B000U5KFIC EBOK

by Janet Lowe

  Charlie spends hours reviewing the architectural plans for buildings at the school. On one occasion, Munger asked an architect to make a change in the school's auditorium to put a slope in the floor, but the architect said that it couldn't be done. Munger pushed until the architect found a way.

  Oddly, the architect did not seem to be offended by Munger's persistence. "No, he doesn't offend people." said Otis Booth, who also serves on the Harvard-Westlake board. "He has a great ability to turn a phrase and make things amusing."

  Although most of Munger's time and money has gone to support the exclusive private schools his children attended, he is sympathetic to the plight of public schools.

  "I'm a product of the Omaha public schools. And in my day, the people who went to private schools were those who couldn't quite hack it in public schools. And that's still the situation in Germany today. The private schools are for people who aren't up to the public schools. I prefer a system like that. However, once a big segment of that system measurably fails, then I think we have to do something different. You don't just keep repeating what isn't working."

  Munger said he would favor the school voucher concept if the vouchers were given only to poor people. "The better off people don't need them, since they already can afford choice and are exercising it. It wouldn't bother me at all if vouchers were only for people otherwise destined for failed schools. But I think we have to do something in our most troubled schools to change our techniques. I think it's insane to keep going the way we are."

  Charlie's conservative-even puritanical views-emerge when he contemplates the state of higher education today. He is especially offended by the "victim" mentality that he says is fostered in U.S. colleges.

  "You could argue that the very worst of all academic inanity is in the liberal arts departments of the great universities. You can see the reason if you ask the question, `What one frame of mind is likely to cause the most damage to an individual's happiness, his contribution to others, and the like-what one frame of mind will be the worst?' The answer, of course, would be some sort of paranoid self-pity. I can't imagine a more destructive frame of mind. Yet whole university departments want everyone to feel like a victim. And you pay money to send your children to these places. And this is what they teach them!" said Munger. "It's amazing how these pockets of irrationality creep into eminent places."

  Then Munger adds a little midwestern Zen, what he calls "the iron prescription: every time you think some person, or some unfairness is ruining your life, it is you who are ruining your life."

  As he did that August morning at Cass Lake, Munger often muses over ways to improve undergraduate education. His views are largely derived from reviewing his own education and from watching his own eight children-and now his grandchildren-attend a variety of schools. "Our education was far too uni-disciplinary," claimed Munger. "Many problems, by nature, cross many academic disciplines. Accordingly, using a uni-disciplinary attack on such problems is like playing a bridge hand by counting trumps and ignoring all else. This is bonkers, sort of like the Mad Hatter's tea party. But nonetheless, too much of that thinking remains in professional practice and, even worse, has long been encouraged in isolated departments of soft science, which I define as everything less fundamental than biology."'

  Munger is not impressed by the notion that the scope of knowledge has become so massive that few people can become truly multidisciplinary, and still have enough time in life for a career. "You don't have to know everything," insists Munger. "A few really big ideas carry most of the freight."'

  Certainly Munger's concepts of the big ideas do not coincide with those of many academics. He says, for example, that mastery of both psychology and accounting should be required of lawyers, rather than taught as mere elective courses. Munger claims that most people would be better off if they were trained for their professions the way pilots are taught to fly: "They learn everything that is useful in piloting, and then, must retrain continuously so that they can cope promptly with practically any eventuality," he explained.

  "Like any good algebraist," said Munger, "the pilot is made to think sometimes in a forward fashion and sometimes in reverse: and so he learns when to concentrate mostly on what he wants to happen and also when to concentrate mostly on avoiding what he does not want to happen.

  Munger says his own life is an example of that process. When he went to Harvard Law School, "I had taken one silly course in biology in high school, briefly learning, mostly by rote, an obviously incomplete theory of evolution, portions of the anatomy of the paramecium and frog, plus a ridiculous concept of `protoplasm' that has since disappeared. To this day, I have never taken any course, anywhere, in chemistry, economics, psychology, or business. But I early took elementary physics and math and paid enough attention to somehow assimilate the fundamental organizing ethos of hard science, which I thereafter pushed further and further into softer and softer subjects, using it as my organizing guide and filing system in a search for whatever multidisciplinary worldly wisdom it would be easy to get."'

  Thus, his life became a sort of accidental educational experiment, continued Munger. "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 of science as my guide, my ability to serve anything I loved was enhanced far beyond my deserts. Large gains came in places that seemed unlikely when I started out, sometimes making me like the only one without a blindfold in a high-stakes game of `pin the donkey.' For instance, I was productively led into psychology, where I had no plans to go, creating large advantages. "

  "I'vE TRIED To IMITATE, in a poor way, the life of Benjamin Franklin," Munger said. "When he was 42, Franklin quit business to focus more on being a writer, statesman, philanthropist, inventor, and scientist. That's why I have diverted my interest away from business.""'

  One of the important lessons from Munger's life, said his daughter Emilie, is: "Don't just take for your own family and hoard it. He gives a lot to institutions, especially educational institutions. He cares about it-not just giving money, but time and intelligence to solving problems."

  Easy for a daughter to say about her father. But Munger's friend Otis Booth, who also is from a generation not used to the frivolous expression of emotions, sees through the crusty outer layer that shrouds Munger's personality. "It is not readily apparent, but he has an immense, high level of compassion and understanding. It's way back inside of him. It is publicly manifested in his charitable work. He does not wear his heart on his sleeve, but he nonetheless has a large heart."

  C H A P T E R T W E N T Y

  ELDER STATESMAN

  AND CONSCIENCE

  OF THE

  INVESTMENT WORLD

  The values that guide his personal life guide his public life. You live life simply. You live it in the middle of the field, and you don't cut corners.

  Ronald Olson

  nARLIE MUNGER OFTEN QUOTES THE late Nobel laureate physicist Richard Feynman, who said the first rule is to not fool yourself, and you are the easiest person to fool. Munger can be merciless if he believes he has caught someone in an act of silly self-deception.

  Pity the poor professor who gets caught up in a debate with Munger on the academic treatment of investment policy. Such was the case at The Benjamin Cardozo School of Law in New York City in 1996 when, due to the death of a close friend, the scheduled moderator was unable to attend. Charlie Munger was asked to step in.

  Charlie told the audience: "The accidents of mortality have given you a Baptist bumpkin suddenly put in charge of a bunch of Catholic archbishops who are going to debate revisions of the Catholic mass, in Latin. But I figure I could moderate such a convention."'

  It was the panel's assignment to discuss the research of Professor William Bratton of the Rutgers-Newark School of Law, which dealt with the corporate decision to pay dividends to shareholders rather than reinvest profits. Munger soon nailed Bratton w
ith what he considered a flawed assumption in the research.

  Munger: I take it that you believe that there is no one-size-fits-all dividend policy and that you're with the professor (Jill E. Fisch of Fordham University School of Law) who said yesterday that there wasn't any one-size-fits-all scheme for corporate governance?

  Bratton: On that simple proposition I am entirely in concord with Professor Fisch.

  Munger: But you say there is some vaguely established view in economics as to what is an optimal dividend policy or an optimal investment?

  Bratton: I think we all know what an optimal investment is.

  Munger: No, I do not. At least not as these people use the term.

  Bratton: I don't know it when I see it ... but in theory, if I knew it when I saw it this conference would be about me and not about Warren Buffett. I Laughter from the audience]

  Munger: What is the break point where a business becomes suboptimal in an ordinary corporation or when an investment becomes suboptimal?

  Bratton: When the return on the investment is lower than the cost of capital.

  Munger: And what is the cost of capital?

  Bratton: Well, that's a nice one ]Laughter] and I would ...

  Munger: Well, it's only fair, if you're going to use the cost of capital, to say what it is.

  Bratton: I would be interested in knowing, we're talking theoretically.

  Munger: No, I want to know what the cost of capital is in the model.

  Bratton: In the model? It will just be stated.

  Munger: Where? Out of the forehead of job or something?

  Bratton: That is correct. I Laughter]

  Munger: Well, some of us don't find this too satisfactory. I Laughter]

  Bratton: I said, you'd be a fool to use it as a template for real world investment decision making. [Laughter] They're only trying t(i ice a particular perspective on human behavior to try to explain things

  Munger: But if you explain things in terms of unexplainable subconcepts, what kind of an explanation is that? [Laughter]

  Bratton: It's a social science explanation. You take for what its worth.

  Munger: Do you consider it understandable for some petuplc• to regard this as gibberish? [Laughter]

  Bratton: Perfectly understandable, although I do my best to teach it. [Laughter)

  Munger: Why? Why do you do this? [Laughter]

  Bratton: It's in my job description. [Laughter]

  Munger: Because other people are teaching it, is what you're telling me. [Laughter]2

  The audience laughter points are essential in this exchange, lest it sound like a food fight at a junior high school cafeteria. The bantering was done in a good-natured tone, but the point of the exchange was quite serious. Later, to make sure his comments were not misunderstood, Munger made amends:

  I don't want my remark about the cost of capital to be interpreted as meaning that I think the great bulk of Professor Bratton's paper is wrong. I think it's profoundly right. When he talks about agency costs in corporations and the discipline caused by levels of debt and the discipline caused by dividend conventions, I think he is profoundly right. And to the extent that those are the conventional academic explanations, I think it's wisdom he's giving. It's just the cost of capital thing that always makes me go into orbit. [Laughter];

  Although he did not say so then, Munger has his own idea of how the cost of investment capital should be measured. Buffett has explained that at Berkshire, the cost of capital is measured by the company's ability to create more than $1 of value for every $1 of earnings retained. "If we're keeping $1 bills that would be worth more in your hands than in ours, then we've failed to exceed our cost of capital," Buffett said.

  A STUDENT ONCE ASKED CHARLIE MUNGER if he and Buffett were fulfilling their responsibility to share his wisdom:

  Sure: Look at Berkshire Hathaway. I call it the ultimate didactic exercise. Warren's never going to spend any money. He's going to give it back to society. He's just building a platform so people will listen to his notions. Needless to say, they are very good notions. And the platform's not so had either. But you could argue that Warren and I are academics in our own way.4

  Both Charlie and Warren are at a phase in their lives when they can choose their activities, concentrating only on those things that seem to have meaning and that interest them. Munger has done some public speaking to law classes at Stanford and the University of Southern California, and to organizations when asked by special friends. He, like Warren, prefers to talk to young people, to students who are still learning about life and who have time to implement some of the concepts that the two of them consider important.

  Charlie's speeches are always informally presented, but as was sometimes the case with Ben Graham, his ideas occasionally go over the heads of the listeners. His method is to present major themes, such as advising listeners to identify the few big ideas that make a difference and try to live by them. Although he talks about what those ideas might be, he does not offer a succinct formula, or a simple list of directions, leaving his listeners with the sense of insufficient guidelines. But occasionally he'll cut right to the hone and lay out a perfect nugget of personal or financial wisdom.

  Some of his lessons are quite practical and apply to life in general and to financial matters in particular: To those whom much is given, much is expected. Always live below your financial means so that you will have money to invest. Invest in such a way so as to avoid the possibility of falling into a negative position-primarily, by limiting the amount of debt you use.

  "If you want to get smart," Munger said, "the question you have to keep asking is 'why, why, why?' And you have to relate the answers to a structure of deep theory. You've got to know the main theories. And it's mildly laborious, but its also a lot of fun."

  From physicists, Munger has learned to solve a problem by seeking the simplest, most direct answer. The easiest way invariably is the best way. From mathematicians Munger learned to turn problems upside down or to look at them backward-invert, always invert.

  Munger used this method, inversion, to capture the attention of his youngest son Philip's graduating class when he gave the commencement address at Harvard School in 1986. Munger told the students that his prescriptions for life were based on a Johnny Carson speech explaining the things a person should do to ensure a miserable life. These included ingesting chemicals in an effort to alter mood or perception, and allowing oneself to indulge in envy and to wallow in resentment. He cited the example of a youthful acquaintance who became an alcoholic, and spent the rest of his life fighting off all sorts of demons. All or any of Carson's three behaviors will guarantee an unhappy existence. Then Munger added four practices that he believes also will help guarantee failure. Be unreliable; learn everything from your own experience rather than learning from others; give up trying after your first, second, or third reverse of fortune; and finally, give in to fuzzy thinking. °... ignore a story they told me when I was very young about a rustic who said, 'I wish I knew where I was going to die, and then I'd never go there."

  BERKSHIRE HATHAWAY AND WESCO INVESTORS listen carefully to maxims about life, but they literally crowd the doorways to hear Munger and Buffett talk about investment issues. A frequently asked question is, how do you learn to be a great investor?

  First of all, you have to understand your own nature, said Munger. "Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable-and some losses are inevitable-you might be wise to utilize a very conservative pattern of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don't think there's a one-size-fits-all investment strategy that I can give you."'

  Then, says Munger, you have to gather information. "I think both Warren and I learn more from the great business magazines than we do anywhere else," said Charlie. "It's such an easy, shorthand way of getti
ng a vast variety of business experience just to riffle through issue after issue covering a great variety of businesses. And if you get into the mental habit of relating what you're reading to the basic structure of the underlying ideas being demonstrated, you gradually accumulate some wisdom about investing. I don't think you can get to be a really good investor over a broad range without doing a massive amount of reading. I don't think any one book will do it for you."

  Each year at the Berkshire annual meeting Munger recommends a wide range of reading material. These include Value Line charts, Robert B. Cialdini's book Influence on how people are persuaded to buy products and take other actions, and recently, Robert Hagstrom's book, The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy.

  Munger explained that a person's reading should not be random: ".. . you have to have some idea of why you're looking for the information. Don't read annual reports the way Francis Bacon said you do sciencewhich, by the way, is not the way you do science-where you just collect endless data and then only later do you try to make sense of it. You have to start with some ideas about reality. And then you have to look to see whether what you're seeing fits in with proven basic concepts.

  "Frequently, you'll look at a business having fabulous results. And the question is, `How long can this continue?' Well, there's only one way I know to answer that. And that's to think about why the results are occurring now-and then to figure out the forces that could cause those results to stop occurring."