Charlie Munger: Philanthropy Roundtable

Talk 7 of the eleven in Chapter Four of Poor Charlie’s Almanack. See The Eleven Talks of Poor Charlie’s Almanack for the full collection.

Key Takeaways

Things like a “wealth effect” with not realizing how much you’re paying for your returns come from:

1. A lack of experience holding stock
   • 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. #Personal Finance
2. An inefficient market where prices are not actually based in sound economic principle
   • 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.
3. And a lack of well-defined thinking
   • 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. #Roam Research #Personal Knowledge Management

Highlights & Notes

Kyle’s reading layer from Poor Charlie’s Almanack, preserved verbatim. Munger’s text and pulled-in source quotes appear as bullets; Kyle’s own annotations appear as Kyle: callouts.

• 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. #Personal Finance
• “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. #Fees and Carry

  Kyle: 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 aggregate 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. #Group Think #Contrarian
• 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.

  Kyle: 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. #Roam Research #Personal Knowledge Management

  Kyle: We have a moral responsibility to try and help people eradicate their ignorance if we in a position to do so.