The printing press,
the steam engine, the telephone, the automobile, the radio - everyone agrees
that these were not ordinary inventions, but giant steps forward for
mankind. Charlie Munger is virtually
alone in including the cash register in the same elevated category. Munger offers these words to sum up the
life's work of the leading purveyor of the modern cash register: "So great
was the contribution of Patterson's cash register to civilization, and so effectively
did he improve the cash register and spread its use, that in the end, he
probably deserved the epitaph chosen for the Roman poet Horace: 'I did not
completely die'" (453).
Why does Munger
offer such overflowing praise for such a commonplace item? The answer lies in the principles of
psychology. Many people will steal if
it's easy to do, and if there's little chance of being caught. Once they start, though, a number of psychological
traits will kick in and make it nearly impossible to stop: operant conditioning
(people will repeat what's worked in the past), incentive-caused bias (people
often genuinely believe that what's best for them is also what's best for
others) and social proof (people tend to ape what other people are doing) will
combine in a "lollapalooza effect" and thievery will spiral out of
control. The cash register nips much of
this in the bud, to society's great advantage.
This is just one of
the many original, profound and tantalizing observations that can be found in Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, in Peter
Kaufman's expanded third edition. Munger
is Berkshire Hathaway's long-serving Vice Chairman, and has been Warren
Buffett's friend and business partner for many decades. The book’s familiar-sounding title alludes to
Poor Richard's Almanack, Ben Franklin’s famous autobiography. Munger not only reveres Franklin, but has
actively sought to emulate him. Most
would blush at the thought of modeling their lives on one of the great figures
of the Enlightenment, but Munger's biography bears striking resemblances to Franklin’s.
Munger, not just
another brick in the wall, is a self-taught polymath, and can speak with
authority on a staggering range of topics, just as Franklin did. Both men became wildly rich through business
in the first half of their lives, but devoted the latter half to philanthropy
and other social and political causes. And
Munger is enough of a Renaissance man that he designed, built and paid for a
large catamaran, just for fun, and he runs Good Samaritan Hospital in Los
Angeles out of a sense of civil service.
Munger's most
important contribution as a thinker is his multidisciplinary
"latticework" of mental models that he uses to solve all kinds of
complex problems. He argues that this is
a way of avoiding "man with a hammer syndrome," an allusion to the
proverb, "To a man with a hammer, every problem looks like a
nail." He estimates that there are
about one hundred powerful ideas, mostly drawn from 100-level university
courses, that people should learn. These
ideas include ecosystems and synthesis from biology, backups and redundancy
from engineering, probability and compound interest from mathematics, tipping
points from physics and chemistry, tradeoffs and opportunity costs from
economics, biases and heuristics from psychology, and so on.
Once a person's
gained an understanding of the models, it becomes easy to draw parallels and
analogies between them. To cite a few of
Munger’s favorite examples: interpreting an economy as a biological ecosystem,
where occupying a specialized niche can offer great advantages; how the concept
of "social proof" from psychology, the tendency to “ape” other
people, can enhance economies of scale in business; economics borrowing from
biology the "Tragedy of the commons" concept, which is a malevolent
"invisible foot" to Adam Smith's benevolent "invisible
hand"; and law schools applying game theory from economics to understand how
competition works. If
economists made more efforts to synthesize a range of ideas, Munger contends,
they wouldn't be so stumped about Japan's prolonged period of economic stagnation. For his part, he believes that cultural
characteristics and social psychology offer part of the explanation.
Munger is well
aware, however, that it's possible to take even a great idea too far, and warns
against borrowing indiscriminately, which has led to literature departments
importing bad ideas from Freud, and business schools adopting a rigid adherence
to "efficient market" hypothesis.
Devoted believers in efficient market theory arrived at a false
conclusion by wanting to make economics more robust, like math or physics, than
it actually is. Markets are mostly
efficient, most of the time, but the difference between mostly efficient
and always efficient is vast.
Munger supplements
the "Big Ideas" with a few critical rules. For example, he often quotes Jacobi, the
Prussian Mathematician, who insisted, "Invert, always invert." In other words, some problems are best - or
only - solved backwards, and some of his wisest advice is what not to
do. Accordingly, Munger once delivered a
commencement speech that offered advice on what to do to achieve a miserable
life, including being resentful of others, being unreliable, and refusing to
learn from other people's mistakes.
Munger argues that Charles Darwin, one of the most important thinkers of
all time, was merely above average in intelligence, but by avoiding bad habits
and destructive behaviors, was able to make an enduring contribution to
humanity.
Using a few of the
powerful concepts from his multi-disciplinary approach, Munger offers a thought
experiment in his fourth talk that essentially reverse-engineers Coca-Cola's
astounding long-term success, explaining it using ideas such as Pavlovian
conditioning and association, the biological facts of human nature resulting
from evolution, using mathematical inversion to identify what not to do and
avoid pitfalls. These (and other) ideas
underpin and complement more familiar concepts such as Coke's powerful brand
and far-reaching distribution system.
The talk is difficult and bound to be misunderstood by many, but well
worth reading anyway.
Munger can apply a
striking array of ideas and concepts, but he is particularly insightful in the
field of psychology. Behavioral
economics and neuroeconomics are deservedly flourishing fields, but Munger was
using - and preaching about - the very same ideas long before almost anybody
else was. Munger argues that the
psychological quirks are so important that wise people should write them out so
they work through them checklist-style to solve difficult problems. Pay particular note, Munger urges, to cases
where several different psychological forces are working in the same
direction.
For Munger,
mastering the theories that underpin psychology was no idle pursuit: he did it
to "acquire capital and independence faster and better assist everything I
loved" (444). In the book's
astonishing eleventh talk, Munger lists and explains 25 psychological
tendencies that are generally useful, but often have unwanted side-effects that
distort decision-making. Munger goes
beyond just citing psychology's best ideas; he also breaks new ground. For example, he has long warned of what he
calls "incentive-caused bias," which some belated economists are now
dubbing "self-serving bias."
Munger had them beat by decades.
On top of the
psychological ideas that are all his own, Munger offers novel perspectives on
others; he insists that anecdotally obvious forces such as envy and jealousy be
included in the canon of psychological ideas; and he puts much greater emphasis
on some of the widely-known ones than most people do, such as the overwhelming power of
denial. Munger's conclusions are deeply insightful, in part because they are often rooted in biology, a field that all
of the social sciences have much to gain from.
Munger is
refreshingly difficult to predict or pin down.
He proudly identifies himself as a Republican, and shares with his GOP
party-mates a deep skepticism of Democrats; he has distaste for
"pot-smoking journalism students"; and he's distinctly unsympathetic
towards the less fortunate. On the other
hand, Munger is a staunch advocate for a woman's right to choose, having
provided legal, monetary and diplomatic support to the cause; he believes that
his taxes are too low; and he regards a "Drill, baby, drill" approach
to oil and gas development as folly, not from a fear of global warming, but due
to the value, scarcity and lack of close substitutes for those hydrocarbons.
Munger and his
ideas are not to everyone's taste.
People who know him report that he is judgmental, self-righteous and
arrogant. Indeed, in one speech, he laments that
a recurring problem he's faced because of his unusually high intelligence is
the risk of offending bosses and experts who know less than he does about their
own area of specialization. Moreover, he
has a staunch Aristocratic mindset, viewing the most eminent members of society
- an exulted group that he certainly includes himself in - as superior and
deserving of outsized wealth and influence, though not without duties.
But being a snob
can be a helpful trait in an investor, and it comes as no great surprise that
Munger's major effect on Buffett was to move him away from investing in
mediocre businesses selling at a cheap price, toward excellent businesses, even
if they're selling at only a decent price.
And it was partly Munger's hard-to-please mentality that led him to
prophesize disaster years before the crash of 2008-09: "I'd be amazed if
we don't have some kind of significant [derivatives-related] blowup in the next
five to ten years" (127). He was
among only a handful of major figures to say so, but few investors and fewer
policy-makers listened, sadly.
Given Munger's
dazzling intelligence and rich body of experience, it's easy to overlook Peter
Kaufman's superb accomplishment as an editor.
Simply collecting Munger's thoughts, speeches, writings and other output
would've been well worth the effort. But
this beautiful, coffee table-sized book has everything: a biography of Munger;
a rich trove of photos and illustrations, as well as articles by and about him; brief
commentaries from Munger's children, friends, colleagues, and fellow investors,
including Buffett, Whitney Tilson and Bill Gross; and an array of book
recommendations from Munger's long life as a devoted reader. Kaufman also offers insightful commentary,
and articulates Munger's musings in a comprehensible way. Anybody searching for wisdom has much to gain
from reading and rereading this book; but for investors this very fine work is an absolute must.
Here is a multi-disciplnary reading of Steve Jobs' life and work.
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