Poor Charlie's Almanack

Key Takeaways

Under Consideration — to be added.

Interconnections

Under Consideration — to be added.

Highlights

• “Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group…then to hell with them.”
• Look first for someone both smarter and wiser than you are. After locating him (or her), ask him not to flaunt his superiority so that you may enjoy acclaim for the many accomplishments that sprang from his thoughts and advice. Seek a partner who will never second-guess you nor sulk when you make expensive mistakes. Look also for a generous soul who will put up his own money and work for peanuts. Finally, join with someone who will constantly add to the fun as you travel a long road together.
• “A partner who is not subservient, who is himself extremely logical, is one of the best mechanisms you can have.” Warren Buffett
  • Be two solid individuals rather than filling each other’s weaknesses.
• His mental models, drawn from every discipline imaginable, recur repeatedly and, in no way, focus on “business portfolio strategy” or “beta” or “Cap M.” Rather, they center on fundamental truth, human accomplishment, human foibles, and the arduous path to wisdom.
• I’ve gotten paid a lot over the years for reading through the newspapers.
• “The next thing most like living one’s life over again seems to be a recollection of that life, and to make that recollection as durable as possible by putting it down in writing.” Benjamin Franklin
  • Everyone should have a personal history (Wilford Woodruff)
• Charlie’s parents, Al and Florence Munger, encouraged reading and gave each of their children several books at Christmas, usually devoured by that night.
  • #reading #parenting
• “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the timenone, zero. You’d be amazed at how much Warren reads-and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
  • #reading
• With Nancy’s support, he turned to outside ventures and alternative ways to generate income. However, he never forgot the sound principles taught by his grandfather: to concentrate on the task immediately in front of him and to control spending.
  • Balance between focus and diversity
• Where one was knowledgeable, the other was just as excited to learn.
  • About Buffett and Munger
• The firm largely eschews conventional law firm marketing, following Charlie’s advice that “The best source of new legal work is the work on your desk.”
  • Whatever you are, be a good one - a job worth doing well
• “I am a biography nut myself. And I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among ‘the eminent dead,’ but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education. It’s way better than just giving the basic concepts.”
  • Reading biographies
• “A partner, ideally, is capable of working alone. You can be a dominant partner, subordinate partner, or an always collaborative equal partner. I’ve done all three. People couldn’t believe that I suddenly made myself a subordinate partner to Warren, but there are some people that it is okay to be a subordinate partner to. I didn’t have the kind of ego that prevented it. There are always people who will be better at something than you are. You have to learn to be a follower before you become a leader. People should learn to play all roles.”
• Charlie Munger speaks of the current harmful trend in which ever more of the nation’s ethical young brain power is attracted into lucrative money management and its attendant modern frictions, as distinguished from work providing much more value to others… Early Charlie Munger [he says of himself] is a horrible career model for the young, because not enough was delivered to civilization in return for what was wrested from capitalism.
  • Rich people are always saying young people should do something more creative and better for the world. - Elon Musk tweet about too many people going into finance
• But I later came to share Cicero’s governmental views. His underlying philosophical view was one of deep and realistic cynicism about human nature, including a distaste for pure mob rule and demagogues. This cynicism was of course counterbalanced by his belief that it was the duty of the citizenry, particularly its most eminent members, to serve the State and its values wisely and vigorously, even if that required a great sacrifice on the part of the servers.
  • Connect to human nature quotes from Hamilton, John Adams, and John Quincy Adams
• As it worked out, I got more out of life than I deserved. And the thought patterns that seem to be rewarded in one’s life are usually those which end up as part of one’s most intense convictions)
  • “It worked for me.”
• As the years have passed, I have encountered more and more criticism from being lost in my own thoughts when others were talking to me. This behavior, too, is deemed a virtue by Cicero as he demonstrates in his appraisal of the astronomer Gallus and others like him: “How often did the rising sun surprise him, fixed on a calculation he began overnight … and how many others we have known in their old age [so] delighting themselves in their studies … ingenious and commendable?”
  • #listening #thinking
• And fear of death is silly and unacceptable for this Roman. He reasons that either (a) you are going to a perpetual, better afterlife, or (b) you won’t retain any pain if there is no such outcome.
• To Cicero it is unworthy that an old man would work to improve only what he would live to enjoy. For him the only life worth living is dedicated in substantial part to good outcomes one cannot possibly survive to see.
  • #service
• The most celebrated passage in de Senectute is probably the following grand summary: “The best Armour of Old Age is a well spent life preceding it; a Life employed in the Pursuit of useful Knowledge, in honourable Actions and the Practice of Virtue; in which he who labours to improve himself from his Youth, will in Age reap the happiest Fruits of them; not only because these never leave a Man, not even in the extreamest [sic] Old Age; but because a Conscience bearing Witness that our Life was well-spent, together with the Remembrance of past good Actions, yields an unspeakable Comfort to the Soul.”
• Moreover, Warren Buffett, as a sort of modern baton carrier for a Ciceronian point of view, is now doing a good job in imitating Cicero and Franklin in old age. Not only does Buffett, much like Cato, stay in the arena with no plan to ever leave. He does so joyously and while providing good results for those who will trust him patiently. And from a pulpit built high by worldly success, he also imitates Cicero, Cato and Franklin by communicating much that tells others what they should think and how they should behave. And his words are often made more acceptable through use of insightful humor.
• “I guess I don’t so much mind being old, as I mind being fat and old. I should have no objection to go over the same life from its beginning to the end: requesting only the advantage authors have, of correcting in a second edition the faults of the first. Life’s Tragedy is that we get old too soon and wise too late. When you’re finished changing, you’re finished.” (Benjamin Franklin)
• My dad often used the forum of the family dinner table to try to educate his children.
• There are a lot of these gems from Minnesota because, in those days when Charlie worked so hard and so long, that was the only meaningful time we spent with him. During the work weeks, he was off before dawn and home about dinner time and then studied Standard & Poor’s and, later, would spend a couple of hours on the phone with Warren.
• Thinking about Father made me remember a long-ago humorous TV beer ad in which a smartly dressed man at a table is so engrossed in his glass of beer as to be oblivious to a rampaging bull charging a bullfighter right in front of him. He doesn’t flinch even when the bull smashes the table into matchsticks. The announcer’s tagline was “Try…beer for a truly unique experience,” or something like that. Take away the beer and substitute the financial market listings, architectural plans, or a scholarly biography of Keynes, and have a dead-on comedic take on Father night after you night in his favorite chair poring over something, all but deaf to the roughhousing younger children, a blaring TV, and Mom trying to summon him to dinner. Even when not reading, Father was often so deep in contemplation that a routine drive to take Molly and Wendy back to Pasadena could have turned into an excursion to San Bernardino without Mom calling out the correct freeway turnoffs. Whatever was on his mind, it wasn’t the outcome of a football game or a botched golf shot. Father’s ability to Chinese wall off the most intrusive distractions from whatever mental task he was engaged in-a practice alternately amusing and irritating if you were trying to get his attention-accounts as much as anything else for his success.
  • Focus, focus, focus.
• Book by Calvin Trillin, called Messages from My Father
  • #books-to-read
• A friend of mine recently began an anecdote about my father by saying, “So your dad’s sitting in his chair, like Rushmore…” I knew exactly what he meant. Not many people can summon up the image of a 5,700-foot granite mountain and the faces of four presidents simply by taking possession of an upholstered chair, but my father can. All of the Munger children have at one time or another approached Rushmore to make a request and felt like Dorothy approaching Oz, except that Oz was more voluble. Rushmore did not always respond. Sometimes my father made a low steady noise from somewhere around his larynx, as though Rushmore had gone volcanic, but that was not so easy to interpret. Can you be more subtle than silent?
• “He knows how to take all of his brains and all of his energy and all of his thought and focus exactly on a single problem, to the exclusion of anything else. People will come into the room and pat him on the back or offer him another cup of coffee or something, and he won’t even acknowledge their presence because he is using one hundred percent of his huge intellect.”
• “People think it’s Charlie’s eyes that cause him to miss seeing things (Charlie lost his vision in one eye many years ago due to complications from cataract surgery). BUT IT’S NOT HIS EYES, IT’S HIS HEAD! I once sat through three sets of traffic lights, and plenty of honking behind us, as Charlie discussed some complex problem at an intersection.” (Warren Buffett)
• ‘Find out what you’re best at and keep pounding away at it.’
  • Whatever you are, be a good one.
• “Charlie has the ability to capture knowledge with simple descriptions. When discussing the intelligence of offspring, he refers to the genetic lottery.’ When discussing venture capitalists who defend stock options, he deems them ‘no better than the piano player in a whorehouse.’ When discussing the deleterious effects on efficiency of cost-plus contracts, he likes to say ‘even the mule knew to slow down.’ (Bill Gates)
• “Take a simple idea and take it seriously.”
• “I find it quite useful to think of a free market economy-or partly free market economyas sort of the equivalent of an ecosystem. Just as animals flourish in niches, people who specialize in some narrow niche can do very well. In business we often find that the winning system almost ridiculously goes far in maximizing and/or minimizing one or a few variables-like the discount warehouses of Costco.”
  • What are you the best in the world at?
• To Charlie, successful investing is simply a byproduct of his carefully organized and focused approach to life.
• “You must know the big ideas in the big disciplines and use them routinely-all of them, not just a few. Most people are trained in one model-economics, for example-and to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.”
  • Lay out the big disciplines and big ideas so you can build an understanding
• He calls the tools he uses to conduct this review “Multiple Mental Models.” They borrow from and neatly stitch together the analytical tools, methods, and formulas from such traditional disciplines as history, psychology, physiology, mathematics, engineering, biology, physics, chemistry, statistics, economics, and so on. The unassailable logic of Charlie’s “ecosystem” approach to investment analysis: Just as multiple factors shape almost every system, multiple models from a variety of disciplines, applied with fluency, are needed to understand that system.
• Simplicity is the end result of long, hard work, not the starting point. (Frederick Maitland)
• “Faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof.” (John Kenneth Galbraith)
  • Connect to Sam Walton quote from David Perell article about being willing to change his mind
• Charlie likes the analogy of looking at one’s ideas and approaches as “tools.” “When a better tool (idea or approach) comes along, what could be better than to swap it for your old, less useful tool? Warren and I routinely do this, but most people, as Galbraith says, forever cling to their old, less useful tools.”
• Especially important examples of these models include the redundancy/backup system model from engineering, the compound interest model from mathematics, the breakpoint/ tipping-moment/autocatalysis models from physics and chemistry, the modern Darwinian synthesis model from biology, and cognitive misjudgment models from psychology.
• Legendary fixed income expert Bill Gross (PIMCO) once told the students of the UCLA Anderson School of Business: “The book that rests on my library coffee table is not Peter Lynch’s Beating the Street or even my own, but several books by historian Paul Johnson on the makings of the nineteenth and twentieth centuries. “There is no better teacher than history in determining the future… There are answers worth billions of dollars in a $30 history book.”
  • #history
• “To this day, I have never taken any course, anywhere, in chemistry, economics, psychology, or business.” And yet these disciplinesespecially psychology-form the foundation upon which his system is built.
• Like a chess grandmaster, through logic, instinct, and intuition, he determines the most promising investment “moves,” all the while projecting the illusion that the insight came easily, even simply. But make no mistake: This “simplicity” comes only at the end of a long journey toward understanding-not at the beginning. His clarity is hard won: the product of a lifetime of studying the patterns of human behavior, business systems, and a myriad of other scientific disciplines.
• “Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do, when it ought to be done, whether you like it or not. It is the first lesson that ought to be learned and however early a man’s training begins, it is probably the last lesson that he learns thoroughly.” (Thomas Henry Huxley) Darwin’s self-appointed advocate or “bulldog”
• “As Jesse Livermore said, “The big money is not in the buying and selling…but in the waiting.”
• Ted Williams is the only baseball player who had a .400 single-season hitting record in the last seven decades. In the Science of Hitting, he explained his technique. He divided the strike zone into seventy-seven cells, each representing the size of a baseball. He would insist on swinging only at balls in his ‘best’ cells, even at the risk of striking out, because reaching for the ‘worst’ spots would seriously reduce his chances of success. As a securities investor, you can watch all sorts of business propositions in the form of security prices thrown at you all the time. For the most part, you don’t have to do a thing other than be amused. Once in a while, will find a ‘fat pitch’ that is slow, straight, and right you in the middle of your sweet spot. Then you swing hard. This way, no matter what natural ability you start with, you will substantially increase your hitting average. (Li Lu, of LL Investment Partners)
• Philip Fisher (1907–2004), author of Common Stocks and Uncommon Profits, among many other books, began his investment career in 1931. Like Ben Graham, he achieved impressive results over his lifetime, but Fisher did it with a markedly different approach. Unlike Graham, who typically invested in statistically cheap “cigar-butts” (with the notable exception of GEICO), Fisher preferred to buy and hold the stocks of high-quality companies that could, “grow and grow and grow.”
  • #books-to-read — Phillip Fisher vs. Ben Graham; I’m sure this book exists somewhere. Go find it. - “Common Stocks and Uncommon Profits” by Phillip Fisher
• “When Warren lectures at business schools, he says, I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches-representing all the investments that you get to make in a lifetime. And once you’d couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”
• Charlie strives to reduce complex situations to their most basic, unemotional fundamentals. He faithfully honors Albert Einstein’s admonition, “A scientific theory should be as simple as possible, but no simpler.” Graham cautioned the investor to carefully use his own, unemotional judgment of value instead of relying on the often manic-depressive behavior of the financial markets.
• “To us, investing is the equivalent of going out and betting against the parimutuel system. We look for a horse with one chance in two of winning and which pays you three to one. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.”
• “It’s kind of fun to sit there and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience.”
• “If you have competence, you pretty much know its boundaries already. To ask the question [of whether you are past the boundary] is to answer it.” (Charlie Munger)
• “If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter.” (Warren Buffett)
• Identifying Your Circle of Competence: In Talk Nine (page 400), Charlie tells the apocryphal story of Max Planck and the chauffeur who drove him to the public lectures he gave throughout Germany. On one occasion the chauffeur, who by this time knew the lecture by heart, suggested that he and Planck switch places. At the conclusion of the chauffeur’s flawless recitation of the lecture, a physicist stood up and posed a very difficult question. The chauffeur, ready for the situation, replied, “I’m surprised that a citizen of an advanced city like Munich is asking so elementary a question, so I’m going to ask my chauffeur to respond.” In the real world, it is critical to distinguish when you are “Max Planck,” and when you are the “chauffeur.” If you cannot respond legitimately to the next question, you lack true mastery and are likely outside your “Circle of Competence.”
• “A great business at a fair price is superior to a fair business at a great price.”
• “I notice that when all a man’s information is confined to the field in which he is working, the work is never as good as it ought to be. A man has to get perspective, and he can get it from books or from people-preferably from both.” (Harvey Firestone)
  • #reading #learning
• “There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash-and I don’t want to go back.” (Charlie Munger)
• Investing Principles Checklist
• Risk-All investment evaluations should begin by measuring risk, especially reputational • Incorporate an appropriate margin of safety • Avoid dealing with people of questionable character • Insist upon proper compensation for risk assumed Always beware of inflation and interest rate exposures • Avoid big mistakes; shun permanent capital loss
• Independence-”Only in fairy tales are emperors told they are naked” • Objectivity and rationality require independence of thought • Remember that just because other people agree or disagree with you doesn’t make you right or wrong-the only thing that matters is the correctness of your analysis and judgment • Mimicking the herd invites regression to the mean (merely average performance)
• Preparation “The only way to win is to work, work, work, work, and hope to have a few insights” • Develop into a lifelong self-learner through voracious readings cultivate curiosity and strive to become a little wiser every day • More important than the will to win is the will to prepare • Develop fluency in mental models from the major academic disciplines If you want to get smart, the question you have to keep asking is “why, why, why!” . Intellectual humility-Acknowledging what you don’t know is the dawning of wisdom • Stay within a well-defined circle of competence • Identify and reconcile disconfirming evidence • Resist the craving for false precision, false certainties, etc. • Above all, never fool yourself, and remember that you are the easiest person to fool
• Analytic rigor-Use of the scientific method and effective checklists minimizes errors and omissions • Determine value apart from price; progress apart from activity; wealth apart from size • It is better to remember the obvious than to grasp the esoteric • Be a business analyst, not a market, macroeconomic, or security analyst • Consider totality of risk and effect; look always at potential second order and higher level impacts • Think forwards and backwards-Invert, always invert
• Allocation-Proper allocation of capital is an investor’s number one job • Remember that highest and best use is always measured by the next best use (opportunity cost) • Good ideas are rare-when the odds are greatly in your favor, bet (allocate) heavily • Don’t “fall in love” with an investment-be situation-dependent and opportunity-driven
• Patience-Resist the natural human bias to act • “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily • Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake • Be alert for the arrival of luck • Enjoy the process along with the proceeds, because the process is where you live
• Decisiveness-When proper circumstances present themselves, act with decisiveness and conviction • Be fearful when others are greedy, and greedy when others are fearful • Opportunity doesn’t come often, so seize it when it does • Opportunity meeting the prepared mind: that’s the game
• Change-Live with change and accept unremovable complexity • Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you • Continually challenge and willingly amend your “best-loved ideas” • Recognize reality even when you don’t like it - especially when you don’t like it
• Focus-Keep things simple and remember what you set out to do • Remember that reputation and integrity are your most valuable assets-and can be lost in a heartbeat • Guard against the effects of hubris and boredom • Don’t overlook the obvious by drowning in minutiae • Be careful to exclude unneeded information or slop: “A small leak can sink a great ship” • Face your big troubles; don’t sweep them under the rug
  • #checklists - connect to Founder’s Fund diligence questions from Cedar work
• “Charlie just loves to use one of his favorite lines on me: I’m right, and you’re smart, and sooner or later you’ll see I’m right.” (Rick Guerin)
• “It is a good thing for an uneducated man to read books of quotations.” (Sir Winston Churchill)
• We try more to profit from always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
• We’re like the hedgehog that only knows one big thing: If you can generate float [cash from insurance premiums that Berkshire can invest before claims must be paid] at three percent and invest it in businesses that generate thirteen percent, that’s a pretty good business.
  • Fox vs. Hedgehog
• The one thing we’ve always guaranteed is that the future will be a lot worse than the past.
• Two-thirds of acquisitions don’t work. Ours work because we don’t try to do acquisitions-we wait for no-brainers.
• The general assumption is that it must be easy to sit behind a desk and people will bring in one good opportunity after another-this was the attitude in venture capital until a few years ago. This was not the case at all for us-we scrounged around for companies to buy. For twenty years, we didn’t buy more than one or two per year. It’s fair to say that we were rooting around. There were no commissioned salesmen. Anytime you sit there waiting for a deal to come by, you’re in a very dangerous seat.
  • Always be sourcing
• The reason we avoid the word “synergy” is because people generally claim more synergistic benefits than will come. Yes, it exists, but there are so many false promises. Berkshire is full of synergies-we don’t avoid synergies, just claims of synergies.
  • Warren Buffett quote about forecasts; Mitt a Romney quote about synergies #[[Quotes to Find]]
• Lumpy results and being willing to write less insurance business if market conditions are unfavorable…that is one of our advantages as an insurer-we don’t give a damn about lumpy results. Everyone else is trying to please Wall Street. This is not a small advantage.
  • Optimizing long term value over short term aesthetics
• Why Don’t More Companies and Investors Copy Berkshire Hathaway? It’s a good question. Our approach has worked for us. Look at the fun we, our managers, and our shareholders are having. More people should copy us. It’s not difficult, but it looks difficult because it’s unconventional-it isn’t the way things are normally done. We have low overhead, don’t have quarterly goals and budgets or a standard personnel system, and our investing is much more concentrated than is the average. It’s simple and common sense.
• Charlie realizes that it is difficult to find something that is really good. So, if you say ‘No’ ninety percent of the time, you’re not missing much in the world.” (Otis Booth)
• Beta and modern portfolio theory and the like—none of it makes any sense to me. We’re trying to buy businesses with sustainable competitive advantages at a low, or even a fair, price.
• We’re partial to putting out large amounts of money where we won’t have to make another decision.
• Since mistakes of omission [aren’t visible], most people don’t pay attention to them. We rub our noses in mistakes of omission-as we just did. [They had just discussed failing to buy Wal-Mart stock because it moved up a bit, a $10 billion mistake.]
• There had been abuses in the 1920s. A joke going around then was the guy who said, “I bought stock for my old age and it worked-in six months, I feel like an old man!”
• I don’t know anyone who [learned to be a great investor] with great rapidity. Warren has gotten to be one hell of a lot better l investor over the period I’ve known him, as have I. So the game is to keep learning. You gotta like the learning process.
• Our cash is speaking for itself. If we had a lot of wonderful ideas, we wouldn’t have so much cash.
• Question: “What macro statistics do you regulary monitor or find useful in your attempt to understand the broader economic landscape?”
• Answer: “None, I find by staying abreast of our Berkshire subsidiaries and by regularly reading busines newspapers and magazines, I am exposed to an enormous amount of material at the micro level, I find that when I see going on there pretty much informs me about what’s happening at the macro level.”
• The general systems of money management [today] require people to pretend to do something they can’t do and like something they don’t. It’s a terrible way to spend your life, but it’s very well paid.
• [It’s] a funny business because on a net basis, the whole investment management business together gives no value added to all buyers combined. That’s the way it has to work.
• We’re so horrified by aggressive accounting [that is rampant in Corporate America] that we reach for ways to be conservative. It helps our business decisions and protects Berkshire. How did we get in situations where we’re all so close to the line? Creative accounting is an absolute curse to a civilization. One could argue that double-entry bookkeeping was one of history’s great advances. Using accounting for fraud and folly is a disgrace. In a democracy, it often takes a scandal to trigger reform. Enron was the most obvious example of a business culture gone wrong in a long, long time.
• I regard [what happened to the innocent employees of Arthur Andersen] as very unfair, but capitalism without failure is like religion without hell. When it gets this bad and there’s a lack of systems for control-which Arthur Andersen didn’t have-maybe a firm should just go down.
• The reason accountants don’t say anything is best summed up by the saying, “Whose bread I eat, his song I sing.” I think you’re getting very foolish numbers in American accounting. I don’t think it’s willful dishonesty, but it might as well be.
  • The problem with most service businesses these days (consulting, banking, accounting) is - how do you fix this? What should the incentive structure be? How do you incentivize honesty and morality?
• In engineering, people have a big margin of safety. But in the financial world, people don’t give a damn about safety. They let it balloon and balloon and balloon. It’s aided by false accounting. I’m more pessimistic about this than Warren.
• It is ridiculous the way a lot of people cling to failed ideas. Keynes said, “It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones.”
• Organized common (or uncommon) sense-very basic knowledge-is an enormously powerful tool. There are huge dangers with computers. People calculate too much and think too little.
  • “We think too much and feel too little.” (Charlie Chaplin)
• We read a lot. I don’t know anyone who’s wise who doesn’t read a lot. But that’s not enough: You have to have a temperament to grab ideas and do sensible things. Most people don’t grab the right ideas or don’t know what to do with them.
• Whitehead spoke of the fatal unconnectedness of academic disciplines, wherein each professor didn’t even know the models of the other disciplines, much less try to synthesize those disciplines with his own. I think there’s a modern name for this approach that Whitehead didn’t like, and that name is bonkers.
• The idea of caring that someone is making money faster [than you are] is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?
• “I have always imagined that Paradise will be a kind of library.” (Jorge Luis Borges)
• You could argue that [the decline of public schools] is one of the major disasters in our lifetime. We took one of the greatest successes in the history of the earth and turned it into one of the greatest disasters in the history of the earth.
• While not having significant public-speaking experience, I do hold a black belt in chutzpah, and I immediately considered Demosthenes and Cicero as role models and anticipated trying to earn a compliment like Cicero gave when asked which was his favorite among the orations of Demosthenes. Cicero replied:
• “The longest one.”
• However, fortunately for this audience, I also thought of Samuel Johnson’s famous comment when he addressed Milton’s poem Paradise Lost and correctly said, “No one ever wished it longer.” And that made me consider which of all the twenty Harvard School graduation speeches I had heard that I had wished longer.
  • Best bar of judgment for a speech.
• While susceptibility varies, addiction can happen to any of us through a subtle process where the bonds of degradation are too light to be felt until they are too strong to be broken. And yet, I have yet to meet anyone, in over six decades of life, whose life was worsened by fear and avoidance of such a deceptive pathway to destruction.
  • Book of Mormon - “flaxen chords” become chains
• “If I have seen a little farther than other men, it is because I stood on the shoulders of giants.” (Isaac Newton)
• “They that won’t be counseled, can’t be helped.” (Benjamin Franklin)
  • #[[spirit of humility]]
• Darwin’s result was due in large measure to his working method, which violated all my rules for misery and particularly emphasized a backward twist in that he always gave priority attention to evidence tending to disconfirm whatever cherished and hard-won theory he already had. In contrast, most people early achieve and later intensify a tendency to process new and disconfirming information so that any original conclusion remains intact. They become people of whom Philip Wylie observed: “You couldn’t squeeze a dime between what they already know and what they will never learn.”
• Avoiding Life’s Pitfalls à la Kipling
• If you can keep your head when all about you Are losing theirs and blaming it on you, If you can trust yourself when all men doubt you But make allowance for their doubting too, If you can wait and not be tired by waiting, Or being lied about, don’t deal in lies, Or being hated, don’t give way to hating, And yet don’t look too good, nor talk too wise…
• If you can talk with crowds and keep your virtue, Or walk with kings-nor lose the common touch, If neither foes nor loving friends can hurt you; If all men count with you, but none too much, If you can fill the unforgiving minute With sixty seconds’ worth of distance run, Yours is the Earth and everything that’s in it, And-which is more-you’ll be a Man, my son!
• Excerpted from the poem “If,” which Charlie has always admired.
• After all, the theory of modern education is that you need a general education before you specialize. And I think, to some extent, before you’re going to be a great stock picker, you need some general education.
• “There is no royal road to learning; no short cut to the acquirement of any art.” (Anthony Trollope)
• However, double-entry bookkeeping was a hell of an invention. And it’s not that hard to understand. But you have to know enough about it to understand its limitations because although accounting is the starting place, it’s only a crude approximation.
• He had another rule, from psychology, which, if you’re interested in wisdom, ought to be part of your repertoire-like the elementary mathematics of permutations and combinations.
  • #look-it-up
• You might ask why is that so important? Well, again, that’s a rule of psychology. Just as you think better if you array knowledge on a bunch of models that are basically answers to the question, why, why, why, if you always tell people why, they’ll understand it better, they’ll consider it more important, and they’ll be more likely to comply. Even if they don’t understand your reason, they’ll be more likely to comply.
• Now you get into the cognitive function as distinguished from the perceptual function. And there, you are equally-more than equally in fact-likely to be misled. Again, your brain has a shortage of circuitry and so forth-and it’s taking all kinds of little automatic shortcuts. So when circumstances combine in certain ways-or more commonly, your fellow man starts acting like the magician and manipulates you on purpose by causing you cognitive dysfunction-you’re a patsy.
  • Free will (Homo Deus), Blink, Behavioral Economics, Nudge
• Personally, I’ve gotten so that I now use a kind of two track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things-which, by and large, are useful but which often misfunction?
• Just as in an ecosystem, people who narrowly specialize can get terribly good at occupying some little niche. Just as animals flourish in niches, similarly, people who specialize in the business world-and get very good because they specialize-frequently find good economics that they wouldn’t get any other way.
  • Jack of all trades, master of nine; Foxes vs. Hedgehogs
• “Change, as in the case of the Internet, can be the friend of society. But it is the absence of change that is often the friend of the investor. While the Internet will change many things, it will not likely change the brand gum people chew. Charlie and I like stable businesses like chewing of gum and try to leave life’s more unpredictable things to someone else.” (Warren Buffett)
• “From 1981 to 1995, we said we were going to be “the most competitive enterprise in the world” by being No. 1 or No. 2 in every market-fixing, selling, or closing every underperforming business that couldn’t get there. There was no doubt what this mission meant or entailed.” (Jack Welch)
• “Before you are a leader, success is all about growing yourself. When you become a leader, success is all about growing others.” (Jack Welch)
• “Give a project visibility. Put great people on it and give them plenty of money. This continues to be the best formula for success.” (Jack Welch)
• “Finding great people happens in all kinds of ways, and I’ve always believed, ‘Everyone you meet is another interview.” (Jack Welch)
• “It was a real blessing for me to be so green and ignorant, because it was from that experience that I learned a lesson which has stuck with me through all the years: you can learn from everybody. I didn’t just learn from reading every retail publication I could get my сan hands on, on, I probably learned the most from studying what [my competitor] was doing across the street.” (Sam Walton)
• If people tell you what you really don’t want to hear-what’s unpleasant-there’s an almost automatic reaction of antipathy. You have to train yourself out of it. It isn’t foredestined that you have to be this way. But you will tend to be this way if you don’t think about it.
  • Spirit of humility
• Walton, being as shrewd as he was, basically broke other small town merchants in the early days. With his more efficient system, he might not have been able to tackle some titan head-on at the time. But with his better system, he could sure as hell destroy those small town merchants. And he went around doing it time after time after time. Then, as he got bigger, he started destroying the big boys.
• You can say, “Is this a nice way to behave?” Well, capitalism is a pretty brutal place. But I personally think that the world is better for having Wal-Mart. I mean, you can idealize small town life. But l’ve spent a fair amount of time in small towns. And let me tell you-you shouldn’t get too idealistic about all those businesses he destroyed. Plus, a lot of people who work at Wal-Mart are very high-grade, bouncy people who are raising nice children. I have no feeling that an inferior culture destroyed a superior culture. I think that is nothing more than nostalgia and delusion. But, at any rate, it’s an interesting model of how the scale of things and fanaticism combine to be very powerful.
  • Scale brings cost cutting. Then that culture erodes.
• The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you. And most people do not get this straight in their heads. But a fellow like Buffett does.
• That’s such an obvious concept-that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.
  • Competition in commodity markets drives down the ROI of innovation.
• If you want to be the best tennis player in the world, you may start out trying and soon find out that it’s hopeless-that other people blow right by you. However, if you want to become the best plumbing contractor in Bemidji, that is probably doable by two-thirds of you, It takes a will, It takes the intelligence. But after a while, you’d gradually know all about the plumbing business in Bemidji and master the art. That is an attainable objective, given enough discipline. And people who could never win a chess tournament or stand in center court in a respectable tennis tournament can rise quite high in life by slowly developing a circle of competence-which results partly from what they were born with and partly from what they slowly develop through work.
  • “Whatever you are, be a good one.”
• And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.
• The way to win is to work, work, work, work, and hope to have a few insights.
• I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.”
  • Compare to the Oil Man in Heaven
• So what makes sense for the investor is different from what makes sense for the manager. And, as usual in human affairs, what determines the behavior are incentives for the decision maker.
• From all business, my favorite case on incentives is Federal Express. The heart and soul of its system which creates the integrity of the product-is having all its airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on time. They tried everything-moral suasion, threats, you name it. And nothing worked. Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift-and when it’s all done, they can all go home. Well, their problems cleared up overnight.
  • Incentives
• In investment management today, everybody wants not only to win, but to have the path never diverge very much from a standard path except on the upside. Well, that is a very artificial, crazy construct. That’s the equivalent in investment management to the custom of binding the feet of the Chinese women. It’s the equivalent of what Nietzsche meant when he criticized the man who had a lame leg and was proud of it. That is really hobbling yourself. Now, investment managers would say, be “We have to be that way. That’s how we’re measured.” And they may right in terms of the way the business is now constructed. But from the viewpoint of a rational consumer, the whole system’s “bonkers” and draws a lot of talented people into socially useless activity.
• And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times.
• Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not goìng to make much different than a six percent return-even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.
  • Price doesn’t matter much if the business is gold or if its crap.
• How do you get into these great companies? One method is what I’d call the method of finding them small-get ‘em when they’re little. For example, buy WalMart when Sam Walton first goes public and so forth. And a lot of people try to do just that. And it’s a very beguiling idea. If I were a young man, I might actually go into it.
• However, averaged out, betting on the quality of a business is better than betting on the quality of l management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But, very rarely, you find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business.
• You will get a few opportunities to profit from finding underpricing. There are actually people out there who don’t price everything as high as the market will easily stand. And once you figure that out, it’s like finding money in the street-if you have the courage of your convictions.
  • Connect to Professor Chad Carlos video about pricing
• I’ve had many friends in the sick-businessfix 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.
• Finally, I’d like to once again talk about investment management. That is a funny business-because on a net basis, the whole investment management business together gives no value added to all buyers combined. That’s the way it has to work.
• Of course, that isn’t true of plumbing, and it isn’t true of medicine. If you’re going to make your careers in the investment management business, you face a very peculiar situation. And most investment managers handle it with psychological denial-just like a chiropractor. That is the standard method of handling the limitations of the investment management process. But if you want to live the best sort of life, I would urge each of you not to use the psychological denial mode.
  • #[[venture returns]]
• Harvard and Yale selected or directly employed investment managers who were way above average in ability, providing additional evidence that investment markets are not perfectly efficient and that some good investment results come from abnormal skill or other abnormal advantage. As one example, Harvard and Yale, by reason of their own prestige, were able to get into some of the most profitable high-tech venture-capital funds, not available to all other investors. These funds, using momentum provided by their own past success, had an opportunity advantage over less well established venture capital operations, in that the best entrepreneurs, quite logically, made early presentations to the best regarded funds.
  • #[[venture returns]]
• My pain comes from (1) foreseeing a lot of future adversity for other worthy institutions, driven by envy and salesmen into enthusiastic imitation of Harvard and Yale and (2) disapproval of the conduct of many of the salesmen likely to succeed in pushing the imitation. Something similar to what I fear happened near the end of the high-tech bubble. At that time envy of successful early-stage, hightech venture-capital investors like Stanford, plus dubious sales methods of many venture capitalists, caused about $90 billion to rush into low quality, imitative earlystage ventures that by now may have created as much as $45 billion in net losses for late-coming investors.
  • Compare to Innovator’s University; not everyone should be Harvard, and not everyone should be Sequoia.
• It is quite counter-intuitive to decrease that part of one’s activity that has recently worked best. But this is often a good idea.
  • Innovator’s Dilemma
• What should a young person look for in a career?
• “I have three basic rules. Meeting all three is nearly impossible, but you should try anyway:
• • Don’t sell anything you wouldn’t buy yourself. • Don’t work for anyone you don’t respect and admire. • Work only with people you enjoy.
• I have been incredibly fortunate in my life: with Warren I had all three.”
• “You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.” (Charlie Munger)
• How do you get worldly wisdom? What system do you use to rise into the tiny top percentage of the world in terms of having sort of an elementary practical wisdom? I’ve long believed that a certain system-which almost any intelligent person can learn-works way better than the systems that most people use. As I said at the U.S.C. Business School, what you need is a latticework of mental models in your head. And you hang your actual experience and your vicarious experience (that you get from reading and so forth) on this latticework l of powerful models. And, with that system, things gradually get to fit together in a way that enhances cognition.
• “The incessant concentration of thought upon one subject, however interesting, tethers a man’s mind in a narrow field.” (Sir William Osler)
• “The very first step towards success in any occupation is to become interested in it.”
  • “Whatever you are, be a good one.”
• Of course, when I urge a multidisciplinary approach-that you’ve got to have the main models from a broad array of disciplines and you’ve got to use them all-I’m really asking you to ignore jurisdictional boundaries.
  • You can’t really say “I’m not interested in math, physics, etc.”
• And some of the worst dysfunctions in businesses come from the fact that they balkanize reality into little individual departments with territoriality and turf protection and so forth. So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries.
• Since your academic structure, by and large, doesn’t encourage minds jumping jurisdictional boundaries, you’re at a disadvantage because, in that one sense, even though academia’s very useful to you, you’ve been mistaught. My solution for you is one that I got at a very early age from the nursery: the story of the Little Red Hen. The punch line, of course, is, ""Then I’ll do it myself,’ said the Little Red Hen.”
• Hershey began to build the Pennsylvania town that bears his name. Hershey’s utopian ideas and principles continue to influence the company and the town.
  • City-building
• Value Line’s mission is “to help investors get the most accurate and independently created research information available, in any format they choose, and teach them how to use it to meet their financial objectives.” In operation since 1931, Value Line has a solid reputation for reliability, objectivity, independence, and accuracy. Best known for the Value Line Investment Survey, the company publishes dozens of print and electronic research products.
  • #look-it-up
• Ideology does some strange things and distorts cognition terribly. If you get a lot of heavy ideology young-and then you start expressing it-you are really locking your brain into a very unfortunate pattern. And you are going to distort your general cognition.
  • How do religious people balance their theology with cognitive reasoning?
• Therefore, in a system of multiple models across multiple disciplines, I should add as an extra rule that you should be very wary of heavy ideology. You can have heavy ideology in favor of accuracy, diligence, and objectivity. But a heavy ideology that makes you absolutely sure that the minimum wage should be raised or that it shouldn’t-and it’s kind of a holy construct where you know you’re right-makes you a bit nuts.
• “What a man wishes, that also will he believe.” (Demosthenes)
• “Work. Finish. Publish.” (Michael Faraday’s advice to the young William Crookes, later a famous chemist and physicist in his own right)
  • Connect to Leonardo da Vinci quote about never finishing things
• But these psychology professors think they’re so smart that they don’t need a checklist. But they aren’t that smart. Almost nobody is. Or, maybe, nobody is.
• So it’s much better to let some things go uncompensated-to let life be hard-than to create systems that are easy to cheat.
• The importance of honesty was amplified by the Mormon Apostle Mark E. Petersen when he said: “Honesty is a principle of salvation in the kingdom of God. Just as no man or woman can be saved without baptism, so no one can be saved without honesty.”
• We’ve never eliminated the difficulty of that problem. And ninety-eight percent of the time, our attitude toward the market is … [that] we’re agnostics. We don’t know. Is GM valued properly vis-à-vis Ford? We don’t know.
• We just look for no-brainer decisions. As Buffett and I say over and over again, we don’t leap seven-foot fences. Instead, we look for one-foot fences with big rewards on the other side. So we’ve succeeded by making the world easy for ourselves, not by solving hard problems.
• Each of you will have to figure out where your talents lie. And you’ll have to use your advantages. But if you try to succeed in what you’re worst at, you’re going to have a very lousy career. I can almost guarantee it. To do otherwise, you’d have to buy a winning lottery ticket or get very lucky somewhere else.
  • Requires intense self-reflection - also, early in your career it’s hard to discern what you’re bad or good at vs. what you just haven’t learned yet.
• Disney is an amazing example of autocatalysis… They had all those movies in the can. They owned the copyright. And just as Coke could prosper when refrigeration came, when the videocassette was invented, Disney didn’t have to invent anything or do anything except take the thing out of the can and stick it on the cassette. And every parent and grandparent wanted his descendents to sit around and watch that stuff at home on videocassette. So Disney got this enormous tail wind from life. And it was billions of dollars worth of tail wind.
• Q: Could you talk about why you left the law?
• I preferred making the decisions and gambling my own money. I usually thought I knew better than the client anyway. So why should I have to do it his way? So partly, it was having an opinionated personality. And partly, it was a desire to get resources permitting independence.
  • Something to be said about building with your own floor plan in mind.
• “The Intelligent Investor is still the best book on investing. It has the only three ideas you really need:
• 1. The Mr. Market analogy 2) A stock is a piece of a business 3) Margin of safety.”
• (Warren Buffett)
• I’m all for fixing social problems. I’m all for being generous to the less fortunate. And I’m all for doing things where, based on a slight preponderance of the evidence, you guess that it’s likely to do more good than harm. What I’m against is being very confident and feeling that you know, for sure, that your particular intervention will do more good than l harm, given that you’re dealing with highly complex systems wherein everything is interacting with everything else.
  • Experimentation in social good #[[Do Good Better]]
• You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. But there are also cases where you have to recognize that you have no wisdom to add-and that your best course is to trust some expert.
  • Balance between offering value as an outside perspective and trusting in the expertise of other people. Compare to “Death of Expertise” by Tom Nichols
• In effect, you’ve got to know what you know and what you don’t know. What could possibly be more useful in life than that?
  • Self-reflection
• On the other hand, in copying Jack Welch, I am trying to teach you something, When you don’t know and you don’t have any special competence, don’t be afraid to say so,
• I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge. To me, they’re like the bee dancing its incoherent dance. They’re just screwing up the hive.
• As you go through life, sell your services once in a while to an unreasonable blowhard if thať’s what you must do to feed your family. But run your own life like Grant McFayden. That was a great lesson.
• There, again, we’re talking about elementary psychology. It’s elementary literature. Good literature makes the reader reach a little for understanding. Then, it works better. You hold it better. It’s the commitment and consistency tendency. If you’ve reached for it, the idea’s pounded in better.
• And if you see he wants to do something really stupid, it probably won’t work to tell him, “What you’re doing is bad. I have better morals than you.” That offends him. You’re young. He’s old. Therefore, instead of being persuaded, he’s more likely to react with, “Who in the hell are you to establish the moral code of the whole world?” But, instead, you can say to him, “You can’t do that without three other people beneath you knowing about it. Therefore, you’re making yourself subject to blackmail. You’re risking your reputation. You’re risking your family, your money, etc.” That is likely to work. And you’re telling him something that’s true. Do you want to spend a lot of time working for people where you have to use methods like that to get them to behave well? I think the answer is no. But if you’re hooked with it, appealing to his interest is likely to work better as a matter of human persuasion than appealing to anything else. That, again, is a powerful psychological principle with deep biological roots.
• “The sign above the players’ entrance to the field at Notre Dame reads ‘Play Like a Champion Today.’ I sometimes joke that the sign at Nebraska reads ‘Remember Your Helmet.’ Charlie and I are ‘Remember Your Helmet’ kind of guys. We like to keep it simple.”
• (Warren Buffett)
• If I were running the civilization, compensation for stress in workers’ comp would be zero-not because there’s no work caused stress, but because I think the net social damage of allowing stress to be compensated at all is worse than what would happen if a few people that had real work-caused stress injuries went uncompensated.
• Well, I am searching for justice when I argue for the Navy rule-for the justice of fewer ships going aground. Considering the net benefit, I don’t care if one captain has some unfairness in his life. After all, it’s not like he’s being courtmartialed. He just has to look for a new line of work. And he keeps vested pension rights and so on. So it’s not like it’s the end of the world.
  • “Let life be hard.”
• Well, if you’re like me, it’s kind of fun for it to be a little complicated. If you want it totally easy and totally laid out, maybe you should join some cult that claims to provide all the answers. I don’t think that’s a good way to go. I think you’ll just have to endure the world-as complicated as it is. Einstein has a marvelous statement on that: “Everything should be made as simple as possible, but no more simple.”
• There are a relatively small number of disciplines and a relatively small number of truly big ideas. And it’s a lot of fun to figure it out. Plus, if you figure it out and do the outlining yourself, the ideas will stick better than if you memorize ‘em using somebody else’s cram list.
  • How does Shane Parish think about this with his “mental models” books?
• Let me turn to some of the probable reasons for present bad education. Part of the trouble is caused by the balkanization of academia. For instance, psychology is most powerful when combined with doctrines from other academic departments. But if your psychology professor doesn’t know the other doctrines, then he isn’t capable of doing the necessary integration.
• Operant conditioning can be summarized as follows: “A behavior is followed by a consequence, and the nature of the consequence modifies the organism’s tendency to repeat the behavior in the future.”
  • Humans learn by biologically-enhanced trial and error. - “B.F. Skinner” by Daniel W. Bjork
• Will such a super-gifted person instead choose academic psychology wherein lie very awkward realities; that the tendencies demonstrated by social psychology paradoxically grow weaker as more people learn them.
• But, whatever you decide, I think it’s a huge mistake not to absorb elementary worldly wisdom if you’re capable of doing it because it makes you better able to serve others, it makes you better able to serve yourself, and it makes life more fun. So if you have an aptitude for doing it, I think you’d be crazy not to. Your life will be enriched-not only financially, but in a host of other ways-if you do.
• I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart…
• “The best that is known and taught in the world—nothing less can satisfy a teacher worthy of the name.” (Sir William Osler)
• After all, I never had more than a shred of an illusion that any views of mine would much change the world. Instead, I always knew that aiming low was the best path for me, and so I merely sought (1) to learn from my betters a few practical mental tricks that would help me avoid some of the worst miscognitions common in my age cohort, and (2) to pass on my mental tricks only to a few people who could easily learn from me because they already almost knew what I was telling them. Having pretty well accomplished these very limited objectives, I see little reason to complain now about the un-wisdom of the world.
  • Don’t make dumb mistakes - Don’t die with your music still inside you.
• “The man who doesn’t read good books has no advantage over the man who can’t read them.” (Mark Twain)
• The first helpful notion is that it is usually best to simplify problems by deciding big “no-brainer” questions first.
• The second helpful notion mimics Galileo’s conclusion that scientific reality is often revealed only by math as if math was the language of God. Galileo’s attitude also works well in messy, practical life. Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.
• Carl Jacobi so often said, “Invert, always invert.”
• The fourth helpful notion is that the best and most practical wisdom is elementary academic wisdom. But there is one extremely important qualification: You must think in a multidisciplinary manner. You must routinely use all the easy-tolearn concepts from the freshman course in every basic subject. Where elementary ideas will serve, your problem solving must not be limited, as academia and many business bureaucracies are limited, by extreme balkanization into disciplines and subdisciplines, with strong taboos against any venture outside assigned territory. Instead, you must do your multidisciplinary thinking in accord with Ben Franklin’s prescription in Poor Richard: “If you want it done, go. If not, send.”
• If, in your thinking, you rely entirely on others, often through purchase of professional advice, whenever outside a small territory of your own, you will suffer much calamity.
  • Decentralized brain: it’s fine to have nodes, but constantly work to expand your own sphere of knowledge (e.g. a bigger territory)
• The fifth helpful notion is that really big effects, lollapalooza effects, will often come only from large combinations of factors.
• “If you get to thinking you’re a person of some influence, try ordering somebody else’s dog around.” (Will Rogers)
• Third, with so much success coming, we must avoid bad effects from envy, which is 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.
  • Envy
• Academic psychology, while it is admirable and useful as a list of ingenious and important experiments, lacks intradisciplinary synthesis.
• 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 extermal appraisal. Indeed, a problem of this sort may have given you your speaker today.
• 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.
  • Not “killing your babies.” Thinking through the inverse of your beliefs doesn’t mean you believe them less. It means you’re more prepared to believe them strongly.
• 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, ranking right up there alongside curiosity, concentration, and perseverance.
• As matters worked out, my 1996 talk failed to get through to almost all people hearing it. Then later, between 1996 and 2006, even when the talk’s written version was slowly read twice by very intelligent people who admired me, its message likewise failed. In almost all cases the message did not get through in any constructive way. On the other hand, no one said to me that the talk was wrong. Instead, people were puzzled briefly, then moved on. Thus my failure as a communicator was even more extreme than the cognitive failure I was trying to explain. Why? The best explanation, I now think, is that I displayed gross folly as an amateur teacher. I attempted too much.
  • Teaching. “Simplify and intensify.”
• Readers of the Second and Third Edition, if they wish, can correct somewhat for the teaching defects that I have stubbornly retained. That is, they can re-read Talk Four after mastering the final Talk. If they are willing to endure this ordeal, I predict that at least some of them will find the result worth the effort.
• “Teachers open the door, but you must enter by yourself.” (Chinese proverb)
  • INVITE others to come unto Christ; that’s all we can do
• “When it really matters, as with pilots and surgeons, educational systems employ highly-effective structures. Yet, they don’t employ these same, well-understood structures in other areas of learning that are also important. If superior structures are known and available, why don’t educators more broadly utilize them? What could be more simple?”
• One partial cure for man-with-a-hammer tendency is obvious: If a man has a vast set of skills over multiple disciplines, he, by definition, carries multiple tools and, therefore, will limit bad cognitive effects from man-with-a-hammer tendency.
• “Not ignorance, but ignorance of ignorance is the death of knowledge.” (Alfred North Whitehead)
  • Process and Reality by Alfred North Whitehead; “it ain’t what I don’t know that is dangerous; it’s what I know for certain that just ain’t so.” (Mark Twain
• “The ‘silly’ question is the first intimation of some totally new development.”
  • Process and Reality by Alfred North Whitehead
• Thus it follows, as the night the day, that in our most elite broadscale education wherein we are trying to make silk purses out of silk, we need for best results to have multidisciplinary coverage of immense amplitude, with all needed skills raised to an ever-maintained practice-based fluency, including considerable power of synthesis at boundaries between disciplines, with the highest fluency levels being achieved where they are most needed, with forward and reverse thinking techniques being employed in a manner reminding one of inversion in algebra, and with “checklist” routines being a permanent part of the knowledge system. There can be no other way, no easier way, to broad scale worldly wisdom. Thus the task, when first identified in its immense breadth, seems daunting, verging on impossible.
• Moreover, we can believe in the attainability of broad multidisciplinary skill for the same reason the fellow from Arkansas gave for his belief in baptism: “I’ve seen it done.” We all know of individuals, modern Ben Franklins, who have (1) achieved a massive multidisciplinary synthesis with less time in formal education than is now available to our numerous brilliant young and (2) thus become better performers in their own disciplines, not worse, despite diversion of learning time to matter outside the normal coverage of their own disciplines.
  • Not a matter of time spent in school
• First, many more courses should be mandatory, not optional. And this, in turn, requires that the people who decide what is mandatory must possess large, multidisciplinary knowledge maintained in fluency.
• Second, there should be much more problem-solving practice that crosses several disciplines, including practice that mimics the function of the aircraft simulator in preventing loss of skills through disuse.
• Incidentally, many elite private schools now wisely use such multidisciplinary methods l in seventh grade science while, at the same time, many graduate schools have not yet seen the same light. This is one more sad example of Whitehead’s “fatal unconnectedness” in education.
• Third, most soft-science professional schools should increase use of the best business periodicals, like the Wall Street Journal, Forbes, Fortune, etc.
• I know no person in business, respected for verified good judgment, whose wisdom-, maintenance system does not include use of such periodicals. Why should academia be different?
• Fourth, in filling scarce academic vacancies, professors of superstrong, passionate, political ideology, whether on the left or right, should usually be avoided. So also for students. Best-form multidisciplinary requires an objectivity such passionate people have lost, and a difficult synthesis is not likely to be achieved by minds in ideological fetters.
• Fifth, soft science should more intensely imitate the fundamental organizing ethos of hard science (defined as the “fundamental four-discipline combination” of math, physics, chemistry, and engineering).
• There is an old two-part rule that often works wonders in business, science, and elsewhere: (1) Take a simple, basic idea and (2) take it very seriously.
• Like pilot training, the ethos of hard science does not say “take what you wish” but “learn it all to fluency, like it or not.”
• “Any book, which is at all important, should be reread immediately.” (Schopenhauer)
  • #reading
• 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 fare as my organizing guide and filing system in a search for whatever multidisciplinary worldly wisdom it would be easy to get.
• “How can smart people so often be wrong? They don’t do what I’m telling you to do: use a checklist to be sure you get all the main models and use them together in a multimodular way”. (Charlie Munger)
  • #checklists
• And it is also inescapable that exactly half of the investors will get a result below the median result after the Croupiers’ take, which median result may well be somewhere between unexciting and lousy.
  • #[[Venture returns]]
• Human nature being what it is, most people assume away worries like those I raise. After all, centuries before Christ, Demosthenes noted, “What a man wishes, he will believe.” And in self-appraisals of prospects and talents, it is the norm, as Demosthenes predicted, for people to be ridiculously over-optimistic. For instance, a careful survey in Sweden showed that ninety percent of automobile drivers considered themselves above average. And people who are successfully selling something, as investment counselors do, make Swedish drivers sound like depressives. Virtually every investment expert’s public assessment is that he is above average, no matter what is the evidence to the contrary.
  • #[[Venture returns]] #[[investment returns]]
• Similarly, the hedge fund known as “Long-Term Capital Management” recently collapsed through overconfidence in its highly leveraged methods, despite I.Q.’s of its principals that must have averaged 160. Smart, hardworking people aren’t exempted from professional disasters from overconfidence. Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.
  • #[[Venture returns]]
• The best defense is that of the best physicists, who systematically criticize themselves to an extreme degree, using a mindset described by Nobel laureate Richard Feynman as follows: “The first principle is that you must not fool yourself, and you’re the easiest person to fool.”
• Indexing can’t work well forever if almost everybody turns to it. But it will work all right for a long time.
• “There is no limit to what a man can do or where he can go if he doesn’t mind who gets the credit.” (Robert W. Woodruff)
• My controversial argument is an additional consideration weighing against the complex, high-cost investment modalities becoming ever more popular at foundations. Even if, contrary to my suspicions, such modalities should turn out to work pretty well, most of the money-making activity would contain profoundly antisocial effects. This would be so because the activity would exacerbate the current, harmful trend in which ever more of the nation’s ethical young brainpower is attracted into lucrative money management and its attendant modern frictions, as distinguished from work providing much more value to others. Money management does not create the right examples. Early Charlie Munger is a horrible career model for the young because not enough was delivered to civilization in return for what was wrested from capitalism. And other similar career models are even worse.
  • Connect to the Elon Musk tweet about how too many young people go into finance
• Leaving out pensions, the top one percent of households probably hold about fifty percent of common stock value, and the bottom eighty percent probably hold about four percent.
• “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” (John Maynard Keynes)
• If a foundation, or other investor, wastes three percent of assets per year in unnecessary, nonproductive investment costs in managing a strongly rising stock portfolio, it still feels richer, despite the waste, while the people getting the wasted three percent, “febezzlers” though they are, think they are virtuously earning income. The situation is functioning like undisclosed embezzlement without being self-limited. Indeed, the process can expand for a long while by feeding on itself. And, all the while, what looks like spending from earned income of the receivers of the wasted three percent is, in substance, spending from a disguised “wealth effect” from rising stock prices.
  • Many feelings with money are impacted by this. When we give to charity, 80% (or whatever) is wasted. We don’t know that so we feel just and good and satisfied. We don’t see aggregrate trading costs, so we day trade, only payıng attention to the big number; ending balance.
• And aggregate “wealth effect” from stock prices can get very large indeed. It is an unfortunate fact that great and foolish excess can come into prices of common stocks in the aggregate. They are valued partly like bonds, based on roughly rational projections of use value in producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up, so far. This situation, combined with big “wealth effects,” at first up and later down, can conceivably produce much mischief.
• My foregoing acceptance of the possibility that stock value in aggregate can become irrationally high is contrary to the hard-form “efficient market” theory that many of you once learned as gospel from your mistaken professors of yore. Your mistaken professors were too much influenced by “rational man” models of human behavior from economics and too little by “foolish man” models from psychology and real-world experience. “Crowd folly,” the tendency of humans, under some circumstances, to resemble lemmings, explains much foolish thinking of brilliant men and much foolish behavior-like investment management practices of many foundations represented here today. It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from practices of the rest of the crowd.
• Remembering Japan, I also want to raise the possibility that there are, in the very long term, “virtue effects” in economics-for instance, that widespread corrupt accounting will eventually create bad long term consequences as a sort of obverse effect from the virtue-based boost double entry bookkeeping gave to the heyday of Venice. I suggest that when the financial scene starts reminding you of Sodom and Gomorrah, you should fear practical consequences even if you like to participate in what is going on.
  • What feels bad on paper will eventually become bad in real life. One way or another.
• The ethical rule is from Samuel Johnson, who believed that maintenance of easily removable ignorance by a responsible officeholder was treacherous malfeasance in meeting moral obligation. The prudential rule is that underlying the old Warner & Swasey advertisement for machine tools: “The man who needs a new machine tool and hasn’t bought it is already paying for it.” The Warner & Swasey rule also applies, I believe, to thinking tools. If you don’t have the right thinking tools, you, and the people you seek to help, are already suffering from your easily removable ignorance.
  • We have a moral responsibility to try and help people eradicate their ignorance if we in a position to do so.
• A wiser board would then have bought in Quant Tech’s stock very aggressively, using up all cash on hand and also borrowing funds to use in the same way. However, such a decision was not in accord with conventional corporate wisdom in 1982.
• Incident to the recruitment of the new executives, it was made plain that Quant Tech’s directors wanted a higher market capitalization as soon as feasible.
  • What are you optimizing for?
• “It is difficult to get a man to understand something when his salary depends on his not understanding it.” (Upton Sinclair)
• “We all agree that pessimism is a mark of superior intellect.” (John Kenneth Galbraith)
• “Meetings are indispensable when you don’t want to do anything.” (John Kenneth Galbraith)
• “More die in the United States of too much food than of too little.” (John Kenneth Galbraith)
• “In any great organization it is far, far safer to be wrong with the majority than to be right alone.”
• Benjamin Franklin’s observation in Poor Richard’s Almanack, “If you would persuade, appeal to interest and not to reason.” The man changed his silly view when his incentives made him change it and not before.
• Well, Berkshire’s whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form. And not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance and morphed into such obscenities as the capital asset pricing model, which we also paid no attention to. I think you’d have to believe in the tooth fairy to believe that you could easily outperform the market by seven percentage points per annum just by investing in high-volatility stocks.
• For one year at the Harvard Law School, I was ranked second in a very large group, and I always figured that, while there were always a lot of people much smarter than I was, I didn’t have to hang back totally in the thinking game.
• Economics was always more multidisciplinary than the rest of soft science. It just reached out and grabbed things as it needed to. And that tendency to just grab whatever you need from the rest of knowledge if you’re an economist has reached a fairly high point in N. Gregory Mankiw’s new textbook. I checked out that textbook. I must have been one of the few businessmen in America that bought it immediately when it came out l because it had gotten such a big advance. I wanted to figure out what the guy was doing where he could get l an advance that great. So this is how I happened to riffle through Mankiw’s freshman textbook. And there I found laid out as principles of economics: Opportunity cost is a superpower, to be used by all people who have any hope of getting the right answer. Also, incentives are superpowers.
  • Interesting side note: decide what books to read based on how much the author got paid
• The big general objection to economics was the one early described by Alfred North Whitehead when he spoke of the fatal unconnectedness of academic disciplines, wherein each professor didn’t even know the models of the other disciplines, much less try to synthesize those disciplines with his own. I think there’s a modern name for this approach that Whitehead didn’t like, and that name is “bonkers.” This is a perfectly crazy way to behave. Yet economics, like much else in academia, is too insular.
  • Interdisciplinary
• Well, practically everybody (1) overweighs the stuff that can be numbered because it yields to the statistical techniques they’re taught in academia and (2) doesn’t mix in the hard-to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that.
  • Intangible variables often left to be measured by “gut” and therefore become undervalued
• “I had an early and extreme multidisciplinary cast of mind. I couldn’t stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else’s discipline. So I just grabbed in all directions for the big ideas that would really work.” (Charlie Munger)
  • Big important ideas
• Thomas Hunt Morgan banned the Friden calculator from the biology department. And when they said, “What the hell are you doing, Dr. Morgan?” he said, “Well, I am like a guy who is prospecting for gold along the banks of the Sacramento River in 1849. With a little intelligence, I can reach down and pick up big nuggets of gold. And as long as I can do that, I’m not going to let any people in my department waste scarce resources in placer mining.” And that’s the way Thomas Hunt Morgan got through life.
• Far less efficient than Munger’s preferred approach of simply “reaching down and picking up big nuggets of gold,” placer mining (pronounced “plass-er”) is an open-pit or open-cast form of mining in which miniscule amounts of valuable minerals are extracted from great volumes of earth using water pressure or surface excavating equipment. The name derives from the Spanish word, “placer,” meaning “sand bank” and refers to precious metal deposits (particularly gold and gem stones) found in alluvial deposits.
  • You can spend as much time, effort, and money chasing big ideas, so why worry about the flecks? Connect to the idea of funds (Vista, etc.) moving up market and Andrew Wilkinson’s tweet from 5/18/20 about “FREEDOM.” A big idea can be a small $ amount.
• I want economics to pick up the basic ethos of hard science, the full attribution habit, but not the craving for an unattainable precision that comes from physics envy. The sort of precise, reliable formula that includes Boltzmann’s constant is not going to happen, by and large, in economics. Economics involves too complex a system. And the craving for that physics-style precision does little but you in terrible trouble, like the poor fool from McKinsey.
• So, economics should emulate physics’ basic ethos, but its search for precision in physics-like formulas is almost always wrong in economics.
• Well, how did I solve those problems? Obviously, I was using a simple search engine in my mind to go through l checklist-style, and I was using some rough algorithms that work pretty well in a great many complex systems, and those algorithms run something like this: Extreme success is likely to be caused by some combination of the following factors:
• I think my experience with my simple question is an example of how little synthesis people get, even in advanced academic settings, considering economic questions. Obvious questions, with such obvious answers. Yet, people take four courses in economics, go to business school, have all these I.Q. points, and write all these essays, but they can’t synthesize worth a damn. This failure is not because the professors know all this stuff and they’re deliberately withholding it from the students. This failure happens because the professors aren’t all that good at this kind of synthesis. They were trained in a different way. I can’t remember if it was Keynes or Galbraith who said that economics professors are most economical with ideas. They make a few they learned in graduate school last a lifetime.
• It’s my opinion that anybody with a high I.Q. who graduated in economics ought to be able to sit down and write a ten-page synthesis of all these ideas that’s quite persuasive. And I would bet a lot of money that I could give this test in practically every economics department in the country and get a perfectly lousy bunch of synthesis. They’d give me Ronald Coase. They’d talk about transaction costs. They’d click off a little something that their professors gave them and spit it back. But in terms of really understanding how it all fits together, I would confidently predict that most people couldn’t do it very well.
• If you know the psychological factors, if you’ve got them on a checklist in your head, you just run down the factors, and, boom! you get to one that must explain this occurrence. There isn’t any other way to do it effectively. These answers are not going to come to people who don’t learn these problem-solving methods. If you want to go through life like a one legged man in an ass-kicking contest, why, be my guest. But if you want to succeed like a strong man with two legs, you have to pick up these methods, including doing micro- and macro-economics while knowing psychology.
• This has been attributed to Samuel Johnson. He said, in substance, that if an academic maintains in place an ignorance that can be easily removed with a little work, the conduct of the academic amounts to treachery. That was his word, “treachery.”
• 7. Too Little Attention to Second- and Higher-Order Effects
• This defect is quite understandable because the consequences have consequences, and the consequences of the consequences have consequences, and so on. It gets very complicated.
• Extreme economic ignorance was displayed when various experts, including Ph. D. economists, forecast the cost of the original Medicare law. They did simple extrapolations of past costs. Well, the cost forecast was off by a factor of more than one thousand percent. The cost they projected was less than ten percent of the cost that happened. Once they put in place various new incentives, the behavior changed in response to the incentives, and the numbers became quite different from their projection. And medicine invented new and expensive remedies, as it was sure to do. How could a great group of experts make such a silly forecast? Answer: They oversimplified to get easy figures, like the rube rounding pi to 3.2! They chose not to consider effects of effects on effects, and so on.
• Usually, I don’t use formal projections. I don’t let people do them for me because I don’t like throwing up on the desk, but I see them made in a very foolish way all the time, and many people believe in them, no matter how foolish they are. It’s an effective sales technique in America to put a foolish projection on a desk. And if you’re an investment banker, it’s an art form. I don’t read their projections either. Once Warren and I bought a company, and the seller had a big study done by an investment banker. It was about this thick, We just turned it over as if it were a diseased carcass. He said, “We paid $2 million for that.” I said, “We don’t use them. Never look at them.”
  • Projections - forecasts
• That’s what’s wrong with the workers’ comp system in California. Gaming has been raised to an art form. In the course of gaming the system, people learn to be crooked. Is this good for civilization? Is it good for economic performance? Hell, no. The people who design easily gameable systems belong in the lowest circle of hell.
  • Some scripture about “causeth a man to sin” - why people should study psychology, to understand how people will react to different incentives
• Frequently overlooked is that Ricardo’s comparative advantage in “delegating” tasks among nations is equally applicable for managers delegating work. Even if a manager can perform the full range of tasks better himself, it is still mutually advantageous to divide them up.
  • Management
• This happened after I asked the question, “Is there a functional equivalent of embezzlement?” I came up with a lot of wonderful, affirmative answers. Some were in investment management. After all, I’m near investment management. I considered the billions of dollars totally wasted in the course of investing common stock portfolios for American owners. As long as the marker keeps going up, the guy who’s wasting all this money doesn’t feel it because he’s looking at these steadily rising values. And to the guy who is getting the money for investment advice, the money looks like well earned income when he’s really selling detriment for money, surely the functional equivalent of undisclosed embezzlement. You can see why I don’t get invited to many lectures.
• “Few things are harder to put up with than the annoyance of a good example.” (Mark Twain)
• Many bad effects from vice are clear. You’ve got the crazy booms and crooked promotions-all you have to do is read the paper over the last six months. There’s enough vice to make us all choke. And, by the way, everybody’s angry about unfair compensation at the top of American corporations, and people should be. We now face various crazy governance nostrums invented by lawyers and professors that won’t give us a fix for unfair compensation, yet a good partial solution is obvious: If directors were significant shareholders who got a pay of zero, you’d be amazed what would happen to unfair compensation of corporate executives as we dampened effects from reciprocity tendency.
  • Incentives = compensation structures
• This is the system Benjamin Franklin, near the end of his life, wanted for the U.S. government, He didn’t want the high executives of government to be paid, but to be like himself or the entirely unpaid, well-off ministers and rulers of the Mormon Church, And when I see what’s happened in California, I’m not sure he wasn’t right. At any rate, no one now drifts in Franklin’s direction. For one thing, professors-and most of them need money-get appointed directors.
• Keynes said, “It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones.” And Einstein said it better, attributing his mental success to “curiosity, concentration, perseverance, and self-criticismn.” By self-criticism, he meant becoming good at destroying your own best-loved and hardest-won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift.
• “Capitalism works best when there is trust in the system.” (Charlie Munger)
• “No matter how smart you are, there are smart people out there who can fool you if they really want to. So, be sure you can trust the smart people you work with.”
• Another idea, and this may remind you of Confucius, too, is that the acquisition of wisdom is a moral duty. It’s not something you do just to advance in life. And there’s a corollary to that idea that is very important. It requires that you’re hooked on lifetime learning. Without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you learn after you leave here.
• I constantly see people rise in life who are not the smartest, sometimes not even the most diligent. But they are learning machines. They go to bed every night a little wiser than they were that morning. And boy, does that habit help, particularly when you have a long run ahead of you.
• Alfred North Whitehead correctly said at one time that the rapid advance of civilization came only when man “invented the method of invention.” He was referring to the huge growth in GDP per capita and many other good things we now take for granted. Big-time progress started a few hundred years ago. Before that progress)per century was almost nil. Just as civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning.
  • Progress studies; Learning studies? Learning, No Greater Responsibility
• “The future belongs to those who can rise above the confines of the earth.” (Alfred North Whitehead)
• Consider Warren Buffett again. If you watched him with a time clock, you’d find that about half of his waking time is spent reading. Then a big chunk of the rest of his time is spent talking one-on-one, either on the telephone or personally, with highly gifted people whom he trusts and who trust him. Viewed up close, Warren looks quite academic as he achieves worldly success.
  • “A student called from his studies.” (John Quincy Adams)
• He wanted to pass this knowledge on to help treat bone cancer. How was he going to do it? Well, he decided to write a textbook, and even though I don’t think a textbook like this sells more than a few thousand copies, they do end up in cancer treatment centers all over the world. He took a sabbatical year and sat down at his computer with all his slides, carefully saved and organized. He worked seventeen hours a day, seven days a week, for a year. Some sabbatical. At the end of the year he had created one of the two great bone tumor pathology textbooks of the world. When you’re around values like Mirra’s, you want to pick up as much as you can.
  • Don’t die with your music in you
• My natural drift, which was toward learning all the big ideas in all the big disciplines, so I wouldn’t be the perfect damn fool the professor described. And because the really big ideas carry about 95% of the freight, it wasn’t at all hard for me to pick up about 95% of what I needed from all the disciplines and to include use of this knowledge as a standard part of my mental routines. Once you have the ideas, of course, you must continuously practice their use. Like a concert pianist, if you don’t practice you can’t perform well. So I went through life constantly practicing a multi-disciplinary approach.
  • Big important ideas
• “It is dangerous to be right in matters where established men are wrong.” (Voltaire)
• Even though I was a good poker player when I was young, I wasn’t good enough at pretending when I thought I knew more than my supervisors did. And I didn’t try as hard at pretending as would have been prudent. So I gave a lot of offense. Now, I’m generally tolerated as a harmless eccentric who will soon be gone. But, coming up, I had a difficult period to go through. My advice to you is to be better than I was at keeping insights hidden. One of my colleagues, who graduated as number one in his class in law school and clerked at the U.S. Supreme Court, tended as a young lawyer to show that he knew a lot. One day the senior partner he was working under called him in and said, “Listen, Chuck, I want to explain something to you. Your duty is to behave in such a way that the client thinks he’s the smartest person in the room. If you have any energy or insight available after that, use it to make your senior partner look like the second smartest person in the room. And only after you’ve satisfied those two obligations, do you want your light to shine at all.” Well, that was a good system for rising in many a large law firm. But it wasn’t what I did. I usually moved with the drift of my nature, and if some other people didn’t like it, well, I didn’t need to be adored by everybody.
  • Apprenticeship
• Another thing to avoid is extremely intense ideology because it cabbages up one’s mind. You see a lot of it in the worst of the TV preachers. They have different, intense, inconsistent ideas about technical theology, and a lot of them have minds reduced to cabbage. (Audience laughs) And that can happen with political ideology. And if you’re young, it’s particularly easy to drift into intense and foolish political ideology and never get out. When you announce that you’re a loyal member of some cult-like group and you start shouting out the orthodox ideology, what you’re doing is pounding it in, pounding it in, pounding it in. You’re ruining your mind, sometimes with startling speed. So you want to be very careful with intense ideology. It presents a big danger for the only mind you’re ever going to have.
  • Compromise
• I have what I call an “iron prescription” that helps me keep sane when I drift toward preferring one intense ideology over another. I feel that I’m not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I’ve reached that state.
• Darwin formulated his theories on the transmutation of species in the late 1830’s, but it was not until 1859 that he published his seminal work, On the Origin of Species by Means of Natural Selection. Darwin accepted that any scientific theory proferring an alternative explanation to human origins would be met with widespread prejudice and that therefore prudence dictated he become fully versed every possible counterargument before publishing his ideas. Accordingly, he spent twenty years painstakingly cultivating his theory and preparing for its defense.
  • “Why I Believe” - invert; why wouldn’t I believe?
• Every time you find you’re drifting into self-pity, whatever the cause, even if your child is dying of cancer, self-pity is not going to help. Just give yourself one of my friend’s cards. Self-pity is always counterproductive. It’s the wrong way to think. And when you avoid it, you get a great advantage over everybody else, or almost everybody else, because self-pity is a standard response. And you can train yourself out of it.
• Another idea that I found important is that maximizing non-egality will often work wonders. What do I mean? Well, John Wooden of UCLA presented an instructive example when he was the number one basketball coach in the world. He said to the bottom 5 players, “You don’t get to play - you are practice partners.” The top seven did almost all the playing. Well, the top seven learned more-remember the importance of the learning machine-because they were doing all the playing. And when he adopted that non-egalitarian system, Wooden won more games than he had won before. I think the game of competitive life often requires maximizing the experience of the people who have the most aptitude and the most determination as learning machines. And if you want the very highest reaches of human achievement, that’s have to go. You do not want to choose a brain surgeon for your child by drawing straws to select one of fifty applicants, all of whom take turns doing procedures. You don’t want your airplanes designed in too egalitarian a fashion. You don’t want your Berkshire Hathaways run that way either. You want to provide a lot of playing time for your best players.
  • Are you self-aware enough and incentivized to acknowledge when you might not be the best player to play?
• In this world I think we have two kinds of knowledge: One is Planck knowledge, that of the people who really know. They’ve paid the dues, they have the aptitude. Then we’ve got chauffeur knowledge. They have learned to prattle the talk. They may have a big head of hair. They often have fine timbre in their voices. They make a big impression. But in the end what they’ve got is chauffeur knowledge masquerading as real knowledge. I think I’ve just described practically every politician in the United States. (Audience claps.) You’re going to have the problem in your life of getting as much responsibility as you can into the people with the Planck knowledge and away from the people who have the chauffeur knowledge. And there are huge forces working against you.
  • Which are you?
• Another thing that I have found is that intense interest in any subject is indispensable if you’re really going to excel in it. I could force myself to be fairly good in a lot of things, but I couldn’t excel in anything in which I didn’t have an intense interest. So to some extent you’re going to have to do as I did. If at all feasible, you want to maneuver yourself into doing something in which you have an intense interest.
  • Career goals
• “First learn the meaning of what you say, and then speak.” (Epictetus)
  • Public speaking. Writing.
• “If you want to improve, be content to be thought foolish and stupid.” (Epictetus)
  • Spirit of humility
• “It is impossible to begin to learn that which one thinks one already knows.” (Epictetus)
  • Spirit of humility
• In the end, I’m speaking toward the only outcome feasible for old Valiant-for-Truth in Pilgrim’s Progress: “My sword I leave to him who can wield it.”
  • Don’t die with your music in you
• Not only would there be stylistic and substantive objections, but also there would be perceptions of arrogance in an old man who displayed much disregard for conventional wisdom while “popping-off” on a subject in which he had never taken a course. My old Harvard Law classmate, Ed Rothschild, always called such a popping-off “the shoe button complex,” named for the condition of a family friend who spoke in oracular style on all subjects after becoming dominant in the shoe button business.
  • Learning in public; when is it okay to speak declaratively on topics in which you’re not an expert?
• Diogenes when he asked: “Of what use is a philosopher who never offends anybody?”
  • If you’re not offending somebody then you’re not thinking radically enough.
• My third and final reason is the strongest. I have fallen in love with my way of laying out psychology because it has been so useful for me. And so, before I die, I want to imitate to some extent the bequest practices of three characters: the protagonist in John Bunyan’s Pilgrim’s Progress, Benjamin Franklin, and my first employer, Ernest Buffett. Bunyan’s character, the knight wonderfully named “Old Valiant for Truth,” makes the only practical bequest available to him when he says at the end of his life: “My sword I leave to him who can wear it.” And like this man, I don’t mind if I have misappraised my sword, provided I have tried to see it correctly, or that many will not wish to try it, or that some who try to wield it may find it serves them not. Ben Franklin, to my great benefit, left behind his autobiography, his Almanacks, and much else. And Ernest Buffett did the best he could in the same mode when he left behind “How to Run a Grocery Store and a Few Things I Have Learned about Fishing.” Whether or not this last contribution to the genre was the best, I will not say. But I will report that I have now known four generations of Ernest Buffett’s descendants and that the results have encouraged my imitation of the founder.
  • Don’t die with your music in you
• I was soon surrounded by much extreme irrationality, displayed in patterns and l subpatterns. So surrounded, I could see that I was not going to cope as well as I wished with life unless I could acquire a better theory-structure on which to hang my observations and experiences.
  • Latticework - mental models
• Better theory, I thought, had always worked for me and, if now available, could make me acquire capital and independence faster and better assist everything I loved. And so I slowly developed my own system of psychology, more or less in the self-help style of Ben Franklin and with the determination displayed in the refrain of the nursery story: “Then I’ll do it myself,’ said the little red hen.”
  • Get yourself some theories and live by them until they prove to be untrue. Then move onto something better.
• First, I had long looked for insight by inversion in the intense manner counseled by the great algebraist, Jacobi: “Invert, always invert.” I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes. Second, I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories. After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to-find stupidity was just over the fence in the other fellow’s professional territory?
  • Thomas S. Monson - quote about what is measured and reported
• I may have been lucky to avoid for so long the academic psychology that was then laid out in most textbooks.
  • Academia
• And I found that introductory psychology texts, by and large, didn’t deal appropriately with a fundamental issue: Psychological tendencies tend to be both numerous and inseparably intertwined, now and forever, as they interplay in life. Yet the complex parsing out of effects from intertwined tendencies was usually avoided by the writers of the elementary texts. Possibly the authors did not wish, through complexity, to repel entry of new devotees to their discipline. And, possibly, the cause of their inadequacy was the one given by Samuel Johnson in response to a woman who inquired as to what accounted for his dictionary’s misdefinition of the word “pastern.” “Pure ignorance,” Johnson replied. And, finally, the text writers showed little interest in describing standard antidotes to standard psychology-driven folly, and they thus avoided most discussion of exactly what most interested me.
  • The impracticality of academia; There is a spectrum here between over-complex academia and worthless “pop” psychology
• With the push given by Cialdini’s book, I soon skimmed through three much used textbooks covering introductory psychology. I also pondered considerably while craving synthesis and taking into account all my previous training and experience. The result was Munger’s partial summary of the non-patient-treating, non-nature vs. nurtureweighing parts of nondevelopmental psychology. This material was stolen from its various discoverers (most of whose names I did not even try to learn), often with new descriptions and titles selected to fit Munger’s notion of what makes recall easy for Munger, then revised to make Munger’s use easy as he seeks to avoid errors.
  • Honesty - Progressive summarization
• Man’s-often wrong but generally useful psychological tendencies are quite numerous and quite different. The natural consequence of this profusion of tendencies is the grand general principle of social psychology: cognition is ordinarily situation-dependent so that different situations often cause different conclusions, even when the same person is thinking in the same general subject area.
• Federal Express case: it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault free, rapid performance of a particular task.
  • Pay for the outcome you want
• Xerox Case: he found out that the commission arrangement with the salesmen gave a large and perverse incentive to push the inferior machine on customers, who deserved a better result.
• Consider the presentations of brokers selling commercial real estate and businesses. I’ve never seen one that I thought was even within hailing distance of objective truth. In my long life, I have never seen a management consultant’s report that didn’t end with the same advice: “This problem needs more management consulting services.”
  • Consulting
• In the end, I concluded that when something was obvious in life but not easily demonstrable in certain kinds of easyto-do, repeatable academic experiments, the truffle hounds of psychology very often missed it.
• The inevitable ubiquity of incentive-caused bias has vast, generalized consequences. For instance, a sales force living only on commissions will be much harder to keep moral than one under less pressure from the compensation arrangement. On the other hand, a purely commissioned sales force may well be more efficient per dollar spent. Therefore, difficult decisions involving trade-offs are common in creating compensation arrangements in the sales function.
• Another generalized consequence of incentive caused bias is that man tends to “game” all human systems, often displaying great ingenuity in wrongly serving himself at the expense of others. Antigaming features, therefore, constitute a huge and necessary part of almost all system design. Also needed in system design is an admonition: Dread, and avoid as much you can, rewarding people for what can be easily faked. Yet our legislators and judges, usually including many lawyers educated in eminent universities, often ignore this injunction. And society consequently pays a huge price in the deterioration of behavior and efficiency, as well as the incurrence of unfair costs and wealth transfers. If education were improved, with psychological reality becoming better taught and assimilated, better system design might well come out of our legislatures and courts.
  • Systems design
• Granny’s Rule, to be specific, is the requirement that children eat their carrots before they get dessert. And the business version requires that executives force themselves daily to first do their unpleasant and necessary tasks before rewarding themselves by proceeding to their pleasant tasks. Given reward superpower, this practice is wise and sound. Moreover, the rule can also be used in the nonbusiness part of life. The emphasis on daily use of this practice is not accidental. The consultants well know, after the teaching of Skinner, that prompt rewards work best.
  • Behavioral establishments that limit your dependence on your stupid brain
• One very practical consequence of Liking/Loving Tendency is that it acts as a conditioning device that makes the liker or lover tend (1) to ignore faults of, and comply with wishes of, the object of his affection, (2) to favor people, products, and actions merely associated with the object of his affection (as we shall see when we get to “Influence-from-Mere-Association Tendency,” and (3) to distort other facts to facilitate love.
  • Working up to “love blindness.”
• Liking or loving, intertwined with admiration in a feedback mode, often has vast practical consequences in areas far removed from sexual attachments. For instance, a man who is so constructed that he loves admirable persons and ideas with a special intensity has a huge advantage in life. This blessing came to both Buffett and myself in large measure, sometimes from the same persons and ideas.
  • You should have strong opinions about the people and ideas that you work with.
• Disliking/Hating Tendency also acts as a conditioning device that makes the disliker/hater tend to (1) ignore virtues in the object of dislike, (2) dislike people, products, and actions merely associated with the object of his dislike, and (3) distort other facts to facilitate hatred.
• After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do. And so man’s Doubt-Avoidance Tendency is quite consistent with the history of his ancient, nonhuman ancestors.
  • Allow yourself to wrestle with uncomfortable realities - connect to “Faith is Not Blind.”
• So pronounced is the tendency in man to quickly remove doubt by reaching some decision that behavior to counter the tendency is required from judges and jurors.
  • Compare to end of Doubt and Meryl Streep’s final lines
• When Marley’s miserable ghost says, “I wear the chains I forged in life,” he is talking about chains of habit that were too light to be felt before they became too strong to be broken.
  • 2 Nephi 28:22
• Also tending to be maintained in place by the anti change tendency of the brain are one’s previous conclusions, human loyalties, reputational identity, commitments, accepted role in a civilization, etc. It is not entirely clear why evolution would program into man’s brain an anti-change mode alongside his tendency to quickly remove doubt.
  • A measure of intelligence is how often you’ve changed your mind. “What he knows for certain that just ain’t so.” (Mark Twain)
• And so, people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of good evidence that they are wrong.
  • Connect to Morgan Housel’s permanent assumptions
• Planck is famous not only for his science but also for saying that even in physics the radically new ideas are seldom really accepted by the old guard. Instead, said Planck, the progress is made by a new generation that comes along, less brain blocked by its previous conclusions. Indeed, precisely this sort of brain blocking happened to a degree in Einstein. At his peak, Einstein was a great destroyer of his own ideas, but an older Einstein never accepted the full implications of quantum mechanics.
  • How do you train yourself to be more open to changing your mind?
• One of the most successful users of an antidote to first conclusion bias was Charles Darwin. He trained himself, early, to intensively consider any evidence tending to disconfirm any hypothesis of his, more so if he thought his hypothesis was a particularly good one. The opposite of what Darwin did is now called confirmation bias, a term of opprobrium. Darwin’s practice came from his acute recognition of man’s natural cognitive faults arising from Inconsistency-Avoidance Tendency.
  • You are not suited to strongly hold an opinion until you can make the counter-argument more effectively than the people who want to argue with you.
• For instance, modern education often does much damage when young students are taught dubious political notions and then enthusiastically push these notions on the rest of us. The pushing seldom convinces others. But as students pound into their mental habits what they are pushing out, the students are often permanently damaged. Educational institutions that create a climate where much of this goes on are, I think, irresponsible. It is important not to thus put one’s brain in chains before one has come anywhere near his full potentiality as a rational person.
  • Be taught to question your notions in a healthy way.
• In advanced human civilization, culture greatly increases the effectiveness of curiosity in advancing knowledge. For instance, Athens (including its colony, Alexandria) developed much math and science out of pure curiosity while the Romans made almost no contribution to either math or science. They instead concentrated their attention on the “practical” engineering of mines, roads, aqueducts, etc. Curiosity, enhanced by the best of modern education (which is by definition a minority part in many places), much helps man to prevent or reduce bad consequences arising from other psychological tendencies. The curious are also provided with much fun and wisdom long after formal education has ended.
  • Rome vs. Athens. We seem much more like Rome than Athens today (e.g. focused on the practical.) Connect to Elon Musk quote about how too many people go into finance.
• It is interesting how the world’s slavery was pretty well abolished during the last three centuries after being tolerated for a great many previous centuries during which it coexisted with the world’s major religions. My guess is that Kantian Fairness Tendency was a major contributor to this result.
  • Connect to the idea of designing the world not knowing what part of it you would be born into.
• Many big law firms, fearing disorder from envy/jealousy, have long treated all senior partners alike in compensation, no matter how different their contributions to firm welfare. As I have shared the observation of life with Warren Buffett over decades, I have heard him wisely say on several occasions: “It is not greed that drives the world, but envy.’
  • Interesting to think about productivity and compensation among sales reps vs. call center workers. (E.g. “they never want to work.”)
• The standard antidote to one’s overactive hostility is to train oneself to defer reaction. As my smart friend Tom Murphy so frequently says, “You can always tell the man off tomorrow, if it is such a good idea.”
  • Connect to Gordon B Hinckley train operator story
• Of course, the tendency to reciprocate favor for favor is also very intense, so much so that it occasionally reverses the course of reciprocated hostility. Weird pauses in fighting have sometimes occurred right in the middle of wars, triggered by some minor courtesy or favor on the part of one side, followed by favor reciprocation from the other side, and so on, until fighting stopped for a considerable period. This happened more than once in the trench warfare of World War I, over big stretches of the front and much to the dismay of the generals.
  • Find the picture of the two sides smoking together during WWI
• In a famous psychology experiment, Cialdini brilliantly demonstrated the power of “compliance practitioners” to mislead people by triggering their subconscious Reciprocation Tendency. Carrying out this experiment, Cialdini caused his “compliance practitioners” to wander around his campus and ask strangers to supervise a bunch of juvenile delinquents on a trip to a zoo. Because this happened on a campus, one person in six out of a large sample actually agreed to do this. After accumulating this one-in-six statistic, Cialdini changed his procedure. His practitioners next wandered around the campus asking strangers to devote a big chunk of time every week for two years to the supervision of juvenile delinquents. This ridiculous request got him a one hundred percent rejection rate. But the practitioner had a follow-up question: “Will you at least spend one afternoon taking juvenile delinquents to a zoo?” This raised Cialdini’s former acceptance rate of 1/6 to 1/2-a tripling. What Cialdini’s “compliance practitioners” had done was make a small concession, which was reciprocated by a small concession from the other side. This subconscious reciprocation of a concession by Cialdini’s experimental subjects actually caused a much increased percentage of them to end up irrationally agreeing to go to a zoo with juvenile delinquents. Now, a professor who can invent an experiment like that, which so powerfully demonstrates something so important, deserves much recognition in the wider world, which he indeed got to the credit of many universities that learned a great deal from Cialdini.
• There is a charming Irish Catholic priest in my neighborhood who, with rough accuracy, often says, “The old Jews may have invented guilt, but we Catholics perfected it.” And if you, like me and this priest, believe that, averaged out, feelings of guilt do more good than harm, you may join in my special gratitude for reciprocate-favor tendency, no matter how unpleasant you find feelings of guilt.
  • Guilt vs. shame
• But there is another type of conditioned reflex wherein mere association triggers a response. For instance, consider the case of many men who have been trained by their previous experience in life to believe that when several similar items are presented for purchase, the one with the highest price will have the highest quality. Knowing this, some seller of an ordinary industrial product will often change his product’s trade dress and raise its price significantly hoping that quality-seeking buyers will be tricked into becoming purchasers by mere association of his product and its high price. This industrial practice frequently is effective in driving up sales and even more so in driving up profits. For instance, it worked wonderfully with high-priced power tools for a long time. And it would work better yet with high-priced pumps at the bottom of oil wells. With luxury goods, the process works with a special boost because buyers who pay high prices often gain extra status from thus demonstrating both their good taste and their ability to pay.
  • Case study: lowering prices to increase volume. Black & Decker vs. DeWalt
• Advertisers know about the power of mere association. You won’t see Coke advertised alongside some account of the death of a child. Instead, Coke ads picture life as happier than reality.
  • Marketing
• To avoid being misled by the mere association of some fact with past success, use this memory clue. Think of Napoleon and Hitler when they invaded Russia after using their armies with much success elsewhere.
• The proper antidotes to being made such a patsy by past success are (1) to carefully examine each past success, looking for accidental, noncausative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking and (2) to look for dangerous aspects of the new undertaking that were not present when past success occurred.
  • Self-reflection
• People disagree about how much blindness should accompany the association called love. In Poor Richard’s Almanack Franklin counseled: “Keep your eyes wide open before marriage and half shut thereafter.” Perhaps this “eyes-half-shut” solution is about right, but I favor a tougher prescription: “See it like it is and love anyway.’
  • “Choose your love and love your choice.” (Thomas S. Monson)
• CBS, in its late heyday, was famous for occurrence of Persian Messenger Syndrome because Chairman Paley was hostile to people who brought him bad news. The result was that Paley lived in a cocoon of unreality, from which he made one bad deal after another, even exchanging a large share of CBS for a company that had to be liquidated shortly thereafter. The proper antidote to creating Persian Messenger Syndrome and its bad effects, like those at CBS, is to develop, through exercise of will, a habit of welcoming bad news. At Berkshire, there is a common injunction: “Always tell us the bad news promptly. It is only the good news that can wait. It also helps to be so wise and informed that people fear not telling you bad news because you are so likely to get it elsewhere.
  • Spirit of humility. Ford vs. Ferrari movie clip - “think like Ferrari,” - “why should Mr. Ford trust you?” You can’t ask for ideas and then act like you know everything. Connect to the Sam Walton story about learning from everyone, even associates.
• Instead, just as he must learn that trend does not always correctly predict destiny, he must learn that the average dimension in some group will not reliably guide him to the dimension of some specific item. Otherwise Pete will make many errors, like that of the fellow who drowned in a river that averaged out only eighteen inches deep.
  • People who anchor their expectations to averages will never fully understand outliers.
• This phenomenon first hit me hard in World War II when the superathlete, superstudent son of a family friend flew off over the Atlantic Ocean and never came back. His mother, who was a very sane woman, then refused to believe he was dead. That’s Simple, Pain-Avoiding Psychological Denial. The reality is too painful to bear, so one distorts the facts until they become bearable. We all do that to some extent, often causing terrible problems. The tendency’s most extreme outcomes are usually mixed up with love, death, and chemical dependency.
  • What do you use to dull the pain?
• We all commonly observe the excessive selfed regard of man. He mostly misappses himself on the high side, like the ninety perceni of Swedish drivers that judge themselves to be above average. Such misappraisals also apply to a person’s major “possessions.” One spouse usually over-appraises the other spouse. And a man’s children are likewise appraised higher by him than they are likely to be in a more objective view. Even man’s minor possessions tend to be overappraised. Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn’t already own them. There is a name in psychology for this overappraise-your-own-possessions phenomenon: the “endowment effect.” And all man’s decisions are suddenly regarded by him as better than would have been the case just before he made them.
  • Connect to Gordon B Hinckley quote about how we can’t rely on genius
• Therefore, some of the most useful members of our civilization are those who are willing to “clean house” when they find a mess under their ambit of control.
  • Moneyball clip - if we play like them in here we will lose to them out there
• Because man is likely to be overinfluenced by face-to-face impressions that by definition involve his active participation, a job candidate who is a marvelous “presenter” often causes great danger under modern executive-search practice. In my opinion, Hewlett-Packard faced just such a danger when it interviewed the articulate, dynamic Carly Fiorina in its search for a new CEO. And I believe (1) that Hewlett-Packard made a bad decision when it chose Ms. Fiorina and (2) that this bad decision would not have been made if Hewlett-Packard had taken the methodological precautions it would have taken if it knew more psychology.
  • Story about orchestra auditions happening behind a curtain and drastically improving outcomes.
• There is a famous passage somewhere in Tolstoy that illuminates the power of Excessive Self-Regard Tendency. According to Tolstoy, the worst criminals don’t appraise themselves as all that bad. They come to believe either (1) that they didn’t commit their crimes or (2) that, considering the pressures and disadvantages of their lives, it is understandable and forgivable that they behaved as they did and became what they became. The second half of the “Tolstoy effect”, where the man makes excuses for his fixable poor performance, instead of providing the fix, is enormously important. Because a majority of mankind will try to get along by making way too many unreasonable excuses for fixable poor performance, it is very important to have personal and institutional antidotes limiting the ravages of such folly. On the personal level a man should try to face the two simple facts: (1) fixable but unfixed bad performance is bad character and tends to create more of itself, causing more damage to the excuse giver with each tolerated instance, and (2) in demanding places, like athletic teams and General Electric, you are almost sure to be discarded in due course if you keep giving excuses instead of behaving as you should. The main institutional antidotes to this part of the “Tolstoy effect” are (1) a fair, meritocratic, demanding culture plus personnel handling methods that build up morale and (2) severance of the worst offenders. Of course, when you can’t sever, as in the case of your own child, you must try to fix the child as best you can. I once heard of a child-teaching method so effective that the child remembered the learning experience over fifty years later. The child later became Dean of the USC School of Music and then related to me what his father said when he saw his child taking candy from the stock of his employer with the excuse that he intended to replace it later. The father said, “Son, it would be better for you to simply take all you want and call yourself a thief every time you do it.”
  • The Tolstoy Effect. Spirit of humility. Parenting
• Of course, some high self-appraisals are correct and serve better than false modesty. Moreover, self-regard in the form of a justified pride in a job well done, or a life well lived, is a large constructive force. Without such justified pride, many more airplanes would crash. “Pride” is another word generally left out of psychology textbooks, and this omission is not a good idea. It is also not a good idea to construe the bible’s parable about the Pharisee and the Publican as condemning all pride. Of all forms of useful pride, perhaps the most desirable is a justified pride in being trustworthy. Moreover, the trustworthy man, even after allowing for the inconveniences of his chosen course, ordinarily has a life that averages out better than he would have if he provided less reliability.
  • Beware of Pride - Pride and the Priesthood
• “What a man wishes, that also will he believe.” (Demosthenes)
• The Greek orator was clearly right about an excess of optimism being the normal human condition, even when pain or the threat of pain is absent. Witness happy people buying lottery tickets or believing that credit-furnishing, deliverymaking grocery stores were going to displace a great many superefficient cash-and-carry supermarkets.
• In displaying Deprival-Superreaction Tendency, man frequently incurs disadvantage by misframing his problems. He will often compare what is near instead of what really matters. For instance, a man with $10 million in his brokerage account will often be extremely irritated by the accidental loss of $100 out of the $300 in his wallet.
  • Loss aversion. Relative loss or gain. Find the story about saving $10 on a $30 purchase vs a $1000 purchase. Story of buying our car, per month amounts aren’t big but added up they get big
• Humans are much the same as this Munger dog. A man ordinarily reacts with irrational intensity to even a small loss, or threatened loss, of property, love, friendship, dominated territory, opportunity, status, or any other valued thing. As a natural result, bureaucratic infighting over the threatened loss of dominated territory often causes immense damage to an institution as a whole.
  • I wonder why we are not as sensitive to losing things to ourselves? Losing time to waste with activities, losing health to laziness, losing dignity to bad behavior.
• It is almost everywhere the case that extremes of ideology are maintained with great intensity and with great antipathy to non-believers, causing extremes of cognitive dysfunction. This happens, I believe, because two psychological tendencies are usually acting concurrently toward this same sad result: (1) Inconsistency-Avoidance Tendency, plus (2) Deprival-Superreaction Tendency. One antidote to intense, deliberate maintenance of groupthink is an extreme culture of courtesy, kept in place despite ideological differences, like the behavior of the justices now serving on the U.S. Supreme Court. Another antidote is to deliberately bring in able and articulate disbelievers of incumbent groupthink. Successful corrective measures to evil examples of groupthink maintenance have included actions like that of Derek Bok when, as president of Harvard, he started disapproving tenure appointments proposed by ideologues at Harvard Law School.
  • How to Begin Teaching I’m Preach My Gospel is meant you establish empathy and understanding,
• And, of course, teenagers’ parents usually learn more than they would like about teenagers’ cognitive errors from Social-Proof Tendency. This phenomenon was recently involved in a breakthrough by Judith Rich Harris who demonstrated that superrespect by young people for their peers, rather than for parents or other adults, is ordained to some considerable extent by the genes of the young people. This makes it wise for parents to rely more on manipulating the quality of the peers than on exhortations to their own offspring. A person like Ms. Harris, who can provide an insight of this quality and utility, backed by new reasons, has not lived in vain.
  • Parenting
• If only one lesson is to be chosen from a package of lessons involving Social-Proof Tendency, and used in self improvement, my favorite would be: Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.
  • Live the Library but not blindly
• Few psychological tendencies do more damage to correct thinking. Small-scale damages involve instances such as man’s buying an overpriced $1,000 leather dashboard merely because the price is so low compared to his concurrent purchase of a $65,000 car. Large- scale damages often ruin lives, as when a wonderful woman having terrible parents marries a man who would be judged satisfactory only in comparison to her parents. Or as when a man takes wife number two who would be appraised as all right only in comparison to wife number one.
  • Marcel the Shell - “compared to what” - Snowflake vs. Fivetran
• One of Ben Franklin’s best-remembered and most useful aphorisms is “A small leak will sink a great ship.” The utility of the aphorism is large precisely because the brain so often misses the functional equivalent of a small leak in a great ship.
  • Sweat the small things.
• In a phenomenon less well recognized but still widely known, light stress can slightly improve performance-say, in examinations whereas heavy stress causes dysfunction.
  • The Profile about the blind astronaut in space
• But not many scientists would have done what Pavlov next did. And that was to spend the rest of his long life giving stress-induced nervous breakdowns to dogs, after which he would try to reverse the breakdowns, all the while keeping careful experimental records. He found (1) that he could classify dogs so as to predict how easily a particular dog would breakdown; (2) that the dogs hardest to break down were also the hardest to return to their prebreakdown state; (3) that any dog could be broken down; and (4) that he couldn’t reverse a breakdown except by reimposing stress.
• This mental tendency echoes the words of the song: “When I’m not near the girl I love, I love the girl I’m near.” Man’s imperfect, limited-capacity brain easily drifts into working with what’s easily available to it. And the brain can’t use what it can’t remember or what it is blocked from recognizing because it is heavily influenced by one or more psychological tendencies bearing strongly on it, as the fellow is influenced by the nearby girl in the song. And so the mind overweighs what is easily available and thus displays Availability-Misweighing Tendency. The main antidote to miscues from Availability-Misweighing Tendency often involve procedures, including use of checklists, which are almost always helpful.
  • Checklists
• Still, the special strength of extra-vivid images in influencing the mind can be constructively used (1) in persuading someone else to reach a correct conclusion or (2) as a device for improving one’s own memory by attaching vivid images, one after the other, to many items one doesn’t want to forget. Indeed, such use of vivid images as memory boosters is what enabled the great orators of classical Greece and Rome to give such long, organized speeches without using notes.
  • Latticework of memory. “Keep your best thoughts close to you.”
• Throughout his life, a wise man engages in practice of all his useful, rarely used skills, many of them outside his discipline, as a sort of duty to his better self. If he reduces the number of skills he practices and, therefore, the number of skills he retains, he will naturally drift into error from man with a hammer tendency. His learning capacity will also shrink as he creates gaps in the latticework of theory he needs as a framework for understanding new experience. It is also essential for a thinking man to assemble his skills into a checklist that he routinely uses. Any other mode of operation will cause him to miss much that is important.
• Continuous thinking and learning, done with joy, can somewhat help delay what is inevitable.
• After Corporal Hitler had risen to dominate Germany, leading a bunch of believing Lutherans and Catholics into orgies of genocide and other mass destruction, one clever psychology professor, Stanley Milgram, decided to do an experiment to determine exactly how far authority figures could lead ordinary people into gross misbehavior. In this experiment, a man posing as an authority figure, namely a professor governing a respectable experiment, was able to trick a great many ordinary people into giving what they had every reason to believe were massive electric shocks that inflicted heavy torture on innocent fellow citizens. This experiment did demonstrate a terrible result contributed to by Authority-Misinfluence Tendency, but it also demonstrated extreme ignorance in the psychology professoriate right after World War II.
• The obvious implication: Be careful whom you appoint to power because a dominant authority figure will often be hard to remove, aided as he will be by Authority-Misinfluence Tendency.
  • Valued Empyrean: be careful who you call a partner
• A rightly famous Caltech engineering professor, exhibiting more insight than tact, once expressed his version of this idea as follows: “The principal job of an academic administration is to keep the people who don’t matter from interfering with the work of the people that do.”
  • Talking for the sake of talking.
• No one knew this better than Carl Braun, who designed oil refineries with spectacular skill and integrity. He had a very simple rule, one of many in his large, Teutonic company: You had to tell Who was to do What, Where, When, and Why. And if you wrote a communication leaving out your explanation of why the addressee was to do what was ordered, Braun was likely to fire you because Braun well knew that ideas got through best when reasons for the ideas were meticulously laid out.
• In general, learning is most easily assimilated and used when, life long, people consistently hang their experience, actual and vicarious, on a latticework of theory answering the question: Why? Indeed, the question “Why?” is a sort of Rosetta stone opening up the major potentiality of mental life.
  • Roam Research
• What are we to make of the extreme ignorance of the psychology textbook writers of yesteryear? How could anyone who had taken a freshman course in physics or chemistry not be driven to consider, above all, how psychological tendencies combine and with what effects? Why would anyone think his study of psychology was adequate without his having endured the complexity involved in dealing with intertwined psychological tendencies? What could be more ironic than professors using oversimplified notions while studying bad cognitive effects grounded in the mind’s tendency to use oversimplified algorithms?
  • Interdisciplinary
• My third question is also compound: In the practical world, what good is the thought system laid out in this list of tendencies? Isn’t practical benefit prevented because these psychological tendencies are so thoroughly programmed into the human mind by broad evolution [the combination of genetic and cultural evolution] that we can’t get rid of them? Well, the answer is that the tendencies are probably much more good than bad. Otherwise, they wouldn’t be there, working pretty well for man, given his condition and his limited brain capacity. So the tendencies can’t be simply washed out automatically, and shouldn’t be. Nevertheless, the psychological thought system described, when properly understood and used, enables the spread of wisdom and good conduct and facilitates the avoidance of disaster. Tendency is not always destiny, and knowing the tendencies and their antidotes can often help prevent trouble that would otherwise occur.
  • Bias’ are there for a reason but they must be “banked and cooled like a river of fire” with a million controls.
• Six: The use of Granny’s incentive-driven rule to manipulate oneself toward better performance of one’s duties.
  • Vegetables before desert
• Eight: The use of autopsy equivalents at Johnson & Johnson. At most corporations, if you make an acquisition and it turns out to be a disaster, all the people, paperwork, and presentations that caused the foolish acquisition are quickly forgotten. Nobody wants to be associated with the poor outcome by mentioning it. But at Johnson & Johnson, the rules make everybody revisit old acquisitions, comparing predictions with outcomes. That is a very smart thing to do.
  • Monson - measured and reported
• But ordinarily, when you try to use your knowledge of psychological tendencies in the artful manipulation of someone whose trust you need, you will be making both a moral and prudential error.
• I even hope that more psychology professors will join me in: (1) making heavy use of inversion; (2) driving for a complete description of the psychological system so that it works better as a checklist; and (3) especially emphasizing effects from combinations of psychological tendencies.
  • Open source thinking
• And her solution is very plausible as she collects and explains data from professional literature, including an interesting case wherein one of two identical twins became a success in business and family life while the other twin went to Skid Row. I won’t here disclose Ms. Harris’ desirably generalized answer to her central question, because it would be better for Almanack readers to first guess the answer, then read her book.
  • Run it through the Checklist
• “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time-none, zero. You’d be amazed at how much Warren reads-and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
  • Reading
• My whole acquaintance with Standard Oil, though casual, irregular and remote, has left me with a favorable impression of the company-at least compared to other large institutions I have dealt with. Standard’s products have never given me any trouble. As a customer at its wholly owned gas stations, when I have negotiated transactions I have been dealt with promptly and fairly. In my 30 years in California, Standard has not irritated me by causing major scandals. When I dealt with Standard a few times as a young lawyer representing other interests, I found it ponderous and bureaucratic (as it probably had to be to maintain internal control and avoid scandals at its size) but the soul of honor and essentially rational on all points.
• Consumers stand to suffer more if corporations. limit reinvestment in energy development than they would from minor gasoline price increases. I, personally, advocate the higher prices and Standard’s higher earnings because I believe that they lead to higher reinvestment and subsequent consumer benefits. There is definitely such a thing as a pro-consumer price increase, when the supplier’s long-term vitality is required to support the consumer’s long-term vitality. And, as demonstrated by the history of my wife’s investment, consumers as yet need not worry that they are causing any unfair bonanza for Standard Oil shareholders.
• My business experience makes me react with horror from proposals by politicians to break up Standard Oil and its counterparts in “Big Oil,” or turn many of their functions over to the government. I think we should reserve our tinkering for those institutions which are plainly deteriorating. I, for one, am quite satisfied with the work of the good grey engineers at the Standard Oil Company of California.
• Warren Buffett’s closest business associate says he and Buffett think so much alike that they usually agree instinctively on whether to go ahead with a major investment. Decisions involving many millions of dollars sometimes are reached in minutes, said Charles T. Munger, vice-chairman of Omaha-based Berkshire Hathaway Inc. The tendency to think alike isn’t always a plus, he said. “If a mistake goes through one filter, it is likely to go through both.”
• Like Buffett, Munger is a generalist rather than a specialist in one or two types of investments., “Charlie can analyze and evaluate any kind of deal faster and more accurately than any man alive,” said Buffett. “He sees any valid weakness in 60 seconds. He’s a perfect partner.”
• Most of the investment ideas are Buffett’s, Munger said. He described Buffett as the same in private or public open, pleasant and straightforward. No side of his personality is hidden, he said. “What you see is exactly what you get.” Buffett’s natural manner “helps enormously” in business, Munger said. “When you behave that way, people trust you. They ought to teach that in business school.”
• Our savings and loan industry has now created the largest mess in the history of U. S. financial institutions. While the mess has many causes, which we tried to summarize fairly in our last annual report to stockholders, it was made much worse by (1) constant and successful inhibition over many years, through League lobbying, of proper regulatory response to operations of a minority of insured institutions dominated by crooks and fools, (2) mickey-mouse accounting which made many insured institutions look sounder than they really were, and (3) inadequate levels of real equity capítal underlying insured institutions’ promises to holders of savings accounts. It is not unfair to liken the situation now facing Congress to cancer and to liken the League to a significant carcinogenic agent, And, like cancer, our present troubles will recur if Congress lacks the wisdom and courage to excise elements which helped cause the troubles.
• As best I can judge from the Microsoft antitrust case, the Justice Department believes the following: that any seller of an ever-evolving, many-featured product-a product that is constantly being improved by adding new features to, every new model-will automatically violate antitrust law if: (1) it regularly sells its product at one all-features-included price; (2) it has a dominant market share and (3) the seller plays “catch-up” by adding an obviously essential feature that has the same function as a product first marketed by someone else. If appellate courts are foolish enough to go along with the trial court ruling in the Microsoft case, virtually every dominant high-tech business in the United States will be forced to retreat from what is standard competitive practice for firms all over the world when they are threatened by better technology first marketed elsewhere. No other country so ties the hands of its strongest businesses. We can see why by taking a look at America’s own history. Consider the Ford Motor Co. When it was the dominant U.S. automaker in 1912, a small firm-a predecessor of General Motors-invented a self-starter that the driver could use from inside the car instead of getting out to crank the engine. What Ford did in response was to add a self-starter of its own to its cars (its “one-price” package)-thus bolstering its dominant business and limiting the inroads of its small competitor. Do we really want that kind of conduct to be illegal?
  • Should we just trust rapid innovation to do its job in disrupting incumbents?
• Even so, and despite the huge damage to World Book, I believe Microsoft was entitled to improve its software as it did, and that our society gains greatly-despite some damage to some companies when its strong businesses are able to improve their products enough to stay strong.
  • No business has a “right” to survive
• Andy Grove of Intel, a company that not long ago was forced out of a silicon chip business in which it was once dominant, has been widely quoted as describing his business as one in which “only the paranoid survive.” If this is so, as seems likely, then Microsoft should get a medal, not an antitrust prosecution, for being so fearful of being left behind and so passionate about improving its products.
• Munger and Buffett complement each other beautifully. Munger comes on more arrogant and erudite, while Buffett comes on modest and folksy. But that’s the surface in both cases. Underneath, these are two minds in almost uncanny sync.
• The Omaha phenomenon began as pure Ben Graham-buy cheap stocks at giveaway prices if possible and sell them when they are no longer cheap. You figure out when they are cheap by careful balance sheet analysis. Buffett still follows the Graham precepts of careful analysis, but it’s been years since Buffett has bought stocks that, by Graham’s standards, are cheap in terms of assets, earnings or cash flow. Nor does he, in classic Graham style, look to sell holdings when they catch up with the market. Over the years, especially in the 1980s and 1990s, Buffett has moved closer to the concept of one-decision growth stocks-buy ‘em and hold ‘em forever, or at least until their fundamentals deteriorate. Coca-Cola wasn’t cheap by conventional standards when Berkshire Hathaway first bought it in 1988. On The Street it was regarded as an excellent but fully valued stock. CocaCola has since appreciated by close to 600%, or a compound annual rate of return of some 25%, but Berkshire has taken not a penny in profits and has sold not a single share.
  • Reminds me of when David Rosenthal called Shopify stock expensive
• Where most analysts saw only good but fully valued properties, Buffett/ saw franchises that were priceless, virtually immune from inflation and capable of continued growth-compound interest machines, in short. None of the flashes in the here like Avon Products or Xerox that passed as buy-andhold-forever stocks 20 years back.
• “You know the cliché that opposites attract? Well, opposites don’t attract.”
• Besides, if you sell stock in a great company, where can you find a comparable investment? As the poet Omar Khayyam put it: “Oft I wonder what the vintner buys half so precious as the stuff he sells.”
• In the exchanges carried over those wires, Buffett is the stock picker while Munger is the doubter, the skeptic, the devil’s advocate, against whom Buffett tests his ideas. The simple fact is that you can’t tell whether an idea is likely to work unless you consider all the possible negatives. Not that Munger is a sour puss. Their verbal exchanges are larded with jokes. For all their surface differences, these two men have similar minds. “Everybody engaged in complicated work needs colleagues, explains Munger. “Just the discipline of having to put your thoughts in order with somebody else is a very useful thing.”
• At time in these 24 years Berkshire any Hathaway could have cashed in all or part of See’s through an initial public offering. Why didn’t it? Answers Munger: “The number of acquisitions making 23% pretax is very small in America.” Better to leave the money compounding in a relatively sure thing.
• In a tie vote, Munger says, Buffett wins. After they have kicked around a subject, he is willing to let Buffett make the final decision. “A lot of dominant personalities, like me, can never play the subservient role even to Warren, who is more able and dedicated than I am,” Munger says. That last sentence explains a lot about both men. Munger is immensely opinionated. Yet he is willing to play second fiddle. To subordinate strong views and a powerful personality requires a high degree of self-discipline and objectivity. Objectivity is the key word here. It means stripping decisions of emotions, of hopes and fears, of impatience and self-delusion and all purely subjective elements. Few people have this strength. Munger does. Giving in sometimes to Buffett requires, in Munger’s own words, “objectivity about where you rank in the scheme of things.”
  • Greatest partnership ever? Compare to Jobs and Wozniak, Disney and Iwertz
• Munger wants the satisfaction of seeing his money do good things now; Buffett sees his role as piling up more chips for his heirs to do good things with.
• In 1965 he stepped down as an active partner of the firm, though he keeps his office there and still lectures the partners on the importance of choosing clients like friends, and not going for the last dollar.
• Remarkably, neither Munger nor Buffett has much regard for Wall Street, though it has made their fortunes, “On a net basis the whole investment management business together gives no value added to all stock portfolio owners combined,” Munger says. “That isn’t true of plumbing and it isn’t true of medicine. Warren agrees with me 100%. We shake our heads at the brains that have been going into money management. What a waste of talent.”
• He adds: “Personally, I think that if security trading in America were to go down by 80%, the civilization would work better. And if I were God, I’d change the tax rules so it would go down by 80%-in fact, by more than 80%.” Munger ‘once proposed a 100% tax on gains taken in less than a year from securities trading.
• “I join John Maynard Keynes in characterizing investment management as a low calling,” he responds, “because most of it is just shifting around a perpetual universe of common stocks. The people doing it just cancel each other out. You will note that none of my children is in investment management. Warren and I are a little different in that we actually run businesses and allocate capital to them.
• The faults of those who misled now get much attention and create demands for greater criminal penalties. But the faults of generally accepted accounting principles are more important, because changing accounting rules, and the way they are adopted, has a greater potential for preventing Enron-type disasters.
• To so state the problem suggests a solution: placing the control of accounting much farther away than it now is from the influence of accounting firms, corporations and politicians.
• Some people think that, to correct accounting, we merely need some new committee or some increase in power for the SEC. But these ideas have failed, time after time, because they are equivalent to trying to influence an elephant with a peashooter. We need a stronger remedy.
• Question: “In your Harvard speech on The Psychology of Human Misjudgment,’ you mention the strange case of the Latin American country, where some very clever reformers used psychology, not economic remedies, to fix an enormously corrupt market system. Can you tell us what country that was and provide more details?”
• Answer: “Oh, yes-I ran across that fascinating story not in an Economics book, but in a Psychology paper. I could dig it out of my files for you, but it’s too much effort, so I won’t.”
• Editor’s note: Sometimes we remain in the dark…
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