-brimstone preacher than a slick-tongued investment guru desperate not to offend
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I’m still a little bummed about the news that the upcoming Stripe Press re-release of Poor Charlie’s Almanack will be abridged. A man of Charlie Munger’s prodigious intellect and clarity should not have his wisdom constrained by so mundane a concern as page count.
(Don’t get me wrong, I’ve already got a spot reserved on my bookshelf for the new Almanack. It just won’t be the definitive edition that I was hoping for…)
So, to console myself, I spent the weekend plowing through some of Munger’s other greatest hits. And, while reading the transcripts of two of his speeches from around the turn of the millennium, something struck me: Undergirding each and every one of Charlie Munger’s lessons on investing and wealth accumulation is an iron-bound moral framework of right and wrong, virtue and vice, that is all too uncommon on Wall Street.
Munger has never been one to equivocate — or to look the other way as business leaders dipped their toes into morally-dubious waters. And he’s not afraid to tell it like it is in a manner more akin to a fire-and-brimstone preacher than a slick-tongued investment guru desperate not to offend.
This approach doesn’t always make him the most popular guy on the party circuit — Warren Buffett once joked, “Miss Manners clearly would need to do a lot of work on Charlie before she could grant him a diploma” — but, in a postmodern world besieged by relativism, it’s comforting to know that there are still men like Charlie Munger out there. Unapologetically speaking black-and-white truths to a generation drowning in shades of gray.
Those two aforementioned speeches — one to the Foundation Financial Officers Group in October 1998 and the other, two years later, at the Philanthropy Roundtable — contain many of Munger’s core teachings.
Ones that will make all of us better investors — and better people.
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DO NOT FOLLOW THE CROWD: For a very long time, the conventional wisdom in the investing world was that the market behaved rationally, that any and all available information was already reflected in a given stock’s price. And, as such, “beating the market” was more a matter of luck than any innate skill.
The so-called Efficient Market Hypothesis became a stifling consensus that brooked very little dissent or argument from the wider community. Only the very bravest were willing to swim against the raging current and defy this orthodoxy. Men like, but certainly not limited to, Warren Buffett and Charlie Munger.
When Buffett struck a devastating blow to the EMH with The Superinvestors of Graham-and-Doddsville in 1984, he held up Munger (among several others) as proof that the market could be tamed by anyone with a sound, value-based approach and a composed emotional framework.
Munger made much the same point at the Philanthropy Roundtable in 2000:
My foregoing acceptance of the possibility that stock value in aggregate can become irrationally high is contrary to the hard-form “efficient market” theory that many of you once learned as gospel from your mistaken professors of yore.
Your mistaken professors were too much influenced by “rational man” models of human behavior from economics and too little by “foolish man” models from psychology and real-world experiences. Crowd folly — the tendency of humans, under some circumstances, to resemble lemmings — explains much foolish thinking of brilliant men and much foolish behavior.
In truth, this goes all the way back to Benjamin Graham — who observed the market’s puzzling tendency to eagerly purchase stocks as prices went up, but then to cower in fright on the way down. A rational response, of course, would be the exact opposite.
Both Buffett and Munger built their fortunes on the idea that people — and the market — will behave irrationally.
A rational man in an irrational world can make a lot of money. It just takes a cool head, clear eyes, and the wherewithal (and backbone) to pounce when others are panicking.
PRIDE GOETH BEFORE THE FALL: But lest anyone think Charlie Munger encourages others to ignore the planks in their own eyes — smugly pointing out the irrationality of others, while neglecting their own shortcomings — he has much to say about the dangers of self-deception and pride.
Five centuries before Christ, Demosthenes noted that: “What a man wishes, he will believe.” And, in self appraisals of prospects and talents, it is the norm, as Demosthenes predicted, for people to be ridiculously over-optimistic … Virtually every investment expert’s public assessment is that he is above average, no matter what is the evidence to the contrary.
And, remember, he said this to an audience of investment experts — all of whom, no doubt, judged themselves to be a cut above the rest at managing money. Munger delivered his startling message right there in the midst of the lion’s den.
This also came just months after the shocking implosion of Long-Term Capital Management, a hedge fund led by Nobel Prize-winning economists and other experts. And, in Munger’s estimation, LTCM’s crash-and-burn had a simple explanation.
Smart, hard-working people aren’t exempted from professional disasters from overconfidence. Often, they just go around in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.
LTCM was a collection of literally the smartest guys in the room — and it all ended in tears. The only thing they were missing was the humility to acknowledge their own shortcomings and to avoid biting off more than they could chew.
Let that be a lesson to us all.
VALUE OTHERS ABOVE YOURSELF: A recurring theme with Charlie Munger is that many of his exhortations are not in his own best (financial) interests. But, rather, are more concerned with the betterment of society — even if that won’t line his pockets any further.
Buffett and Munger didn’t have to speak out against the Efficient Market Hypothesis. They could have kept quiet, hoarded their knowledge, and profited to an even greater degree off of everyone else’s errors and misjudgments.
“There’s nothing like being at a bridge table when the other guy believes he shouldn’t be looking at his cards,” Buffett once said. But, in effect, he and Munger have spent the better parts of their careers telling people to start looking at their cards. Creating like-minded competitors and, in turn, reducing opportunities for themselves.
If some of you make your investment style more like Berkshire Hathaway’s … you will be unlikely to have cause for regret — even if you can’t get Warren Buffett to work for nothing. Instead, Berkshire will have cause for regret as it faces more intelligent investment competition.
But Berkshire won’t actually regret any disadvantage from your enlightenment. We only want what success we can get despite encouraging others to share our general views about reality.
In other words, Munger hopes that Berkshire attracts as many copycats as possible.
This “Be Like Berk” philosophy will mean more and more companies and individual investors will emulate the conglomerate’s actions and values. And, if that cramps Berkshire’s style as more competitors enter the marketplace, Munger is okay with that.
After all, that’s an easy trade-off: A better society at the expense of a few dollars and cents. Unlike the common characterization of a rich fat cat who hopes to pull the ladder up behind himself, Charlie Munger preaches a gospel that will make his own life harder — but everyone else’s better.