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An Important Lesson From Ben Graham by Charlie Munger

Munger's recounts of one of Ben Graham's teachings.

June 11, 2018

When reading old Outstanding Investor Digest issues today, I bumped into a fascinating story told by Charlie Munger (Trades, Portfolio) during the 1990 Wesco meeting. The story is dubbed an important real life lesson from Ben Graham. Below is Mungers recount of the story and what he thought Ben Graham was trying to teach them:

"Ben Graham was first, second or third in every department at Columbia whether it was physics, mathematics, music, or the classics. He spoke fluent Greek and Latin. He could write poetry in Latin. He was a kind of a polymath and a genius.

Later in life, he came to one of the meetings that people who had learned from him and studied under him had held for some years. And he had a little test that he invented himself. And the average I.Q of those at the meeting was certainly above 150.

Graham gave this little true-false test. And all but one of these people including the one speaking and Warren Buffett (Trades, Portfolio) got less than half of the questions right, again, on a true-false test.

What happened? The answer was that Graham was a very brilliant man. He had deliberately set out to trick us. And he was very good at it. The person who got the highest score actually knew the answers to three of the questions and all the others he just guessed. And using that technique, he got a little better than half of them right."

Munger then shared what he thought Ben Graham was trying to teach them:

"Graham never explained what he was trying to teach us. But I think what he was trying to teach us is that its very hard to demonstrate good judgment and to get correct conclusions when somebody very intelligent is trying to mislead you.

If you create a system with huge incentives in sales and put a lot of high I.Q people into it and say you cant eat unless you sell savings and loans a lot of complex strategies, then you are going to get a fair amount of bull from some very talented people.

Maybe the average savings and loan executive is up to handling it, but all I can say is that Warren Buffett (Trades, Portfolio) and I werent when Ben Graham did it to us."

How to protect yourself from this phenomenon? Mungers answer may not surprise you.

"Luckily, Ben Graham was quite exceptional, so we dont meet many like that. Also, because were quite aware of our inadequacies which are ample we try and operate with what Warren calls our circle of competency. And he and I regard that as a pretty small circle.

A friend of mine when I was very young said, Munger wouldnt know the world was round if it didnt help him in his business We try and figure out what we know and what we dont know. And we tend to stay within our circle".

Hope you enjoyed todays short but classic Mungerism.

About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

Rating: 4.8/5 (20 votes)



Dunyuliu - 2 years ago    Report SPAM

Excellent post as always! Thanks a lot!

Cuttothequickcooking - 2 years ago    Report SPAM

Sherlock Holmes scandalized Dr. Watson when he revealed that he didn't know Copernican theory and the composition of the solar system. Watson challenged Holmes, who replied that he didn't know those things because he didn't need to know them, that the human brain was an "attic" with limited space and he didn't want to clutter it with useless bric-a-brac.

Banker2001 - 2 years ago    Report SPAM

well spoken as always


Josh Zachariah
Josh Zachariah - 1 year ago    Report SPAM
This was the highest ranked article of the last year? Something is wrong with the algorithm or it was a very slow year. 95% of the article is quotations. Why don't I just read Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio)?

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