Tonight I got to see A Conversation with Charlie Munger at Caltech in Pasadena. I took some notes on the discussion below. C refers to Charlie Munger speaking, while T stands for Tom Tombrello, the interviewer. These are not their exact words.
C: I love Occum's Razor (Wikipedia). Einstein once said make everything as simple as possible, but not simpler. In the field of messy social sciences, use a variety of disciplines and look for a confluence of factors when dealing with "lollapaloozas". (significant and strange events, black swans)
For example, I was fascinated about what made people join Moonies, a cult-like group. It didn't make sense until I ran into Pavlov, who experimented on dogs by pushing them to nervous breakdowns (He did this by locking them in cages and then raising the water level up to mouth height, making them think they were about to drown) . Afterwards, they would act in the complete opposite fashion. This was very similar to one of the Moonies conversion methods: "causing the target to snap".
I always like when I ask economics students how you can raise prices while also increasing demand. One in fifty will say in luxury good situations, where raising the prices gives the appearance of quality. But no one ever comes up with the most successful method- raising the price and then using the extra money to bribe the sales agents. We see this all the time in title insurance, mutual funds, and some defense contracts.
I liken my own education to a gold miner with a pan in the gold rush days. I sift through and pick up the big nuggets of information. I let other people deal with the placer mining.
Derivatives have intensified the common-mode failure. (Concentrating too much similar risk in one party) Wall Street has created things so complicated and complex, and you had no choice but to rely on a ratings agency. This was not a modest problem. Professionals and Academia has failed us by not questioning what was going on.
T: It is interesting that in physics and the natural sciences, there is linearity. Cause and effect are intertwined. In the social sciences, that is not the case. If Munger was to say tonight that the economy is going to free fall, it could very likely cause the economy to free fall tomorrow morning.
It is funny, I was talking with a friend who was working at a place called Division X, which was working on nuclear weapons. And he just kept going on about the competition and how they had to get these more powerful weapons out or else they would lose out to competition. Finally I get to thinking, there is no way we are talking about the Soviet Union. And he says no, I'm talking about our competitors, Livermore. No one stopped to think hey, our country is escalating the arms race in competition with itself.
Thoughts on Global Warming?
C: I think its a problem, but not as big as Al Gore makes it out to be. What I think is real silly is turning corn to fuel. There is a case where the environmentalists did not first stop to ask the ecologists about what goes into the dirt needed to grow corn. (I think?) I think we should want to preserve petrochemicals because they may have more valuable uses than driving our cars and heating our homes. Once we're out, we're out.
Thoughts on how this current credit crisis plays out?
C: The lessons to this are unbelievably important. There were some people making unbelievable gains with no social contribution.
Best piece of advice for new investors?
C: Go at it with a capitalistic perspective. Competitions will always be coming at you if you are earning great returns, so have some barrier. And invest with a margin of safety- If you were an engineer and you know you were going to have 10,000 ton trucks driving over your bridge, you would build a bridge that can stand 15,000 tonnes. Similarly, buy a stock for much less than you think it is really worth.