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MungerGoesMental
http://www.fool.com/investing/general/2004/06/04/mungergoesmental.aspx
WhitneyTilson
June4,2004
BerkshireHathaway's(NYSE:BRK.A)(NYSE:BRK.B)WarrenBuffettandCharlieMungerare
undoubtedlythegreatestinvestmentduoever,soIthinkanysensibleinvestorshouldtrytolearnas
muchaspossibleaboutthesetwomenandhowtheyachievedtheirsuccess.InthecaseofBuffett,it's
nothardtherearemanybooksabouthim,he'spublishedlengthyannuallettersfordecades(youcan
readthelast27ofthemforfreeonBerkshire'swebsite),andhegivesspeechesandmakespublic
appearancesregularly.ButMungerismoreprivatethereareonlytwobooksabouthim,heisafarless
prolificwriter,andrarelygivesspeeches.
Thus,myheartskippedabeatwhenafriendgavemearecordingofaspeechMungergavetothe
economicsdepartmentattheUniversityofCalifornia,SantaBarbaralastOct.3.It's85minuteslong
andentitled,"AcademicEconomics:StrengthsandFaultsAfterConsideringInterdisciplinaryNeeds."
Withthatkindoftitle,itsoundslikearealsnoozer,eh?Butit'snot.Inthisspeech,Mungerapplieshis
famousmentalmodelsapproachtocritiquinghoweconomicsistaughtandpracticed,andIthinkthe
lessonsheteachesareprofoundbothforinvestorsaswellasanyonewhoseekstobeabetter,
clearerthinker.
Itranscribedthespeechformyownbenefit,butaftermakingsuchaneffort(ittookforever,asit's21
singlespacedpages),IthoughtthatothersmightbeinterestedinMunger'swisdom,soIsenthima
copyandaskedifIcouldpublishit.Heaskedmenottountilhe'dhadachancetoreviewitandmake
someedits.Hehasnowdoneso,soI'mdelightedtoshareitwithyou:Clickheretoreadit.
Inthiscolumn,Iwillsharesomeofthehighlightsofthespeech.
Berkshire'ssuccess
Mungerstartedhisspeechbyhighlightinghiscredentialstotalkabouteconomicsnamelythe
extraordinarysuccessofBerkshireHathawayovertheyearsheandBuffetthavebeenrunningit
(BuffettranitforafewyearsbeforeMungerjoinedhim):
WhenWarrentookoverBerkshire,themarketcapitalizationwasabouttenmilliondollars.
Andfortysomethingyearslater,therearenotmanymoresharesoutstandingnowthan
therewerethen,andthemarketcapitalizationisaboutahundredbilliondollars,ten
thousandforone.Andsincethathashappened,yearafteryear,inkindofagrindahead
fashion,withveryfewfailures,iteventuallydrewsomeattention,indicatingthatmaybe
WarrenandIknewsomethingusefulinmicroeconomics.
Efficientmarkettheory
BuffettandMungerhavealwaysheapedscornupontheacademicswhoclingtotheefficientmarket
theory,unabletodistinguishbetweenanobvioustruththatthemarketismostlyefficientmostofthe
timeandobviousnonsensethatthemarketisalwaysperfectlyefficientallofthetime:
Berkshire'swholerecordhasbeenachievedwithoutpayingoneounceofattentiontothe
efficientmarkettheoryinitshardform.Andnotoneounceofattentiontothe
descendantsofthatidea,whichcameoutofacademiceconomicsandwentintocorporate
financeandmorphedintosuchobscenitiesasthecapitalassetpricingmodel,whichwe
alsopaidnoattentionto.Ithinkyou'dhavetobelieveinthetoothfairytobelievethat
youcouldeasilyoutperformthemarketbysevenpercentagepointsperannumjustby
investinginhighvolatilitystocks.Yet.manypeoplestillbelieveit.ButBerkshireneverpaid
anyattentiontoit.
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Multidisciplinaryeducationand"manwithahammersyndrome"
Overtheyears,Mungerhasalwayspreachedtheimportanceoflearningandthenusingallofthe
bigdisciplines,suchasmath,science,psychology,etc.Tohim,thisjustcamenaturally:
Forsomeoddreason,Ihadanearlyandextrememultidisciplinarycastofmind.Icouldn't
standreachingforasmallideainmyowndisciplinewhentherewasabigidearightover
thefenceinsomebodyelse'sdiscipline.SoIjustgrabbedinalldirectionsforthebigideas
thatwouldreallywork.NobodytaughtmetodothatIwasjustbornwiththatyen.
Ifonedoesn'tembraceallmultidisciplinarythinking,Mungerargues,thenoneislikelytofallintothe
trapof:
"manwithahammersyndrome."Andthat'stakenfromthefolksaying:Tothemanwith
onlyahammer,everyproblemlooksprettymuchlikeanail.Andthatworksmarvelously
togumupallprofessions,andalldepartmentsofacademia,andindeedmostpracticallife.
Theonlyantidoteforbeinganabsoluteklutzduetothepresenceofamanwithahammer
syndromeistohaveafullkitoftools.Youdon'thavejustahammer.You'vegotallthe
tools.Andyou'vegottohaveonemoretrick.You'vegottousethosetoolscheckliststyle,
becauseyou'llmissalotifyoujusthopethattherighttoolisgoingtopopupunaided
wheneveryouneedit.
Problemstosolve
Duringhisspeech,toillustratethetypesofquestionshiswaysofthinkingwillhelpanswer,Munger
posedanumberofproblemstosolve:
1.There'sanactivityinAmerica,withoneononecontests,andanationalchampionship.Thesame
personwonthechampionshipontwooccasionsabout65yearsapart.Nametheactivity.
2.Youhavestudiedsupplyanddemandcurves.Youhavelearnedthatwhenyouraisetheprice,
ordinarilythevolumeyoucansellgoesdown,andwhenyoureducetheprice,thevolumeyou
cansellgoesup.Nowtellmeseveralinstanceswhen,ifyouwantthephysicalvolumetogoup,
thecorrectansweristoincreasetheprice?
3.YouownasmallcasinoinLasVegas.Ithas50standardslotmachines.Identicalinappearance,
they'reidenticalinthefunction.Theyhaveexactlythesamepayoutratios.Thethingsthatcause
thepayoutsareexactlythesame.Theyoccurinthesamepercentages.Butthere'sonemachine
inthisgroupofslotmachinesthat,nomatterwhereyouputitamongthe50,infairlyshort
order,whenyougotothemachinesattheendoftheday,therewillbe25%morewinningsfrom
thisonemachinethanfromanyothermachine.Whatisdifferentaboutthatheavywinning
machine?
Fortheanswerstothesequestions,you'llhavetoreadthetranscript.
Secondandthirdorderconsequencesandfreetrade
Mungergaveanumberofexamplesofhowoftenpeopleonlylookatimmediateconsequencesof
certainactionsandfailtoconsidersecondandthirdorderconsequences.Forexample:
Everybodyineconomicsunderstandsthatcomparativeadvantageisabigdeal,whenone
considersfirstorderadvantagesintradefromtheRicardoeffect.Butsupposeyou'vegot
averytalentedethnicgroup,liketheChinese,andthey'reverypoorandbackward,and
you'reanadvancednation,andyoucreatefreetradewithChina,anditgoesonforalong
time.
Nowlet'sfollowandsecondandthirdorderconsequences:Youaremoreprosperousthan
youwouldhavebeenifyouhadn'ttradedwithChinaintermsofaveragewellbeinginthe
U.S.,right?Ricardoprovedit.Butwhichnationisgoingtobegrowingfasterineconomic
terms?It'sobviouslyChina.They'reabsorbingallthemoderntechnologyoftheworld
throughthisgreatfacilitatorinfreetradeand,liketheAsianTigershaveproved,theywill
getaheadfast.LookatHongKong.LookatTaiwan.LookatearlyJapan.So,youstartina
placewhereyou'vegotaweaknationofbackwardpeasants,abillionandaquarterof
them,andintheendthey'regoingtobeamuchbigger,strongernationthanyouare,
maybeevenhavingmoreandbetteratomicbombs.Well,Ricardodidnotprovethatthat's
awonderfuloutcomefortheformerleadingnation.Hedidn'ttrytodeterminesecond
orderandhigherordereffects.
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Ifyoutryandtalklikethistoaneconomicsprofessor,andI'vedonethisthreetimes,they
shrinkinhorrorandoffensebecausetheydon'tlikethiskindoftalk.Itreallygumsupthis
nicedisciplineoftheirs,whichissomuchsimplerwhenyouignoresecondandthirdorder
consequences.
Openmindedness
Howmanypeopledoyouknowwhoactivelyseekoutopinionscontrarytotheirown?Mungercertainly
does.Forexample,hesaid:
.takePaulKrugmanandreadhisessays,youwillbeimpressedbyhisfluency.Ican'tstand
hispoliticsI'montheotherside.[KrugmanconstantlybashesRepublicansandtheBush
administrationontheOpEdpageofTheNewYorkTimes.]ButIlovethisman'sessays.I
thinkPaulKrugmanisoneofthebestessayistsalive.
Destroyingyourownbestlovedideas
Mungerbelievesthatit'sabsolutelycriticalnotto"clingtofailedideas."Youmustbecomegood,he
argues,"atdestroyingyourownbestlovedandhardestwonideas.Ifyoucangetreallygoodat
destroyingyourownwrongideas,thatisagreatgift."
Howimportantthisiswhenitcomestoinvesting!Notlongago,Ipubliclyrecommendedastock,yeta
fewweekslater,basedonnewinformation,Icametotheconclusionthatitwasnolongeragoodidea.
AnaturaltendencywouldhavebeentoholdontothestockandrefusetoadmittomyreadersthatI
mighthavebeenmistaken.Makingitevenhardertosellwasthefactthatthestockhaddeclinedwhy
notwaituntilitreboundedtothepriceatwhichIhadboughtit,right?(Thisisadeadlyerror,asI've
discussedinpreviouscolumns.)Fortunately,Ididsell,refusingto"clingtofailedideas."
Chutzpah
I'llconcludethiscolumnwithabitofclassicMungerhumor:WhileBuffettbendsoverbackwardto
appearhumble,Munger'stheoppositehejokesabouthisbigego.Inhisopeningremarks,hesaid:
AsItalkaboutstrengthsandweaknessesinacademiceconomics,oneinterestingfactyou
areentitledtoknowisthatInevertookacourseineconomics.Andwiththisstrikinglack
ofcredentials,youmaywonderwhyIhavethechutzpahtobeupheregivingthistalk.
TheanswerisIhaveablackbeltinchutzpah.Iwasbornwithit.
ContributorWhitneyTilsonisalongtimeguestcolumnistforTheMotleyFool.Heownedsharesof
BerkshireHathawayatpresstime,thoughpositionsmaychangeatanytime.Undernocircumstances
doesthisinformationrepresentarecommendationtobuy,sell,orholdanysecurity.Mr.Tilson
appreciatesyourfeedback.ToreadhispreviouscolumnsforTheMotleyFoolandotherwritings,visit
www.tilsonfunds.com.TheMotleyFoolisinvestorswritingforinvestors.
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