Just popping in on my writing break to share a 1 lot…
🎙️Stripe’s John Collison Recently Interviewed The Late Charlie Munger (Invest Like The Best)
Loved the rapid fire format. RIP Charlie, a true legend. I’m hesitant to put my favorite excerpts because it’s no substitute for listening to it, but I’m going to anyway to make it easier to quote from in the future.
Excerpts
Did you learn the big ideas in the various disciplines because you were just intellectually curious about them? Or because you thought they’d be instrumentally useful in the work?
Both. I saw instantly, for instance, when I was introduced to the math of Pascal and the elementary probability, I saw immediately how important this math was. My math teacher had no idea that he’d come to a part of the math that was very important in the regular world to everybody, but I saw it immediately and I just utterly mastered it. And I used it. I’m still using it. I used it routinely all my life quite intensely.
And when I got to study in the Harvard Business School, in the early days at the Harvard Business School, they were proudest of something called decision tree theory. And they taught it at the Harvard Business School, a lot of pomp and ceremony and many examples, all these graduate students.
Decision tree theory, it’s a Harvard Business School — in those early days, what they were teaching you was that Pascalian probability math works in real life. Here’s the Harvard Business School needing to do remedial high school math to a bunch of graduate students, and they weren’t wrong. They were right in those days to teach decision tree theory because other people hadn’t mastered probability math the way it should be mastered.
My teacher in high school, if you don’t pay attention to anything else, this stuff you ought to master. And he should explain how carny operators and casinos take advantage of ordinary people. It should have been taught, and it wasn’t taught right in high school, and it wasn’t taught right in college and it wasn’t taught right. Finally, the Harvard Business School got so they taught high school math to graduate students. And you can say how could that be correct? But it’s because the earlier education was so ineffective.
In Poor Charlie’s Almanack, you advocate the multidisciplinary approach and knowing the big ideas from all the different disciplines. And one of the ones that I particularly liked and stuck with me was the one from biology of stable ecosystems and understanding how entities prosper within ecosystems. And in particular how you don’t want necessarily to be in this robber baron, monopolistic, rent extraction position. But instead, businesses that sustain and endure over the long term are ones where they are not rent extracting.
Well, some of the robber barons last a long time. And there are a lot of real estate operators that are basically sleazy. And they don’t even think their business is sound unless they’re doing something sleazy. They’re doing something sleazy, they have a safe advantage. And of course, that’s exactly the opposite to my idea.
My idea is so simple, is that if you make your living selling things to other people that are good for them, that is safer and more profitable averaged out than selling them stuff that’s bad for them like gambling, drugs, crazy religions, all kinds of things that are terrible for people. And so of course, you want to sell things that are good for them. And it’s amazing the people who don’t pay any attention to that rule.
And I think it was sleazy products and investment banking has sort of you willing to sell and the sleazy stuff that compensation consultants are perfectly willing to sell. And I just decided I wasn’t going to do any of that. I was going to sell what kind of stuff that I would buy if I were on the other side. And I also wanted to work with the kind of people that I admired. And that’s a very important thing to learn to just search out the reliable people that you can trust and be the kind of person in dealing with everybody else that they can trust.
It’s just a huge advantage if you start doing that young and keep doing it consistently through life. It isn’t very hard, stay awake in high school math and deal with the good people instead of the bad people and sell what you would buy if you were the buyer, not what you can sell by misleading people. These are very simple ideas. But it’s just absolutely amazing how well they work for people who relentlessly follow these simple ideas.
On Investing
Has investing gotten harder?
Of course, it’s gotten harder, way harder. It’s gotten so hard that most of the people who are in wealth management have an almost zero chance of outperforming an unmanaged index like the S&P.
How has it gotten harder?
There’s so much more of this wealth invested in securities. And so we’ll get a whole lot of big sums to manage. And of course, it’s a long time to buy in, a long time to sell out, costs are higher. And so it’s way harder to manage a large sum of money to make a lot of money at high returns than it is to manage a small sum of money. And then way more brains came into the business. So it’s gotten brutally competitive.
And then we have these manias that get — when things are hot and they’ll start running like the behavior gets almost crazy. It’s almost like a delusion. Of course, it’s harder. And in my lifetime, a guy who just bought the best common stocks and sat on his ass, would have made about 10% per annum before inflation. Maybe 8% after inflation. That is not the standard return that a man can expect from investment. That was a very unusual period in a very unusual place. And I do not anticipate that the average result is going to be nearly that good over the next 100 years.
Why was the results so good? Why was it 10% per annum?
Let’s call it 8% after inflation. The Great Depression so demoralized everybody, they were utterly despised and then the economic system improved a lot. And the combination of the investment climate, the economic situation together evolving, just made it unusually good. If you go back to what the rich people of England did back, say, in 1900, they bought consols (type of perpetual bond), 2.5%, no inflation. Two and a half percent return if you wanted to stay safe, you’d be satisfied with that. No rich people thought there was any safe way of getting 8% if you go back to 1880 among the rich people of England.
And so this is an unusual period. And now everybody who’s in investment management teaches everybody, you’ll get 8% after inflation by dealing with us because that’s the way it worked for the last 100 years. Just because it worked for the last 100 years does not mean it’s going to work for the next 100 years.
So it’s been a period of significant economic growth. I think there’s also maybe the U.S. stock market that has outperformed…
Yes, everything, United States, country prospered, a lot of good stuff happened at once that caused that very good result. It’s not always going to work that way.
What do you think of the SEC?
We’re a lot better with an SEC. The tendency to prosper through financial chicanery in all forms of wealth management is perfectly enormous. So of course, you need something to throttle that back and control it. So I’m glad we have an SEC. It would have been crazy not to have one. By the way, that came in as part of the Roosevelt, and I would argue that its main trouble is that it isn’t tough enough.
Tough enough on what?
Miscreancy. If I were running the SEC and had the power to do it, I wouldn’t allow people to publish a record saying, “Here’s what I did over the last 20 years, when I started with $2 and went up to $200 million.” because it misleads people. And of course, we will create mutual funds, create little ones to get a phony big record. I would forbid that kind of stuff.
I would force everybody who is a big-time money manager to report his investment record per dollar year instead of historical, and that would take the miscreancy out of it. And it would be so simple, and it would radically change the whole industry.
And how many people have you ever heard say it will be mandatory that all wealth management will report its results per dollar year, which would be easier to do mathematically? And it would totally change the way everybody is promoting their service in a way that fosters truth and excellence and a lot of the things.
What I just suggested is so goddamn simple and so obviously required in terms of honorable disclosure, that it ought to be automatic. And yet who has ever suggested — why is little Charlie Munger, 98 years old, think the SEC or the government ought to require that all investment professionals report results per dollar year instead of per historical? Nobody suggest it. But to me, it’s obvious it ought to be required.
And when you say per dollar year, you mean dollar weighted results, basically?
Yes. How much return — for every dollar year, what was your return? And of course, that’s a very different figure. I know of a case of a hedge fund where the proprietor made a lot of money, but per dollar year, the net return was zero. Because when he got a lot of money, he really made a lot of dumb mistakes.
He made a lot of money when this one didn’t matter much. And yet it looks like a wonderful record. But in fact, it was terrible. And why wouldn’t that be a fair thing to require?
The Principal-Agent Problem
It’s very interesting reading the book with the lens post the financial crisis. It’s also interesting to see you railing against derivatives in this a few years before the financial crisis.
That derivative railing was so manipulative and they marked the books like, “Two guys that make a big trade, they both recorded a big profit to their accounts, the accounts would less the profit on both sides.” It’s the same trade. One was reporting a profit, and the other’s reporting a profit. It couldn’t both be — if it gets too easy and too manipulative, and into that culture, the stock brokers, big banking, the guys who did the ordering, they take them to Las Vegas, they buy them a stack of chips, negotiable chips, and give it to them.”
“There was cocaine, they were prostitutes. It was not a pretty culture and kind of tolerated. What do you expect from a bunch of security traders? Everybody knew that his traders were behaving that way, but it was a mistake to let all that stuff to creep in. And it got pretty extreme. And then the bankers deal — that deal that Goldman Sachs did with Malaysia, that sovereign wealth fund…that guy obviously should have been avoided on moral grounds, and prudential grounds, too, but these get so intoxicated by the easy money.
It feels like a lot of the objections you have, sort of, say, professional money managers or Wall Street or whatever, can be summed up by people should be more cognizant of principal agent problems. Is that fair?
You can hardly imagine a field more full principal agents with their money than wealth management. Of course the wealth managers take care of themselves. That includes the foundation manager. A foundation manager basically wants to get $400,000 a year while a professor gets $110,000.
He’s got one way of doing it: picking money managers who get 3% off the top and in various forms of private equity. That’s the only way he justifies his big peso. It’s a principal agent problem. Of course you’re going to want to invest a lot of money with private equity. And of course, private equity is going to do all kinds of horrible things to try and get 3 points off the top. Imagine you get 3 percentage points off the top of somebody else’s money.
It’s a good business model.
You can only do that if you have some miraculous way of making money. By the way, the guys in your field, Jim Simons, Jim Simons is a world-class mathematician. Here’s what he did. He just used his damn computers to identify trading patterns that had deep human psychological background.
One of them was very simple. He took his computer data and he found that patterns in the market as a whole, there are 4 different patterns: win-win, lose-lose, win-lose, and lose-win. If it’s just random, then all 4 are going to be equal. And low and behold, he sifted the data and win-win was more common than win-lose or lose-win. And lose-lose was more common.
So all they had to do is use program at computers to make these modest moderate-sized trades, or big -by his standards were moderate compared to the market. On that basis, the business whirled and whirled, the money just poured out of it.
The tax shenanigans.
Billions poured out of the clearance system. And it was so simple and so elementary. And as a social utility of making money that way is about zero, so if I’d done that, I suppose I would be pleased that I was so clever, but I would have been a bit ashamed of not delivering anything to society in exchange for my big winnings. But luckily, I wasn’t enough of a computer science to even think about such things, and I don’t like short-term trading. And I don’t want to be hanging over some trading desk punching keys.
Why do you think Sequoia has done so well?
Sequoia got early into the game, and it’s a fanatic meritocracy. So they work very hard, all of them. And they’ve gotten big and successful way ahead of everybody else, and they kept writing it like some chip manufacturers, each generation of chips they get. And in the end, they have a file. We have an example.”
“In our apartment houses, we use some little computer program in adjusting the rents or something or other that somebody — and this one little guy, I had him check, Sequoia already had a file on this guy. So every little asshole with a little tiny computer program, they got an army of young guys out there finding every little guy and on big files and so forth.”
“So they see more — they see better opportunities sooner and more than other people. And they’ve got the reputation. So people who are usually successful, they want to go with Sequoia, not some lesser firm. And the combination is just unbeatable. But lately, were they right to go into big Robinhood, but no, they made a huge mistake for Sequoia there, and they shouldn’t have gone…
Morally or…
Morally and professionally, it’s a big mistake. Really stupid. But it got so much, we’ve got to be in every new thing that’s hot. They got to thinking like investment bankers, but it was a huge mistake for Sequoia to get involved with Robinhood and…
Is your objection to Robinhood that it encourages short-term trading and trading options?
Yes, they lie and so forth.
Do they?
Oh my God.
What do they lie about?
Anything that works. They try and sell it, hey, this is a new fraternity of freedom or it’s — the whole thing is a lie.
You don’t like the movement aspect of it.
Oh no, no. They’re trying to create mass hysteria. I don’t like luring people in and screwing them, basically. You’re successful with Sequoia and you’re identified with financing people like Apple and so on, why in the hell would you take Robinhood? It’s totally crazy. You don’t want to do all the business that’s legal for you to do. You want to exclude all kinds of things because it’s beneath you. This shows that you work at these things intelligently. It gets hard, but it doesn’t get impossible.”
But the other side of it is, if you take the — I have been very well located in life. But with minor exceptions, what do I have relative to investments in life? I’ve got Costco stock, Berkshire stock, Li Lu’s China fund and Avi’s apartments. So I have four investments, basically, after 60 years or something — by the way, I feel perfectly adequately diversified. Nobody teaches that’s adequate diversification.
And they’re dead wrong. Simple fact is that it’s easier to find four things that are above average than it is to find 40. It’s not that damned easy to find. You find something that’s almost sure to work because you figure — you’re asking to finding a gold mine in your backyard. When it works, is that easy? How many gold mines are you going to find in your backyard? You shouldn’t expect to have all that many opportunities that are clearly identifiable.
“It’s going to be very hard and you’re lucky if you get only a few in a lifetime. And then you have to be a combination of very patient and very aggressive. You have to sit patiently waiting, watching, surveying, hunting and pounce very occasionally. You get four pounces in a lifetime that really work big time, and that’s a very successful lifetime. And other people think — like that guy on TV, he’s an expert in every company every time. That’s crazy. He’s an expert in saying something that’s mildly plausible. That’s not being an expert investor.
Doesn’t it feel like the narrative on that is changing, where I think people are coming to understand the merits of concentration in positions that really work?
I had dinner with a whole crowd of Fidelity this very week, and they’ve got trillions under management, and they scrape only a modest amount off the top. And they’ve got a wonderful business, but they have the moral problem that they have no possibility at all of exceeding what an index man could do with their common stock investments.
Maybe they have an occasional analyst that’s a little better than average that works into the system. Basically, what they do is they force everybody to be a closet indexer because nobody wants to be an extreme outlier on the losing side because that can destroy your investment management business. But I would argue that the whole damn system is corrupt in investment management.
They take care of the agents way better than they take care of the principals, and they lie to themselves and they lie to others. And that’s our system. And everybody that wants a fair amount of easy money pretty fast. And that requires a plausible narrative. That’s what’s admired now. I regard modern venture capital as investment banking in disguise. Just a little different form of investment banking, same morality, same obsession with a lot of quick wealth. There’s nothing wrong with investment banking, properly done, venture investing.