by Janet Lowe
Second, we must avoid ever losing even half of our powerful trademarked name. It will cost us mightily, for instance, if our sloppiness should ever allow sale of any other kind of "cola," for instance, a "peppy cola." If there is ever a "peppy cola," we will be the proprietor of the brand.
Third, with so much success coming, we must avoid bad effects from envy, given a prominent place in the Ten Commandments because envy is so much a part of human nature. The best way to avoid envy, recognized by Aristotle, is to plainly deserve the success we get. We will be fanatic about product quality, quality of product presentation, and reasonableness of prices, considering the harmless pleasure we will provide.
Fourth, after our trademarked flavor dominates our new market, we must avoid making any huge and sudden change in our flavor. Even if a new flavor performs better in blind taste tests, changing to that new flavor would be a foolish thing to do. This follows because, under such conditions, our old flavor will be so entrenched in consumer preference by psychological effects that a big flavor change would do us little good. And it would do immense harm by triggering in consumers the standard deprival super-reaction syndrome that makes "take-aways" so hard to get in any type of negotiation and helps make most gamblers so irrational. Moreover, such a large flavor change would allow a competitor, by copying our old flavor, to take advantage of both (1) the hostile consumer super-reaction to deprival and (2) the huge love of our original flavor created by our previous work.
Well, that is my solution to my own problem of turning $2 million into $2 trillion, even after paying out billions of dollars in dividends. I think it would have won with Glotz in 1884 and should convince you more than you expected at the outset. After all, the correct strategies are clear after being related to elementary academic ideas brought into play by the helpful notions.
How consistent is my solution with the history of the real Coca-Cola company? Well, as late as 1896, twelve years after the fictional Glotz was to start vigorously with $2 million, the real Coca-Cola company had a net worth under $150 thousand and earnings of about zero. And thereafter the real Coca-Cola company did lose half its trademark and did grant perpetual bottling franchises at fixed syrup prices. And some of the bottlers were not very effective and couldn't easily be changed. And the real Coca-Cola company, with this system, did lose much pricing control that would have improved results, had it been retained. Yet, even so, the real Coca-Cola company followed so much of the plan given to Glotz that it is now worth about $125 billion and will have to increase its value at only 8 percent per year until 2034 to reach a value of $2 trillion. And it can hit an annual physical volume target of 2.92 trillion servings if servings grow until 2034 at only 6 percent per year, a result consistent with much past experience and leaving plenty of plain-water ingestion for Coca-Cola to replace after 2034. So I would guess that the fictional Glotz, starting earlier and stronger and avoiding the worst errors, would have easily hit his $2 trillion target. And he would have done it well before 2034.
This brings me, at last, to the main purpose of my talk. Large educational implications exist, if my answer to Glotz's problem is roughly right and you make one more assumption I believe true-that most Ph.D. educators, even psychology professors and business school deans, would not have given the same simple answer I did. And, if I am right in these two ways, this would indicate that our civilization now keeps in place a great many educators who can't satisfactorily explain Coca-Cola, even in retrospect, and even after watching it closely all their lives. This is not a satisfactory state of affairs.
Moreover-and this result is even more extreme-the brilliant and effective executives who, surrounded by business school and law school graduates, have run the Coca-Cola company with glorious success in recent years, also did not understand elementary psychology well enough to predict and avoid the "New Coke" fiasco, which dangerously threatened their company. That people so talented, surrounded by professional advisers from the best universities, should thus demonstrate a huge gap in their education is also not a satisfactory state of affairs.
Such extreme ignorance, in both the high reaches of academia and the high reaches of business, is a lollapalooza effect of a negative sort, demonstrating grave defects in academia. Because the bad effect is a lollapalooza, we should expect to find intertwined, multiple academic causes. I suspect at least two such causes.
First, academic psychology, while it is admirable and useful as a list of ingenious and important experiments, lacks intradisciplinary synthesis. In particular, not enough attention is given to lollapalooza effects coming from combinations of psychological tendencies. This creates a situation reminding one of a rustic teacher who tries to simplify school work by rounding pi to an even three. And it violates Einstein's injunction that "everything should be made as simple as possible-but no more simple." In general, psychology is laid out and misunderstood as electromag netism would now be misunderstood if physics had produced many brilliant experimenters like Michael Faraday and no grand synthesizer like James Clerk Maxwell.
And, second, there is a truly horrible lack of synthesis blending psychology and other academic subjects. But only an interdisciplinary approach will correctly deal with reality-in academia as with the Coca-Cola company.
In short, academic psychology departments are immensely more important and useful than other academic departments think. And, at the same time, the psychology departments are immensely worse than most of their inhabitants think. It is, of course, normal for self-appraisal to be more positive than external appraisal. Indeed, a problem of this sort may have given you your speaker today. But the size of this psychology-department gap is preposterously large. In fact, the gap is so enormous that one very eminent university (Chicago) simply abolished its psychology department, perhaps with an undisclosed hope of later creating a better version.
In such a state of affairs, many years ago and with much that was plainly wrong already present, the "New Coke" fiasco occurred, wherein Coke's executives came to the brink of destroying the most valuable trademark in the world. The academically correct reaction to this immense and well-publicized fiasco would have been the sort of reaction Boeing would display if three of its new airplanes crashed in a single week. After all, product integrity is involved in each case, and the plain educational failure was immense.
But almost no such responsible, Boeing-like reaction has come from academia. Instead academia, by and large, continues in its balkanized way to tolerate psychology professors who mis-teach psychology, nonpsychology professors who fail to consider psychological effects obviously crucial in their subject matter, and professional schools that carefully preserve psychological ignorance coming in with each entering class and are proud of their inadequacies.
Even though this regrettable blindness and lassitude is now the normal academic result, are there exceptions providing hope that disgraceful shortcomings of the educational establishment will eventually be corrected? Here, my answer is a very optimistic yes.
For instance, consider the recent behavior of the economics department of the University of Chicago. Over the last decade, this department has enjoyed a near monopoly of the Nobel prizes in economics, largely by getting good predictions out of "free market" models postulating man's rationality. And what is the reaction of this department, after winning so steadily with its rational-man approach?
Well, it has just invited into a precious slot amid its company of greats a wise and witty Cornell economist, Richard Thaler. And it has done this because Thaler pokes fun at much that is holy at the University of Chicago. Indeed, Thaler believes, with me, that people are often massively irrational in ways, predicted by psychology that must be taken into account in microeconomics.
In so behaving, the University of Chicago is imitating Darwin, who spent much of his long life thinking in reverse as he tried to disprove his own hardest won and best loved ideas. And so long as there are parts of academia that keep alive its best values by thinking in reverse like Darwin
, we can confidently expect that silly educational practices will eventually be replaced by better ones, exactly as Carl Jacobi might have predicted.
This will happen because the Darwinian approach, with its habitual objectivity taken on as a sort of hair shirt, is a mighty approach. Indeed, no less a figure than Einstein said that one of the four causes of his achievement was "self criticism," rapking right up there alongside curiosity, concentration, and perseverance.
And, to further appreciate the power of self-criticism, consider where lies the grave of that very ungifted undergraduate, Charles Darwin. It is in Westminister Abbey, right next to the headstone of Isaac Newton, perhaps the most gifted student who ever lived, honored on that headstone in five Latin words constituting the most eloquent praise in all graveyard print: hic iacet quod iuortale fuet-"here lie the remains of what was mortal."
A civilization that so places a dead Darwin will eventually develop and integrate psychology in a proper and practical fashion that greatly increases skills of all sorts. But all of us who have dollops of power and see the light should help the process along. There is a lot at stake. If, in many high places, a universal product as successful as Coca-Cola is not properly understood and explained, it can't bode well for our competency in dealing with much else that is important.
Of course, those of you with 50 percent of net worth in Coca-Cola stock, occurring because you tried to so invest 10 percent after thinking like I did in making my pitch to Glotz, can ignore my message about psychology as too elementary for useful transmission to you. But I am not so sure that this reaction is wise for the rest of you. The situation reminds me of the old-time Warner & Swasey ad that was a favorite of mine: "The company that needs a new machine tool, and hasn't bought it, is already paying for it."
NOTES
Chapter One An Extraordinary Combination of Minds
1. "The Forbes Four Hundred," Forbes, October 18, 1993.
2. Linda Grant, Los Angeles Times, April 1991.
3. Carol J. Loomis, "The Inside Story of Warren Buffett," Fortune, April 11, 1988. p. 26.
4. Robert Dorr, "Buffett's Right Hand Man ..." Omaha World Herald, August 10, 1986.
5. Roger Lowenstein, Buffett: Making of an American Capitalist (New York: Random House, 1995), p. 75.
6. "Richest List has Gates at No. 1, plus 83 Californians," Los Angeles Times, September 29, 1997, p. D-2.
7. See note 5, p. 162.
8. Judith H. Dobrzynski, "Warren's World," Business Week, May 10, 1993, p. 32.
9. "The Forbes 400," Forbes, October 14, 1996, p. 240.
10. Roger M. Grace, "Prospectives," Metropolitan-News Enterprise, June 1, 1999, p. 10.
11. Phil Swigard, "Main Street journal," self-published newsletter, May 1999.
12. Carmen Moran and Margaret Massam, "An Evaluation of Humour in Emergency Work," The Australasian Journal of Disaster and Trauma Studies, Volume: 1997-3.
Chapter Two The Lake-A Place That Defines Munger
1. Charles Munger, Berkshire Hathaway annual meeting, Omaha, Nebraska, May 1999.
2. Charles Munger, letter to J.D. Ramsey, June 17, 1999. Used with the permission of the author.
3. "News Trends: Now Hear This," Fortune, May 31, 1993, p. 22.
4. Robert Dort, "Buffett's Right Hand Man ..." Omaha World Herald, August 10, 1986.
Chapter Three The Nebraskans
1. "Interesting Facts about the Cornhusker State," University of Nebraska, College of Independent Study, 1998-99 Bulletin.
2. This Fabulous Century: Sixty Years of American Life, 1920-1930 (New York: Time-Life Books, 1970), p. 25.
3. J.B. Munger, The Munger Family, self-published in 1915, part of the genealogy collection, Los Angeles Public Library.
4. "33 years ... A Federal Judge," World Herald, March 2, 1939.
5. Ibid.
6. Ibid.
7. This Fabulous Century: Sixty Years of American Life, 1920-1930 (New York: Time-Life Books, 1970), p. 27.
S. Charles Munger, See's Seventy-Fifth Anniversary Lunch, Los Angeles, California, March 1998.
9. This Fabulous Century: Sixty Years of American Life, 1920-1930 (New York: Time-Life Books, 1970), p. 128.
10. Ibid.
11. Carol Loomis, "Mr. Buffett on the Stock Market," Fortune, November 22, 1999, p. 212.
12. From a letter by Charles Munger, as reported: Robert Dorr, "Ex-Omahan Traded Law for Board Room," Omaha World Herald, August 31, 1977.
13. Roger Lowenstein, Buffett: Making of an American Capitalist (New York: Random House, 1995), p. 20.
14. Ibid.
15. From a letter by Charles Munger, as reported: Robert Dorr, "Ex-Omahan Traded Law for Board Room," Omaha World Herald, August 31, 1977.
Chapter Four Surviving the Wars
1. Nicholas Lemann, The Big Test: The Secret History of the American Meritrocracy (New York: Ferrar Straus & Giroux, 1999), p. 189.
2. Ibid.
3, Charles Munger, "l'he Need for more Multidisciplinary Skill from Professionals: Educational Implications." Address to the fiftieth reunion of the Harvard Law School (:lass of 1948. April 4, 1999.
4. Charles Munger, See's Candy, Seventy-Fifth Anniversary Lunch, Los Angeles, California, March 1998.
5. Ibid.
6. Charles Munger, Harvard School Commencement Speech, Los Angeles, California, June 13, 1996.
7. Interview with Roy Tolles, Roger Lowenstein, Buffett: Making of an American Capitalist (New York: Random House, 1995), p. 20.
8. Superior Court of the State of California for the County of Los Angeles, Metropolitan News Company u. Daily Journal Corporation and Charles T. Munger, July 1, 1999, Vol. 12, p. 1810.
9. Nicholas Lemann, The Big Test: The Secret History of the American Meritrocracy (New York: Farrar, Straus & Giroux, 1999), p. 192.
Chapter Five Putting Together a New Life
1. Outstanding Investor Digest, March 13, 1998.
2. From a letter by Charles Munger, reported: Robert Dort, "Ex-Omahan Traded Law for Board Room," Omaha World Herald, August 31, 1977.
Chapter Six Munger Makes His First Million
1. Richard Dawkins, The Selfish Gene (Oxford, UK, Oxford University Press, 1976), p. 250.
2. Kelly Barron, "Charlie's Pal, Otis," Forbes, October 12, 1998.
3. Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Birmingham, Alabama: AKPE, 1998), p. 684.
4. Charles Munger, Chairman's letter, Wesco Financial Corp., March 5, 1990.
5. Ibid.
Chapter Seven A Combination of Big Ideas
1. From a letter by Charles Munger, as reported: Robert Dorr, "Ex-Omahan Traded Law for Board Room," Omaha World Herald, August 31, 1977.
2. Warren E. Buffett, "The Superinvestors of Graham and Doddsville," Speech, Columbia Business School, May 17, 1984.
3. David Eisner, "It Works: Buying $1 for 40 cents," Chicago Tribune, December 8, 1985, Section 7, p. 1.
4. Robert Dort, "Buffett's Right Hand Man..." Omaha World Herald, August 10, 1986.
5. Charles Munger, Wesco Annual Meeting, Pasadena, California, May 1991.
6. L.J. Davis, "Buffett Takes Stock," New York Times Magazine, April 1, 1990, p. 61.
7. Forbes, January 22, 1996.
8. Ibid.
9. L.J. Davis, "Buffett Takes Stock," Neu, York Times Magazine, April 1, 1990, p. 61.
10. Carol J. Loomis, "The Inside Story of Warren Buffett," Fortune, April 11, 1988, p. 26.
11. L.J. Davis, "Buffett Takes Stock," New York Times Magazine, April 1, 1990, p. 61.
12. Andrew Kilpatrick, Of Permanent Value: The Story of Warren Buffett (Birmingham, Alabama: AKPE, 1998), p. 728.
Chapter Eight Pound-for-Pound, the Best Law Firm
1. Carol Loomis, "Mr. Buffett on the Stock Market," Fortune, November 22, 1999, p. 216.
2. "The Top," California Law Business, September 28, 1998, p. 21.
3. Nicholas Lemann, The Big Test.- The Secret History of the American Meritrocracy (New Yor
k: Ferrar, Straus & Giroux, 1999), p. 214.
5. Ibid.
6. Jaclyn Fierman, "The Perilous New World of Fair Pay," Fortune, June 13, 1994, p. 57.
7. Ibid.
8. Michael Parrish, "Buffett Finds Aide at L.A. Law Office That Reflects His Style," Los Angeles Times, August 27, 1991.
Chapter Nine Operating Wheeler, Munger Out of a Utility Room
1. Warren E. Buffett, "The Superinvestors of Graham and Doddsville," Speech, Columbia Business School, May 17, 1984.
2. Ibid.
3. Nicholas Lemann, The Big Test: The Secret History of the American Meritrocracy (New York: Ferrar Straus & Giroux, 1999), p. 214.
4. David Santry, "Shareholder Heaven at New America Fund," Business Week, December 3, 1979, p. 103-
5. Ibid.
6. Dolly Setton and Robert Lenzner, "The Berkshire Bunch," Forbes, October 12, 1998.
7. Kelly Barron, "Charlie's Pal Otis," Forbes, October 12, 1998.
Chapter Ten Blue Chip Stamps
1. Roger Lowenstein, Buffett: Making of an American Capitalist (New York: Random House, 1995), p. 170.
2. Ibid.
3. Ibid., p. 179.
4. SEC File No. HO 84, Blue Chip Stamps et al. Charles Munger, letter to Charles E. Rickershauser, ►r., October 22, 1974.
5. Ibid., Order directing private investigation, December 10, 1974.
6. Robert Dort, "Five Assigned to Corporate Staff," Omaha World Herald, July 10, 1983.
. Warren Buffett, Letter to Shareholders, Berkshire Hathaway Inc., February 26, 1982.
8. Robert Dort, "Five Assigned to Corporate Staff," Omaha World Herald, July 10, 1983.