The quotes were originally posted on 25iq. This article covers Munger's quotes on topics from letters L-O.
LAWYERS:
“…With Congress and the S.E.C. so heavily peopled by lawyers, and with lawyers having been so heavily involved in drafting financial disclosure documents now seen as bogus, there was a new “lawyer” joke every week. One such was: “The butcher says ‘the reputation of lawyers has fallen dramatically', and the check-out clerk replies: “How do you fall dramatically off a pancake?…'”
“The lawyers have escaped most criticism [and undeservedly so]. The tax shelters [were approved by lawyers, who got paid huge commissions to do so] and every miscreant had a high-falutin' lawyer at his side. Why don't more law firms vote with their feet and not take clients who have signs on them that say, “I'm a skunk and will be hard to handle?” I've noticed that firms that avoid trouble over long periods of time have an institutional process that tunes bad clients out. Boy, if I were running a law firm, I'd want a system like that because a lot of firms have a lot of bad clients.”
“[Lawyers who file class-action securities suits] is not a group you would want to marry into your family. “That said, more than half the time the people being sued by the Lerach firm are guilty of outrageous conduct. The problem is, they don't mind (suing) the other half. They are an equal opportunity litigator.”
“Accounting incomes were reduced by discrepancy [but] “the net amount paid by lawyers for lawyerly discrepancy is close to zippo. In this case, the goddess of justice was blind.”
LEGAL SYSTEM:
“The definition of hell in the legal system is: endless due process and no justice; (in the corporate world) it would be: endless due diligence and no horse sense.”
LEADERSHIP:
“There are always people who will be better at something than you are. You have to learn to be a follower before you become a leader.”
“We want very good leaders who have a lot of power,” he said, “and we want to delegate a lot of power to those leaders….It's crazy not to distribute power to people with the most capacity and diligence…Every time I see an opportunity to choose somebody, the second best guy is just awful compared to the guy we hire. Usually the decision is a no-brainer. We have to give power to the people who can wield it efficiently in serious game of survival.”
LEARNING:
“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side. If you can't state arguments against what you believe better than your detractors, you don't know enough.”
“The game is to keep learning, and I don't think people are going to keep learning who don't like the learning process.”
“The name of the game is continuing to learn. Even if you're very well trained and have some natural aptitude, you still need to keep learning”
LEVERAGE (SEE ALSO DEBT):
“Berkshire's past record has been almost ridiculous. If Berkshire had used even half the leverage of, say, Rupert Murdoch, it would be five times its current size.”
LEVERAGED BUY OUTS:
“In the LBO field there is a buried “covariance” with marketable equities, toward disaster in generally bad business conditions, and competition is now extremely intense.”
LIES:
“Lou Vincenti [former Chairman of Wesco], who used to sit here, said, “If you tell the truth, you don't have to remember your lies.”
LIFE:
“You have to realize the truth of biologist Julian Huxley's idea that ‘Life is just one damn relatedness after another' “So you must have the models, and you must see the relatedness and the effects from the relatedness.”
LIQUIDITY:
“I think the notion that liquidity of tradable common stock is a great contributor to capitalism is mostly twaddle. The liquidity gives us these crazy booms, so it has as many problems as virtues.”
LITIGATION:
“Litigation is notoriously time-consuming, inefficient, costly and unpredictable.” Lowenstein at 217
LOYALTY:
“There are exceptional loyalties and there are old fashion ideas about how you get loyalties, and after all the auditorium is full of people who have co-owned shares with the managers for many decades, and in many cases they co-invested when everyone was young and obscure. Also when you come back to a place like that you are celebrating old loyalties, and of course the basic idea behind so much of Berkshire is the old fashioned idea that the best way to get loyalty is to deserve loyalty.”
LUCK:
“Well, some of our success we predicted and some of it was fortuitous. [Regardless,] like most human beings, we took a bow. (Laughter)”
MANAGEMENT:
“I think corporate managers should learn to be better investors because it would make them better managers.”
“Understanding how to be a good investor makes you a better business manager and vice versa.”
“We don't train executives, we find them. If a mountain stands up like Everest, you don't have to be a genius to figure out that it's a high mountain.”
“Our success has come from the lack of oversight we've provided, and our success will continue to be from a lack of oversight. (Laughter) But if you're going to provide minimal oversight, you have to buy carefully. It's a different model from GE's. GE's works – it's just very different from ours.”
“…management matters…. I do not think it takes a genius to understand that Jack Welch was a more insightful person and a better manager than his peers in other companies….you do get an occasional opportunity to get into a wonderful business that's being run by a wonderful manager. And, of course, that's hog heaven day. If you don't load up when you get those opportunities, it's a big mistake.” averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But, very rarely, you find a manager who's so good that you're wise to follow him into what looks like a mediocre business.”
“Good businesses can survive a little bad management.”
MANAGEMNET FEES:
“All the equity investors, in total, will surely bear a performance disadvantage per annum equal to the total croupiers' costs they have jointly elected to bear. This is an inescapable fact of life. And it is also inescapable that exactly half of the investors will get a result below the median result after the croupiers' take, which median result may well be somewhere between unexciting and lousy.”
“Why would you want to invest with a guy whose thought process says, “If a second layer of fees is good, then let's add a third layer.”
“If a foundation, or other investor, wastes 3% of assets per year in unnecessary, nonproductive investment costs in managing a strongly rising stock portfolio, it still feels richer, despite the waste, while the people getting the wasted 3%, “febezzelers” though they are, think they are virtuously earning income. The situation is functioning like undisclosed embezzlement without being self-limited. Indeed, the process can expand for a long while by feeding on itself. And all the while what looks like spending from earned income of the receivers of the wasted 3% is, in substance, spending from a disguised “wealth effect” from rising stock prices. ”
MARGIN OF SAFETY:
“In engineering, people have a big margin of safety. But in the financial world, people don't give a damn about safety. They let it balloon and balloon and balloon. It's aided by false accounting.
MARRIAGE:
“What's the best way to get a good spouse? The best single way is to deserve a good spouse because a good spouse is by definition not nuts.”
MATH:
“If you want to understand science, you have to understand math. In business, if you're enumerate, you're going to be a klutz. The good thing about business is that you don't have to know any higher math….”
“There is bound to be a regression toward the mean.”
“Even in pure mathematics they can't remove all paradox, and the rest of us should also recognize we are going to have to endure a lot of paradox, like it or not.
Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.”
MENTAL MODELS:
“You need a different checklist and different mental models for different companies. I can never make it easy by saying, ‘Here are three things.' You have to derive it yourself to ingrain it in your head for the rest of your life.”
For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldn't stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else's discipline. So I just grabbed in all directions for the big ideas that would really work. Nobody taught me to do that; I was just born with that yen.
“You must know the big ideas in the big disciplines, and use them routinely — all of them, not just a few. Most people are trained in one model — economics, for example — and try to solve all problems in one way. You know the old saying: to the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.”
“If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands”
MISPRICED BETS:
“… we came to this notion of finding a mispriced bet and loading up when we were very confident that we were right….”
MISTAKES:
“The more hard lessons you can learn vicariously rather than through your own hard experience, the better.”
“Although I am very interested in the subject of human misjudgment — and lord knows I've created a good bit of it — I don't think I've created my full statistical share”
“Since mistakes of omission don't appear in the financial statements, most people don't pay attention to them. We rub our noses in mistakes of omission – as we just did.
“The most extreme mistakes in Berkshire's history have been mistakes of omission. We saw it, but didn't act on it. They're huge mistakes — we've lost billions. And we keep doing it. We're getting better at it. We never get over it.” There are two types of mistakes: 1) doing nothing; what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.”
After nearly making a terrible mistake not buying See's, we've made this mistake many times. We are apparently slow learners.
These opportunity costs don't show up on financial statements, but have cost us many billions.
“Chris Davis (Trades, Portfolio) [of the Davis funds] has a temple of shame. He celebrates the things they did that lost them a lot of money. What is also needed is a temple of shame squared for things you didn't do that would have made you rich. Forgetting your mistakes is a terrible error if you are trying to improve your cognition. Reality doesn't remind you. Why not celebrate stupidities in both categories?”
There's no way that you can live an adequate life without [making ] many mistakes.
“Our biggest mistakes, were things we didn't do, companies we didn't buy.”
Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) on How to Avoid Mistakes in Life and Business:
MOATS:
Kellogg's and Campbell's moats have also shrunk due to the increased buying power of supermarkets and companies like Wal-Mart. The muscle power of Wal-Mart and Costco has increased dramatically.”
“How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.”
MONEY:
There are a lot of things in life way more important than money. All that said, some people do get confused. I play golf with a man who says, ” What good is health? You can't buy money with it.”
MONEY MANAGEMENT:
“It's my guess that something like 5% of GDP goes to money management and its attendant friction. I define it broadly – annuities, incentive pay, all trading, etc. Nobody else has used figures that high, but that's my guess. Worst of all, the people doing this are among the best and the brightest. Hundreds and thousands of engineers, etc. are going into hedge funds and investment banking. That is not an intelligent allocation of the brainpower of the civilization.
I think money management is a low calling relative to being a surgeon. I don't like the percentage of our GDP and brainpower and professional effort that's in money management. I don't think it's a good thing for our country, and don't expect it to end well. The present era has no comparable precedent in the history of capitalism when so many people are trading pieces of paper. We have a higher proportion of the intelligent sections of society involved in buying and selling bits of paper and trying to make money doing it. There are more people doing this than at any time in history. A lot of this reminds me of Sodom and Gomorrah.
The general systems of money management [today] require people to pretend to do something they can't do and like something they don't. It's a terrible way to spend your life, but it's very well paid.
“It's natural that you'd have more brains going into money management. There are so many huge incomes in money management and investment banking — it's like ants to sugar. There are huge incentives for a man to take up money management as opposed to, say, physics, and it's a lot easier.”
I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they're purple and green. Do fish really take these lures?” And he said, “Mister, I don't sell to fish.”
INVESTMENT
In investment management today, everybody wants not only to win, but to have a yearly outcome path that never diverges very much from a standard path except on the upside. Well, that is a very artificial, crazy construct. That's the equivalent in investment management to the custom of binding the feet of Chinese women.
I think a select few—a small percentage of the investment managers—can deliver value added. But I don't think brilliance alone is enough to do it. I think that you have to have a little of this discipline of calling your shots and loading up—you want to maximize your chances of becoming one who provides above average real returns for clients over the long pull. But I'm just talking about investment managers engaged in common stock picking. I am agnostic elsewhere. I think there may well be people who are so shrewd about currencies and this, that and the other thing that they can achieve good long term records operating on a pretty big scale in that way. But that doesn't happen to be my milieu. I'm talking about stock picking in American stocks.
The whole concept of the house advantage is an interesting one in modern money management. The terms of the managers of the private partnerships look a lot like the take of the croupier at Monte Carlo, only greater.
MORALS:
Once you start doing something bad, then it's easy to take the next step – and in the end, you're a moral sewer.
We believe there should be a huge area between everything you should do and everything you can do without getting into legal trouble. I don't think you should come anywhere near that line. We don't deserve much credit for this. It helps us make more money. I'd like to believe that we'd behave well even if it didn't work. But more often, we've made extra money from doing the right thing. Ben Franklin said I'm not moral because of it's the right thing to do – but because it's the best policy.
We don't claim to have perfect morals, but at least we have a huge area of things that, while legal, are beneath us. We won't do them. Currently, there's a culture in America that says that anything that won't send you to prison is OK.
“With so much money riding on reported numbers, human nature is to manipulate them. And with so many doing it, you get Serpico effects, where everyone rationalizes that it's okay because everyone else is doing it. It is always thus.”
“The old culture had come out of poverty, out of English customs,” he said. “People did not have the vast sense of entitlement, that they were entitled to be rich. People were damned glad to have a decent job where they might advance.”
It is not always recognized that, to function best, morality should sometimes appear unfair, like most worldly outcomes. The craving for perfect fairness causes a lot of terrible problems in system function. Some systems should be made deliberately unfair to individuals because they'll be fairer on average for all of us. I frequently cite the example of having your career over, in the Navy, if your ship goes aground, even if it wasn't your fault. I say the lack of justice for the one guy that wasn't at fault is way more than made up by a greater justice for everybody when every captain of a ship always sweats blood to make sure the ship doesn't go aground. Tolerating a little unfairness to some to get a greater fairness for all is a model I recommend to all of you.
The cash register did more for human morality than the Congregational Church. It was a really powerful phenomenon to make an economic system work better, just as, in reverse, a system that can be easily defrauded ruins a civilization. A system that's very hard to defraud, like a cash register, helped the economic performance of a civilization by reducing vice, but very few people within economics talk about it in those terms.
MR. MARKET:
“Ben Graham [had] his concept of “Mr. Market”. Instead of thinking the market was efficient, he treated it as a manic-depressive who comes by every day. And some days he says, “I'll sell you some of my interest for way less than you think its worth.” And other days, “Mr. Market” comes by and says, “I'll buy your interest at a price that's way higher than you think its worth.” And you get the option of deciding whether you want to buy more, sell part of what you already have or do nothing at all. To Graham, it was a blessing to be in business with a manic-depressive who gave you this series of options all the time. That was a very significant mental construct….”
MODELS:
“The great economist Keynes, “Better to be roughly right than precisely wrong.”
MUTUAL FUNDS:
“Mutual funds charge 2% per year and then brokers switch people between funds, costing another 3-4 percentage points. The poor guy in the general public is getting a terrible product from the professionals. I think it's disgusting. It's much better to be part of a system that delivers value to the people who buy the product. But if it makes money, we tend to do it in this country.”
“This mutual fund study is roughly right, it raises huge questions about foundation wisdom in changing investment managers all the time as mutual fund investors do. If the extra lag reported in the mutual fund study exists, it is probably caused in considerable measure by folly in constant removal of assets from lagging portfolio managers being forced to liquidate stockholdings, followed by placement of removed assets with new investment managers that have high-pressure, asset-gaining hoses in their mouths
NEWSPAPERS:
“For years I have read the morning paper and harrumphed. There's a lot to harrumph about now.”
It is way less certain to be a wonderful business in the future. The threat is alternative mediums of information. Every newspaper is scrambling to parlay their existing advantage into dominance on the Internet. But it is way less sure [that this will occur] than the certainty 20 years ago that the basic business would grow steadily, so there's more downside risk. The perfectly fabulous economics of this business could become grievously impaired.”
OBJECTIVITY:
“The life of Darwin demonstrates how a turtle may outrun a hare, aided by extreme objectivity, which helps the objective person end up like the only player without a blindfold in a game of Pin the Tail on the Donkey.
OPPORTUNITIES:
The general assumption is that it must be easy to sit behind a desk and people will bring in one good opportunity after another — this was the attitude in venture capital until a few years ago. This was not the case at all for us — we scrounged around for companies to buy. For 20 years, we didn't buy more than one or two per year. …It's fair to say that we were rooting around. There were no commissioned salesmen. Anytime you sit there waiting for a deal to come by, you're in a very dangerous seat.
OPPORTUNITY COSTS:
If you take the best text in economics by Mankinaw, he says intelligent people make decisions based on opportunity costs — in other words, it's your alternatives that matter. That's how we make all of our decisions. The rest of the world has gone off on some kick — there's even a cost of equity capital. A perfectly amazing mental malfunction.
“There is this company in an emerging market that was presented to Warren. His response was, ‘I don't feel more comfortable buying that than I do of adding to Wells Fargo.' He was using that as his opportunity cost. No one can tell me why I shouldn't buy more Wells Fargo. Warren is scanning the world trying to get his opportunity cost as high as he can so that his individual decisions are better.”
Finding a single investment that will return 20% per year for 40 years tends to happen only in dreamland. In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities. That's your opportunity cost. That's what you learn in freshman economics. The game hasn't changed at all. That's why Modern Portfolio Theory is so asinine.
Opportunity cost is a huge filter in life. If you've got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that's the way we filter out buying opportunities”
OVERCONFIDENCE:
Most people who try it don't do well at it. But the trouble is that if even 90% are no good, everyone looks around and says, “I'm the 10%.”
“..in the 5th century B. C. Demosthenes noted that: “What a man wishes, he will believe.” And in self-appraisals of prospects and talents it is the norm, as Demosthenes predicted, for people to be ridiculously over-optimistic. For instance, a careful survey in Sweden showed that 90 percent of automobile drivers considered themselves above average. And people who are successfully selling something, as investment counselors do, make Swedish drivers sound like depressives. Virtually every investment expert's public assessment is that he is above average, no matter what is the evidence to the contrary.”
“[GEICO] got to thinking that, because they were making a lot of money, they knew everything. And they suffered huge losses. All they had to do was to cut out all the folly and go back to the perfectly wonderful business that was lying there.
