B000U5KFIC EBOK (46 page)

"Like any good algebraist," said Munger, "the pilot is made to think
sometimes in a forward fashion and sometimes in reverse: and so he learns
when to concentrate mostly on what he wants to happen and also when to
concentrate mostly on avoiding what he does not want to happen.

Munger says his own life is an example of that process. When he
went to Harvard Law School, "I had taken one silly course in biology in
high school, briefly learning, mostly by rote, an obviously incomplete theory of evolution, portions of the anatomy of the paramecium and frog,
plus a ridiculous concept of `protoplasm' that has since disappeared. 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 subjects, using it as my organizing guide and
filing system in a search for whatever multidisciplinary worldly wisdom
it would be easy to get."'

Thus, his life became a sort of accidental educational experiment,
continued Munger. "What I found, in my extended attempts to complete
by informal means my stunted education, was that, plugging along with
only ordinary will but with the fundamental organizing ethos of science
as my guide, my ability to serve anything I loved was enhanced far beyond my deserts. Large gains came in places that seemed unlikely when I
started out, sometimes making me like the only one without a blindfold
in a high-stakes game of `pin the donkey.' For instance, I was productively led into psychology, where I had no plans to go, creating large
advantages. "

"I'vE TRIED To IMITATE, in a poor way, the life of Benjamin Franklin,"
Munger said. "When he was 42, Franklin quit business to focus more on
being a writer, statesman, philanthropist, inventor, and scientist. That's
why I have diverted my interest away from business.""'

One of the important lessons from Munger's life, said his daughter
Emilie, is: "Don't just take for your own family and hoard it. He gives a lot
to institutions, especially educational institutions. He cares about it-not
just giving money, but time and intelligence to solving problems."

Easy for a daughter to say about her father. But Munger's friend Otis
Booth, who also is from a generation not used to the frivolous expression
of emotions, sees through the crusty outer layer that shrouds Munger's
personality. "It is not readily apparent, but he has an immense, high level
of compassion and understanding. It's way back inside of him. It is publicly manifested in his charitable work. He does not wear his heart on his
sleeve, but he nonetheless has a large heart."

The values that guide his personal life guide his public life.
You live life simply. You live it in the middle of the field, and
you don't cut corners.

Ronald Olson

nARLIE MUNGER OFTEN QUOTES THE late Nobel laureate physicist
Richard Feynman, who said the first rule is to not fool yourself, and
you are the easiest person to fool. Munger can be merciless if he believes
he has caught someone in an act of silly self-deception.

Pity the poor professor who gets caught up in a debate with Munger
on the academic treatment of investment policy. Such was the case at The
Benjamin Cardozo School of Law in New York City in 1996 when, due to
the death of a close friend, the scheduled moderator was unable to attend.
Charlie Munger was asked to step in.

Charlie told the audience: "The accidents of mortality have given you
a Baptist bumpkin suddenly put in charge of a bunch of Catholic archbishops who are going to debate revisions of the Catholic mass, in Latin.
But I figure I could moderate such a convention."'

It was the panel's assignment to discuss the research of Professor
William Bratton of the Rutgers-Newark School of Law, which dealt with
the corporate decision to pay dividends to shareholders rather than reinvest profits. Munger soon nailed Bratton with what he considered a
flawed assumption in the research.

Munger: I take it that you believe that there is no one-size-fits-all dividend
policy and that you're with the professor (Jill E. Fisch of Fordham
University School of Law) who said yesterday that there wasn't any
one-size-fits-all scheme for corporate governance?

Bratton: On that simple proposition I am entirely in concord with Professor Fisch.

Munger: But you say there is some vaguely established view in economics
as to what is an optimal dividend policy or an optimal investment?

Bratton: I think we all know what an optimal investment is.

Munger: No, I do not. At least not as these people use the term.

Bratton: I don't know it when I see it ... but in theory, if I knew it when
I saw it this conference would be about me and not about Warren
Buffett. I Laughter from the audience]

Munger: What is the break point where a business becomes suboptimal in
an ordinary corporation or when an investment becomes suboptimal?

Bratton: When the return on the investment is lower than the cost of
capital.

Munger: And what is the cost of capital?

Bratton: Well, that's a nice one ]Laughter] and I would ...

Munger: Well, it's only fair, if you're going to use the cost of capital, to
say what it is.

Bratton: I would be interested in knowing, we're talking theoretically.

Munger: No, I want to know what the cost of capital is in the model.

Bratton: In the model? It will just be stated.

Munger: Where? Out of the forehead of job or something?

Bratton: That is correct. I Laughter]

Munger: Well, some of us don't find this too satisfactory. I Laughter]

Bratton: I said, you'd be a fool to use it as a template for real world investment decision making. [Laughter] They're only trying t(i ice a
particular perspective on human behavior to try to explain things

Munger: But if you explain things in terms of unexplainable subconcepts,
what kind of an explanation is that? [Laughter]

Bratton: It's a social science explanation. You take for what its worth.

Munger: Do you consider it understandable for some petuplc• to regard
this as gibberish? [Laughter]

Bratton: Perfectly understandable, although I do my best to teach it.
[Laughter)

Munger: Why? Why do you do this? [Laughter]

Bratton: It's in my job description. [Laughter]

Munger: Because other people are teaching it, is what you're telling me.
[Laughter]2

The audience laughter points are essential in this exchange, lest it
sound like a food fight at a junior high school cafeteria. The bantering was
done in a good-natured tone, but the point of the exchange was quite serious. Later, to make sure his comments were not misunderstood, Munger
made amends:

I don't want my remark about the cost of capital to be interpreted as meaning that I think the great bulk of Professor Bratton's paper is wrong. I think
it's profoundly right. When he talks about agency costs in corporations and
the discipline caused by levels of debt and the discipline caused by dividend conventions, I think he is profoundly right. And to the extent that
those are the conventional academic explanations, I think it's wisdom he's
giving. It's just the cost of capital thing that always makes me go into orbit.
[Laughter];

Although he did not say so then, Munger has his own idea of how the
cost of investment capital should be measured. Buffett has explained that
at Berkshire, the cost of capital is measured by the company's ability to
create more than $1 of value for every $1 of earnings retained. "If we're
keeping $1 bills that would be worth more in your hands than in ours,
then we've failed to exceed our cost of capital," Buffett said.

A STUDENT ONCE ASKED CHARLIE MUNGER if he and Buffett were fulfilling
their responsibility to share his wisdom:

Sure: Look at Berkshire Hathaway. I call it the ultimate didactic exercise.
Warren's never going to spend any money. He's going to give it back to society. He's just building a platform so people will listen to his notions.
Needless to say, they are very good notions. And the platform's not so had
either. But you could argue that Warren and I are academics in our own
way.4

Both Charlie and Warren are at a phase in their lives when they can
choose their activities, concentrating only on those things that seem to
have meaning and that interest them. Munger has done some public
speaking to law classes at Stanford and the University of Southern California, and to organizations when asked by special friends. He, like Warren,
prefers to talk to young people, to students who are still learning about
life and who have time to implement some of the concepts that the two of
them consider important.

Charlie's speeches are always informally presented, but as was sometimes the case with Ben Graham, his ideas occasionally go over the heads
of the listeners. His method is to present major themes, such as advising listeners to identify the few big ideas that make a difference and try to
live by them. Although he talks about what those ideas might be, he does
not offer a succinct formula, or a simple list of directions, leaving his listeners with the sense of insufficient guidelines. But occasionally he'll cut
right to the hone and lay out a perfect nugget of personal or financial
wisdom.

Some of his lessons are quite practical and apply to life in general and
to financial matters in particular: To those whom much is given, much is
expected. Always live below your financial means so that you will have
money to invest. Invest in such a way so as to avoid the possibility of
falling into a negative position-primarily, by limiting the amount of debt
you use.

"If you want to get smart," Munger said, "the question you have to
keep asking is 'why, why, why?' And you have to relate the answers to a
structure of deep theory. You've got to know the main theories. And it's
mildly laborious, but its also a lot of fun."

From physicists, Munger has learned to solve a problem by seeking
the simplest, most direct answer. The easiest way invariably is the best
way. From mathematicians Munger learned to turn problems upside down
or to look at them backward-invert, always invert.

Munger used this method, inversion, to capture the attention of his
youngest son Philip's graduating class when he gave the commencement
address at Harvard School in 1986. Munger told the students that his prescriptions for life were based on a Johnny Carson speech explaining the
things a person should do to ensure a miserable life. These included ingesting chemicals in an effort to alter mood or perception, and allowing
oneself to indulge in envy and to wallow in resentment. He cited the example of a youthful acquaintance who became an alcoholic, and spent the
rest of his life fighting off all sorts of demons. All or any of Carson's three
behaviors will guarantee an unhappy existence. Then Munger added four
practices that he believes also will help guarantee failure. Be unreliable;
learn everything from your own experience rather than learning from
others; give up trying after your first, second, or third reverse of fortune;
and finally, give in to fuzzy thinking. °... ignore a story they told me
when I was very young about a rustic who said, 'I wish I knew where I
was going to die, and then I'd never go there."