Wednesday, March 12, 2008

Notes From A Conversation with Munger

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.

Q&A:
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.

15 comments:

Vishal said...

Good one.Thanks for the putting it up. But too short. Hope you put the entire transcript.

Nnejad said...

I took pretty brief notes and I left out quite a bit. But the entire video of the event will be posted soon for those who want to hear it all.

Valuebull said...

Thanks for the notes, very interesting. Where will the video be posted? Thanks!

Valuebull said...

Thanks for the notes, very interesting. Where will the video be posted? On Caltech's website? Thanks

Valuebull said...

Thanks for the notes, very interesting. Where will the video be posted? On Caltech's website? Thanks

Alex said...

I was worried when he spoke about natural selection and China. He is perfectly right, and academia does irresponsibly ignore the implications of genetic variation, but the PC police are ever vigilant.

It's hard to believe that he is over 80 years old. Did you notice how easily he pulled quotes from the past and related them to current issues? The ability to understand that you have heard something good and to retain the gems for decades probably has some relationship with his success.

Nnejad said...

The video will likely be posted on the Caltech website.

Hey Alex, my friend and I were talking about that right after the presentation. On whether the Chinese are genetically more intelligent or not, we pleaded ignorance. But two other factors are definitely working in their favor. One, they have four times the US population, so they can pick their creme of the crop from a much larger group. Second, they have much more incentive than we do. The Chinese can see our lifestyle and they want all the things we have, whereas in the United States many of us are already pretty content with the lives we live.

John Allen said...

Can someone elaborate on the China/genetics comments that were made?

halfhenry said...

Thanks Nick!

Lincoln Minor said...

"...two other factors are definitely working in their [the Chinese'] favor. One, they have four times the US population, so they can pick their creme of the crop from a much larger group."

This is similar to the benefit we small investors have over the big institutions. We can pick the cream of the stock crop from the entire universe of market caps but the big institutions are confined to the smaller population of big market cap stocks. In his annual letter to shareholders, Warren Buffett mentions this as a handicap at Berkshire Hathaway. He calls it an anchor around Berkshire's future performance.

Nnejad said...

Sorry for the late response John. Basically, Munger was saying the Chinese are genetically smarter than us, and they would be producing more engineers and physicists than us. He even criticized Jared Diamond (Author of Guns, Germs, and Steel) for believing that people were all of equal make-up. (The specific example Jared used was comparing people from civilized nations to a tribe of isolated people in New Guinea as equals). So he was of the belief that genetic differences did exist and to deny them in favor of some higher idea of equality was false. Someone asked him if this then meant that the US future was bleak, and he said far from it. We would just have to get used to some intense competition.

Lincoln, very true. In fact, I'm thinking this is a worthy example to keep on any Munger-type list of important concepts.

chris said...

As a big fan of Munger and China born and educated, I couldn't resist posting a comment: The Chinese people are willing to sacrifice ANYTHING to attain material wealth(health,moral, relationships with loved ones etc) Today, China is a much FREER, more liberal place than the US in daily life! The people generally don't believe in check and balance, that is why the centralized government structure works better there. Education system is a big minus. Majority of the engineers have been trained to solve problems without understanding what is the problem!

Most Chinese people are under-achievers in the US, because they generally are not trained culturally to take risks, pursue their real passion. Anyone want to know more about China or discuss investment ideas(Munger's approach), feel free to contact me at joylucks@gmail.com

Anonymous said...

The whole interview session is available at the CAl Tech website now.

http://today.caltech.edu/theater/item?story%5fid=30623

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