Money Wisdom – from Physics, Biology, Psychology and Magic

This great lecture, given by Charles Munger (Vice-Chairman of Berkshire Hathaway), was one of the best I’ve read for a while. It’s ‘dessert’ is his advice on how to pick stocks, but the ‘vegetables’ might be the most nourishing part: a series of analogies (from fields as diverse as biology, psychology, and even magic) useful in understanding the art of making money, and living well.

I liked his analogy of the advantages of finding niches (in nature as well as businesses) to find good economics. And a really good look at the advantages of scale – why it is such a non-brainer – but which can be beaten by the ‘niche’ technique. Also, some fields naturally destroy profit for everybody as they become more efficient – whereas others maintain profitability for everyone.

Charles Munger

Charles Munger

The Wal-Mart story is good too – how old Sam Walton beat the big guys by learning their rules, and playing them better than his mentors. And how he couldn’t take on the big guys in the early days, so he beat (other) little guys dozens of times, getting stronger each time. Eventually, he became the strongest retailer in the nation, which is quite a Taoist model of success.

Other topics covered – Surfing and the Early Bird advantages, finding and developing your own circle of competence, only ‘playing’ (or working) when you have a substantial advantage. The ‘Geiger counter’ technique of picking such advantages.

The one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.

It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced be—that they can occasionally find one.

And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

Berkshire Hathaway made the majority of its billions betting heavily on perhaps spotting just 10 sure-thing mispriced insights, and then consciously sitting on its hands for the other 90% of the time. It is the last thing that most people find too difficult to do, since it seems to go against our ego’s idea of ourselves as geniuses. But the market is almost a perfect system. And it probably applies as much to people in the service industries as picking stocks et cetera. Working more often, or harder, is not always the best way to go.

When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”

He says, “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

There is a great FedEx example Munger gives – when even the most difficult problems were solved merely by paying people to finish a job at the center of the problem, rather than by the hour (the importance of incentives). And when it comes to selling to people? His story is great 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.”

It is a long article, so I’ll leave it to Munger to explain about the joy of finding businesses where you can easily double the price, and not lose many customers. Or, keeping the macro view in buying shares:

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

You can read a transcript of the whole lecture here.



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