Charlie Munger (Berkshire Hathaway Vice Chairman) – A Conversation with Charlie Munger at Michigan Ross (2017)
Chapters
00:00:00 Charlie Munger: An Extraordinary Life of Learning and Success
Charlie Munger, born in Omaha, Nebraska on January 1st, 1924, excelled academically and graduated from Omaha Central High School in 1941. He briefly attended the University of Michigan and Caltech before serving as a meteorologist in the Air Force during World War II. After the war, Munger earned a Juris Doctor degree from Harvard Law School without completing an undergraduate degree. He then practiced law in Los Angeles and co-founded the successful law firm Munger, Tolles & Olson. Since 1975, Munger has been primarily involved with Berkshire Hathaway as an officer and director. He also serves as the vice chairman of Berkshire Hathaway and the chairman of the Daily Journal Corporation. Munger is a renowned investor, known for his partnership with Warren Buffett. He is the author of the book “Poor Charlie’s Almanac” and is a strong advocate for the University of Michigan.
00:09:57 Family Values and Influences on Charlie Munger's Moral Development
Munger’s Grandfather: A Brilliant Man from Humble Beginnings: Charlie Munger’s paternal grandfather, a federal judge in Nebraska, rose from poverty through self-education and determination. Utterly brilliant and scorning those who lacked rationality, he held that eradicating ignorance and stupidity was a moral duty.
Grandfather’s Changing Views: Initially harsh on criminals, his views softened with age and experience.
Support for Family Members in Hard Times: In the 30s, Munger’s grandfather helped a struggling son-in-law by sponsoring his education in pharmacy and setting him up with a bankrupt pharmacy. Another uncle, with an overly optimistic outlook, struggled when his bank was closed during the 1933 banking crisis.
00:13:48 Lessons from Family History: Overcoming Adversity and Finding Opportunities
Munger’s Grandfather’s Financial Prudence: Munger’s paternal grandfather, Judge Munger, displayed financial prudence by carefully selecting first mortgages on homes occupied by reliable and hard-working individuals. He avoided defaults by ensuring the houses were in good neighborhoods and the borrowers were sober and industrious. Faced with a bank failure, he astutely replaced one-third of his good mortgages with bad assets from the bank, saving two-thirds of his children’s inheritance. Years later, during World War II, he recovered most of his money from the bank’s lossy assets.
Coping with Financial Hardship: Munger’s maternal grandfather’s dry goods business failed during the 1922 recession, leading to financial difficulties. His son-in-law went broke, and Munger’s grandfather took the family into his home to provide support. Another son-in-law, despite being a successful architect in the 1920s, faced unemployment during the Great Depression. He moved to California, struggled to find work, and eventually secured a low-paying job with the county of Los Angeles, classified as a laundromat to save money.
Resilience and Adaptation: Despite the hardships, Munger observed that his family members maintained a positive outlook and coped with difficulties effectively. He attributed this resilience to the human ability to adapt and get accustomed to challenging circumstances. Munger emphasized that aging involves facing new challenges and indignities, but a good day for an older person is when nothing new hurts.
Conclusion: Munger’s childhood in Omaha exposed him to a community of educated, civilized, generous, and decent people with a good sense of humor. He recognized the importance of financial prudence, resilience, and coping mechanisms in the face of hardships. His upbringing in Omaha provided a valuable foundation for his future success and contributed to his insights into human behavior and decision-making.
00:17:12 From Omaha to Investing: Charlie Munger's Journey
Early Life and Education: Munger grew up in Omaha, Nebraska, and attended the University of Michigan. He chose Michigan over Stanford, which was his initial choice, due to financial constraints. Initially, Munger studied mathematics but later shifted his focus to law.
Legal Career: After graduating, Munger practiced law in California and co-founded a law firm. He found the legal profession challenging and not suited to his personality.
Transition to Investments: Munger entered the investment world with limited capital but a cautious approach. He successfully created several real estate projects while maintaining a law practice. Within a few years, he had accumulated a significant fortune.
Wheeler Munger & Company: Munger established Wheeler Munger & Company, an investment firm, where he achieved consistent market outperformance. He demonstrated expertise in handling financial crises, such as the 1974-75 market downturn, without suffering losses.
Reasons for Leaving Wheeler Munger & Company: Munger had achieved financial security and no longer relied on fees from other investors. He was concerned about the suffering of his investors during market downturns and felt a moral obligation to protect their interests.
00:27:28 From Textile Mills to Windmills: Warren Buffett's Early Investment Strategies
Munger’s Personal Investment Philosophy: Munger’s approach to investing involves seeking opportunities where he can invest his own money without incurring fees, overrides, or salaries.
Berkshire Hathaway’s Roots: Warren Buffett, guided by Ben Graham’s teachings, focused on acquiring undervalued assets, even if the underlying businesses were struggling. Berkshire Hathaway’s early investments included New England textile mills, a sector facing inevitable decline due to high electricity rates.
Warren Buffett’s Initial Investment in New England Textile Mills: Buffett recognized the low purchase price as an opportunity, despite the certainty of the business’s demise. The goal was to extract enough value from the declining textile business to recover the investment and reinvest in other ventures.
Reflections on Cigar Butt Approach: Munger acknowledges that their initial strategy of buying undervalued, struggling businesses, known as “cigar butts,” was not ideal. He advises against replicating their approach, as it involved painful liquidations and was not a sustainable strategy.
Berkshire Hathaway’s Success Formula: The key to Berkshire Hathaway’s success lies in acquiring businesses that do not require significant managerial intervention from headquarters. Munger emphasizes the hubris of believing in the effectiveness of central management.
Challenges in Fixing Lousy Businesses: Munger stresses the difficulty in turning around struggling businesses. While extracting value through liquidation is possible, genuine fixes are often elusive.
Case Study: Warren Buffett’s Windmill Company Acquisition: Buffett purchased a windmill company without expertise in the industry based on its low cost. Munger introduced an accountant colleague to help manage the company. The colleague implemented efficiency measures, including eliminating unnecessary practices and raising prices for sole-sourced parts.
00:31:45 Talent Management Strategies for Sustainable Business Success
Business Strategies: Charlie Munger and Warren Buffett shifted their focus from buying low-quality businesses to acquiring high-quality businesses that could be scaled. This change was driven by the challenges of scaling low-quality businesses, as well as the emotional difficulty of firing employees.
Owner’s Perspective: Munger emphasizes the importance of thinking like an owner rather than a careerist when evaluating business strategies. He cites the example of General Motors, where a lack of owner’s perspective led to bankruptcy despite being the mightiest company in the world.
Talent Evaluation: Berkshire Hathaway generally prefers to buy businesses with talented people already in place, rather than replacing them. Munger believes that it is difficult to teach new tricks to old dogs, and that experienced leaders are often more valuable than younger talent.
Paper Record vs. Interviews: Munger stresses the importance of evaluating candidates based on their paper record, as it has three times the predictive value of interviews. He cautions against overestimating the ability to judge people accurately through interviews.
Executive Search: Munger criticizes executive search firms for prioritizing selling candidates over finding the best fit for the company. He highlights the success of an executive search firm in finding Ajit Jain, who transformed Berkshire’s insurance business into the largest reinsurance business in the world.
00:38:35 Recognizing and Avoiding Harmful Traps in Life
Munger’s Disdain for Cryptocurrency: Charlie Munger considers investing in Bitcoin and cryptocurrency to be utterly absurd and unworthy of any consideration.
Critique of Bitcoin’s Value: Unlike gold, which is scarce due to natural constraints, Bitcoin is infinitely producible by humans. Munger casts doubt on the trustworthiness of Bitcoin’s creators, suggesting they could easily alter the rules to their advantage.
Moral Hazard of Cryptocurrency: Cryptocurrency promotes the fantastical notion of effortless wealth without requiring substantial effort. This pursuit is harmful and should be avoided, as it can lead to a cycle of chasing easy gains.
General Life Lesson: Munger advocates for avoiding a wide range of detrimental people and concepts that can negatively impact one’s life. People full of resentment, self-pity, and feelings of victimhood should be avoided. Cryptocurrency, particularly Bitcoin, falls into this category of things that should be given a wide berth.
00:40:51 Economic Policy and Technological Advancements: Insights from Charlie Munger
Charlie Munger expresses disdain for promoting Bitcoin and does not intend to invest in it.
Tax Policy Views Munger anticipates the passage of a tax bill, including a $2,000 tax credit for those earning $70,000 with several children, and a reduction in the corporate income tax rate. He believes these policies may have positive macroeconomic consequences, including increased capital values and a wealth effect. Munger acknowledges differing political viewpoints on the tax policy and dismisses extreme reactions as wrong.
The Importance of Open-mindedness Munger emphasizes the dangers of holding a rigid point of view and assuming certainty in one’s beliefs. He stresses the need for a balanced perspective, acknowledging that even experts do not have all the answers.
Political Disagreements Munger views political disagreements, especially those characterized by hatred and contempt, as unhealthy and counterproductive. He advises against adopting political viewpoints that lead to constant anger and misery, suggesting that such behavior hinders worldly achievement.
The Influence of Groupthink Munger draws parallels between the behavior of politicians influenced by groupthink and that of cult members like the Moonies. He warns against adopting such extreme beliefs, as they can lead to irrational decision-making and a diminished capacity for critical thought.
Technological Disruption Munger acknowledges the transformative impact of technology on the world but expresses caution in becoming overly excited about specific innovations. He emphasizes the importance of remembering how much technology has advanced wealth and living standards over time, a concept missed by Adam Smith.
00:48:03 China's Rise, US-China Trade, and the Impact on Individuals
Munger on Ricardo’s Mistakes: David Ricardo, a renowned economist, accurately predicted free trade’s positive outcomes, but failed to consider second-order effects. Malthusian poverty traps prevent nations from developing, but trade with advanced economies can offer a pathway to prosperity. The first country to industrialize using cheap labor from developing countries gains substantially, risking the decline of the original economy.
Munger on the US and China: Free trade between the US and China benefits both nations, but China’s superior economic growth rate may lead to their dominance. Not trading with China is impractical as other countries will continue to do so, promoting China’s rise regardless. The US must maintain a friendly relationship with China despite political conflicts due to shared interests and global influence.
Munger’s Advice for Success: Marriage is the most critical decision in life, with Ben Franklin advising to fully consider the choice and then accept the challenges it brings. Consistent effort, learning, and discipline are essential for success. Instead of aiming for grand ambitions, focus on achieving independence and personal growth. Success often involves a combination of hard work, luck, and virtue. Not all exceptional achievements result from exceptional merit; some individuals simply benefit from favorable circumstances.
Abstract
Charlie Munger: A Life Shaped by Rationality, Resilience, and Realism
Charlie Munger, born in Omaha, Nebraska on January 1, 1924, excelled academically and graduated from Omaha Central High School in 1941. He briefly attended the University of Michigan and Caltech before serving as a meteorologist in the Air Force during World War II. After the war, Munger earned a Juris Doctor degree from Harvard Law School without completing an undergraduate degree. The remarkable life of Charlie Munger, born in Omaha, Nebraska in 1924, encapsulates lessons of resilience, rationality, and realism forged during the Great Depression. Munger, a figure synonymous with critical thinking and shrewd investments, owes his perspective to a childhood marked by economic hardships, influential family members, and a skeptical approach to ideologies. His journey from a legal career to co-leading Berkshire Hathaway with Warren Buffett, and his outspoken views on issues ranging from Bitcoin to global trade, offer insights into a life shaped by pragmatic wisdom, disciplined investment strategies, and a commitment to moral and fiduciary responsibility.
Childhood and Early Influences:
Charlie Munger’s formative years during the Great Depression were crucial in shaping his worldview. Witnessing extreme poverty, he learned the value of self-reliance and adaptability. His family, including a liberal activist aunt and a federal judge grandfather, imparted critical thinking skills and an understanding of rationality and duty. These early experiences taught Munger the importance of overcoming adversity and instilled a lifelong interest in discerning what works in life and business.
Munger’s paternal grandfather, a federal judge in Nebraska, rose from poverty through self-education and determination. Utterly brilliant and scorning those who lacked rationality, he held that eradicating ignorance and stupidity was a moral duty. Initially harsh on criminals, his views softened with age and experience. He supported family members in hard times, sponsoring a struggling son-in-law’s education and setting him up with a bankrupt pharmacy. However, another uncle, with an overly optimistic outlook, struggled when his bank was closed during the 1933 banking crisis.
Munger’s maternal grandfather’s dry goods business failed during the 1922 recession, leading to financial difficulties. His son-in-law went broke, and Munger’s grandfather took the family into his home to provide support. Another son-in-law, despite being a successful architect in the 1920s, faced unemployment during the Great Depression. He moved to California, struggled to find work, and eventually secured a low-paying job with the county of Los Angeles, classified as a laundromat to save money.
Despite the hardships, Munger observed that his family members maintained a positive outlook and coped with difficulties effectively. He attributed this resilience to the human ability to adapt and get accustomed to challenging circumstances. Munger emphasized that aging involves facing new challenges and indignities, but a good day for an older person is when nothing new hurts.
Early Life and Education:
Growing up in Omaha, Nebraska, Munger initially chose to attend the University of Michigan over Stanford due to financial constraints. He initially studied mathematics but later shifted his focus to law.
Legal Career:
After graduating, Munger practiced law in California and co-founded a law firm. However, he found the legal profession challenging and not suited to his personality.
Transition to Investments:
With limited capital but a cautious approach, Munger entered the investment world. He successfully created several real estate projects while maintaining a law practice. Within a few years, he had accumulated a significant fortune.
Wheeler Munger & Company:
Munger established Wheeler Munger & Company, an investment firm, where he achieved consistent market outperformance. He demonstrated expertise in handling financial crises, such as the 1974-75 market downturn, without suffering losses.
Reasons for Leaving Wheeler Munger & Company:
Munger had achieved financial security and no longer relied on fees from other investors. He was concerned about the suffering of his investors during market downturns and felt a moral obligation to protect their interests.
Career and Investment Philosophy:
Munger’s professional journey, starting from Harvard Law School to founding Wheeler Munger & Company, reflects his contrarian nature and a quest for independence. His transition from law to investment, and his eventual partnership with Warren Buffett at Berkshire Hathaway, were driven by a desire for financial control and ethical investment practices. Munger’s investment strategies, initially focused on undervalued businesses and later shifting to high-quality, well-managed companies, demonstrate his adaptability and foresight.
Critique of Bitcoin and Cryptocurrency:
Charlie Munger considers investing in Bitcoin and cryptocurrency to be utterly absurd and unworthy of any consideration. Unlike gold, which is scarce due to natural constraints, Bitcoin is infinitely producible by humans. Munger casts doubt on the trustworthiness of Bitcoin’s creators, suggesting they could easily alter the rules to their advantage. Cryptocurrency promotes the fantastical notion of effortless wealth without requiring substantial effort. This pursuit is harmful and should be avoided, as it can lead to a cycle of chasing easy gains.
Tax Policy Views:
Munger anticipates the passage of a tax bill, including a $2,000 tax credit for those earning $70,000 with several children, and a reduction in the corporate income tax rate. He believes these policies may have positive macroeconomic consequences, including increased capital values and a wealth effect. Munger acknowledges differing political viewpoints on the tax policy and dismisses extreme reactions as wrong.
The Importance of Open-mindedness:
Munger emphasizes the dangers of holding a rigid point of view and assuming certainty in one’s beliefs. He stresses the need for a balanced perspective, acknowledging that even experts do not have all the answers.
Political Disagreements:
Munger views political disagreements, especially those characterized by hatred and contempt, as unhealthy and counterproductive. He advises against adopting political viewpoints that lead to constant anger and misery, suggesting that such behavior hinders worldly achievement.
The Influence of Groupthink:
Munger draws parallels between the behavior of politicians influenced by groupthink and that of cult members like the Moonies. He warns against adopting such extreme beliefs, as they can lead to irrational decision-making and a diminished capacity for critical thought.
Technological Disruption:
Munger acknowledges the transformative impact of technology on the world but expresses caution in becoming overly excited about specific innovations. He emphasizes the importance of remembering how much technology has advanced wealth and living standards over time, a concept missed by Adam Smith.
Charlie Munger’s Advice and Observations on Ricardo, Trade, China, and Success:
Munger on Ricardo’s Mistakes:
David Ricardo, a renowned economist, accurately predicted free trade’s positive outcomes, but failed to consider second-order effects. Malthusian poverty traps prevent nations from developing, but trade with advanced economies can offer a pathway to prosperity. The first country to industrialize using cheap labor from developing countries gains substantially, risking the decline of the original economy.
Munger on the US and China:
Free trade between the US and China benefits both nations, but China’s superior economic growth rate may lead to their dominance. Not trading with China is impractical as other countries will continue to do so, promoting China’s rise regardless. The US must maintain a friendly relationship with China despite political conflicts due to shared interests and global influence.
Munger’s Advice for Success:
Marriage is the most critical decision in life, with Ben Franklin advising to fully consider the choice and then accept the challenges it brings. Consistent effort, learning, and discipline are essential for success. Instead of aiming for grand ambitions, focus on achieving independence and personal growth. Success often involves a combination of hard work, luck, and virtue. Not all exceptional achievements result from exceptional merit; some individuals simply benefit from favorable circumstances.
Views on Business and Economics:
Throughout his career, Munger has emphasized the importance of acquiring businesses with strong management and sustainable practices. He advocates for thinking like owners, not careerists, focusing on long-term value. His skepticism towards Bitcoin and speculative investments further underscores his commitment to rational and prudent financial decisions. Munger’s support for tax policies favoring macroeconomic growth and his criticism of political polarization reflect his pragmatic approach to socio-economic issues.
Global Perspectives and Personal Philosophies:
Munger’s views on global trade, particularly the dynamics with China, highlight his understanding of economic complexities and geopolitical realities. He stresses the importance of maintaining cordial international relations while recognizing the inevitabilities of global economic shifts. Additionally, Munger offers timeless advice on life, emphasizing the significance of marriage, discipline, continuous learning, and the role of luck in achieving success.
Charlie Munger’s life, characterized by resilience during economic hardships, a rational approach to business, and a realistic assessment of global dynamics, offers invaluable lessons. His journey underscores the importance of adaptability, ethical decision-making, and a pragmatic worldview in navigating the complexities of life and business. Munger’s legacy is a testament to the power of rational thinking, disciplined investment, and a commitment to moral and fiduciary responsibility in achieving lasting success.
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