Variant Perceptions

Category: Munger

Munger on the perfect turnaround

GEICO is a very interesting model. It’s another one of the hundred or so models you ought to have in your head.

I’ve had many friends in the sick business fix-up game over a long lifetime. And they practically all use the following formula—I call it the cancer surgery formula:

  • They look at this mess.
  • And they figure out if there’s anything sound left that can live on its own if they cut away everything else.
  • And if they find anything sound, they just cut away everything else.
  • Of course, if that doesn’t work, they liquidate the business.
  • But it frequently does work.

And GEICO had a perfectly magnificent business submerged in a mess, but still working. Misled by success, GEICO had done some foolish things. They got to thinking that, because they were making a lot of money, they knew everything. And they suffered huge losses.

All they had to do was to cut out all the folly and go back to the perfectly wonderful business that was lying there.

And when you think about it, that’s a very simple model. And it’s repeated over and over again.

And, in GEICO’s case, think about all the money we passively made…. It was a wonderful business combined with a bunch of foolishness that could easily be cut out.

And people were coming in who were temperamentally and intellectually designed so they were going to cut it out.

That is a model you want to look for.

Munger on patience

How many different things has Wesco done since Blue Chip Stamps? We’ve only bought two or three companies and made a few big stock purchases. We’ve probably made a significant decision every two years.

But nobody manages money this way. For one thing, clients won’t want to pay you.

But this is not fun, watching and waiting, for people who have an action bias. Too much action bias is dangerous, especially if you’re already rich.

It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.

There are a lot of things we pass on. We have three baskets: in, out and too tough. A lot of stuff goes into the ‘too tough’ basket. We can’t do that if it’s a problem at a Berkshire subsidiary company, but if we don’t own it, we just pass. I don’t know how people cope trying to figure everything out.

We have to have a special insight, or we’ll put it in the ‘too tough’ basket. All of you have to look for a special area of competency and focus on that.

But our theory is that getting a real chance to invest at rates way better than average is not all that easy. I’m not saying it’s not moderately easy to beat the indices by half a percentage point every year, but the moment you seek higher returns, is a very rarified achievement.

The only way we know how to do this is to make relatively few investments of size.

It’s not so bad to have one’s money scattered over three wonderful investments.

Suppose you were a real estate investor with a 1/3 interest in the best apartment complex in town, the best mall, and the best office building. Would you feel like a poor, undiversified investor? No! But as soon as you get into stocks, people feel this way. Partly, people need to justify their fees.

Over many decades, our usual practice is that if something we like goes down, we buy more and more. Sometimes something happens, you realize you’re wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices.

Munger on ideology

Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind. You see it a lot with T.V. preachers (many have minds made of cabbage) but it can also happen with political ideology.

When you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out, what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind. So you want to be very, very careful of this ideology. It’s a big danger.

I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another and that is: I say that I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who support it. I think only when I’ve reached that state am I qualified to speak. This business of not drifting into extreme ideology is a very, very important thing in life

Of course the self-serving bias is something you want to get out of yourself. Thinking that what’s good for you is good for the wider civilization and rationalizing all these ridiculous conclusions based on this subconscious tendency to serve one’s self is a terribly inaccurate way to think.

Of course you want to drive that out of yourself because you want to be wise, not foolish. You also have to allow for the self-serving bias of everybody else because most people are not going to remove it all that successfully, the human condition being what it is. If you don’t allow for self-serving bias in your conduct, again you’re a fool.

Darwin paid particular attention to disconfirming evidence. Objectivity maintenance routines are totally required in life if you’re going to be a great thinker.

USC Law Commencement 2007 

I do not like  to discuss political and macroeconomic issues in this blog, much less religious ones, considering the highly ideological component. You convince no one, learn little, and in return do not make many new friends … though some might say that is the whole point of blogging.

But considering the seriousness of the situation, and its implications for investors, let me post the question. Should not we at least be thinking about the disconfirming evidence of the last few months and see if they fit our mental models?

  • Treasuries rally after an S&P downgrade
  • TIPS 10y at 0% despite the spending and monetary stimulus
  • Business investment and consumer spending anemic despite the free money

Munger on financial innovation

It all started with an asinine bubble. The cause was a combination of megalomania, stupidity, insanity, and I would say evil on the part of bankers and mortgage brokers.

And it was widespread. Alan Greenspan was a smart guy, but he totally overdosed on Ayn Rand when he was young. You can’t give bankers the freedom to create gambling games.

Clever derivatives broke dozens of companies. It killed them. Bankrupt. We don’t need these kinds of innovation in finance. It’s OK to be boring in finance. What we want is innovation in widgets.

I bet Richard Fuld doesn’t have an ounce of contrition. It’s just megalomania. When it’s like that, you need rules to prevent catastrophe. When banks are borrowing the government’s credit rating, you need rules to prevent stupid things.

I don’t want to sell credit to people who are going to hurt themselves with it. You should only sell products that are good for the people who use them. Some disagree with this, but I know I’m right. That is to say, you’re talking to a Republican who admires Elizabeth Warren.

Fancy computers are engaging in legalized front-running. The profits are clearly coming from the rest of us — our college endowments and our pensions. Why is this legal? What the hell is the government thinking? It’s like letting rats into a restaurant.

None of us should fall for the idea that this was constructive capitalism. In the 1920s they called it bucket shops just the name tells you it’s bad and they eventually made it illegal, and rightly so. They should do the same this time.

Charlie Munger, Morning with Charlie 2011

Munger on key success factors

You need a different checklist and different mental models for different companies. I can never make it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life – Wesco meeting 2002

Munger on financials

The beauty of a financial institution is that there are a lot of ways to go to hell in a bucket. You can push credit too far, do a dumb acquisition, leverage yourself excessively – it’s not just derivatives

Wesco Meeting 2002

Munger on expecting the unexpected

What’s interesting in Japan is that every life insurance company is essentially insolvent because they promised to pay 3%. Who’d have thought that this could lead to insolvency, but interest rates went to zero and stayed there for years. They tried to invest in equities, but got negative returns. Can you imagine 13 years with negative equity returns and interest rates below 1%?

Is it inconceivable that it could ever happen here? I don’t think so. Strange things happen.

Wesco 2002 Annual Meeting

Munger on valuation

Organized common (or uncommon) sense  is an enormously powerful tool. There are huge dangers with computers. People calculate too much and think too little

Munger on PlanMaestro

Charlie does not believe in master plans! I should not think that everything is about me (how I hate that song) but it is funny and insightful

And there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.

It wasn’t just Berkshire Hathaway that had this attitude about master plans. The modern Johns Hopkins [hospital and medical school] was created by Sir William Osler. He built it following what Carlyle said: “Our main business is not to see what lies dimly in the distance but to do what lies clearly at hand.”

Look at the guy who took over the company that became IBM. At the time, it had three equal sized business: [a division that made] scales, like those a butcher uses; one that made time clocks (they bought this for a block of shares, making an obscure family very rich); and the Hollerith Machine Company, which became IBM. He didn’t know this would be the winner, but when it took off, he had the good sense to focus on it. It was enlightened opportunism, not some master plan.

I happen to think great cities develop the way IBM or Berkshire did. I think master plans do more harm than good. Anyway, we don’t allow them at Berkshire, so you don’t have to worry about them.

via Mungerism: Wesco 2004 Annual Meeting.

Munger on personal honesty

The ethos of not fooling yourself is one of the best ethoses you could possibly have. It’s powerful because it’s so rare