Warren Buffett’s “Partner” and Right Hand
HE DISCOVERED ‘LOLLAPALOOZA’ EFFECT
a lollapalooza effect is a combination of factors, filtered through multidisciplinary models that lead to an outstanding result.
ONE OF THE FINEST INVESTORS
Vice-Chairman of Berkshire Hathaway Corporation
Chairperson of Wesco Financial Corporation
Chairperson of the Daily Journal Corporation
An American Shareholder, Attorney, Business tycoon, and Philanthropist
Charlie Munger is the Chairperson of Wesco Financial and of Berkshire Hathaway, where his lasting partner Warren Buffett serves as Chairperson. Buffett and Munger both are natives of Omaha, Nebraska. After studying mathematics at the University of Michigan and serving the U.S. Army Air Corps in the capacity of a meteorologist, he entered Harvard Law School without an undergraduate degree. After graduating in 1948 with a Juris Doctor Magna cum laude, he founded Tolles & Olson LLP and worked as a real estate attorney, until 1965. He then gave up the practice of law to give attention to managing investments. In his book Poor Charlie’s Almanack, Munger has introduced the concept of “Elementary, Worldly Wisdom” as it relates to business and finance. Munger’s worldly wisdom consists of a set of mental models framed as a latticework to help solve critical business problems. He has given an investment and business related design of “Elementary, Worldly Wisdom,” that comprises of a set of mental models that required giving answers to business-related problems.
Mental models echo his business philosophy. He states that for accomplishment in business one should be fair. All businesses based on immoral strategies fall down in the end. He believes that Americans have to face an insolvent financial state of affairs in the future because of flawed banking configurations. He used a term “Lollapalooza Effect” for a situation when numerous prejudices, inclinations, or mental models are active at associated times and trends. He considers Tupperware parties and open outcry auctions as a best example for the situation of “Lollapalooza Effect.” In March 2003, Rich Rockwood published his paper on The Munger Network of Mental Models
Below is Charlie Munger’s track record pre-Berkshire Hathaway days:
Annual percentage change Partnership DJIA 1962 30.1 -7.6 1963 71.7 20.6 1964 49.7 18.7 1965 8.4 14.2 1966 12.4 -15.8 1967 56.2 19.0 1968 40.4 7.7 1969 28.3 -11.6 1970 -0.1 8.7 1971 25.4 9.8 1972 8.3 18.2 1973 -31.9 -13.1 1974 -31.5 -23.1 1975 73.2 44.4 Average Return 24.3 6.4 Standard Deviation 33.0 18.5 Minimum -31.9 -23.1 Maximum 73.2 44.4 [Compound annual return] 19.8 4.9
Charlie Munger was born in Omaha, Nebraska, in January 1, 1924. Charles Thomas Munger, known as Charlie, studied mathematics from the University of Michigan. He graduated in 1948 from Harvard Law School. Later he left law to focus on investment. The early life of Charlie Munger is full of tragedies. At the age of 21, he got married, but after 8 years, they divorced. His wife kept everything and he left home with his children in pathetic conditions. After a year of that his 9 years old son Teddy Munger died of cancer. Later, because of escalating pain, doctors removed one of his eyes. Around 35 years of age, he again got married and now has 8 children and many grandchildren. At the age of 25, his annual pay was $29,851. Now his pay is $1 billion. At the age of 69, he was one of the 400 richest people in the world.
Munger is a Republican, as opposed to Warren Buffett, who is a Democrat.
Before graduation, Charlie Munger qualified at Caltech and served in the U.S. Army Air Corps.
After graduation, he was an active member of the Harvard Legal Aid Bureau. He was a founder and employee as a property lawyer at Munger, Tolles & Olson LLP, since 1965. He and Otis Booth were associates in real estate progress. Charlie Munger and Jack Wheeler established the Wheeler, Munger, and Company, an investment firm, as partners. They closed the business in 1976 after 31% losses in 1973-74.
Currently, he is a Vice-Chairperson of Berkshire Hathaway Corporation. Warren Buffett (second richest man in the world), is the Chairperson of the Corporation. Buffett has publically acknowledged Charlie Munger as “my partner.” Charlie does not engage in the daily procedures of Berkshire, rather, he has investment as part of a wide variety of pursuits. He is a Chairperson of Wesco Financial Corporation, based in Pasadena, California. Wesco Financial Corporation is a subsidiary of Berkshire Hathaway Corporation. He is also a Chairperson of the Daily Journal Corporation, based in Los Angeles, California.
CHARLIE MUNGER & WARREN BUFFETT
Fortune Magazine’s 2006 profile of Munger includes this apt description of how the two men interact on stage during the marathon Q&A session that highlights each year’s Berkshire Hathaway shareholders meeting in Omaha:
“Over the years, the Buffett-and-Munger show has taken on a somewhat mechanical maneuvering. The two men sit center stage, in front of a dark sea of shareholders. Questions are usually answered first by Buffett, who will answer and then stroll a bit in his unique way often with a one-liner or two mixed in for five minutes or so. At that point, he will look over to his partner and inquire, ‘Charlie?’ Then one of two things occurs: Munger will either lean in or make a pointed, pithy, and often scathing comment that sometimes elicits gasps or loud guffaws from the crowd. On the other hand, Munger will simply remark, ‘I have nothing to say’.”
Performance of Berkshire Hathaway Book Value
|Year||Return (%)||S&P500 (%)||Excess Gain (%)|
HIS ADVICE ON CARRYING OUT INVESTMENT
- While carrying out any investment assessment, first calculate risk.
- Make decisions on your own and be self-determining. After listing risks, you make decisions based on involved risks. Whatever you decide, you should be be self-determining regarding your decisions and actions.
- Plan to encompass a few imminent, possible complications.
- Being humble and admitting where you are deficient the first step towards perception. Committing mistakes is human, and admitting your mistakes is part of being humble.
- In order to reduce errors and mistakes, investigate thoroughly. Accepting mistakes is good but nothing is as good as avoiding mistakes.
- While making any investment capital is assigned, allocating capital and assets intelligently is a must.
- Oppose the normal inclination to do something and have patience.
- In appropriate situations, be determined and confident.
- Accept change. Change is a common phenomenon of any business and investment so recognize, accept, and acknowledge it instead of fighting it tooth and nail.
- Pay attention. When you lack attention and concentration, you’ve taken your first step towards failure.
Charlie Munger has donated and funded much in the shape of hard money or in a form of his shares. He was too young when he left his law profession but he helped many legal institutions for providing good services to law students. Stanford Law School is one of them. He generously contributed shares equal to 43.5 million dollars, to Stanford University, for the Construction of Residences for Stanford Law School. Another case in point of his generosity is his donations of three million dollars to the University of Michigan Law School in the year 2007, for upgrading lighting in Hutchins Hall and the William W. Cook Legal Research. Therefore, those students can study books without having strain on their eyes. He further contributed 23 million dollars to Lawyer School for the restoration of their Lawyer Club Residencies in the year 2011. Those residencies are named on his name. His generously and philanthropy is not limited for lawyers only, he also contributed for the reconstruction of Green Library. Specifically he made the following donations.
- For the Construction of Residences for Stanford Law School, he contributed shares equal to 43.5 million dollars, to Stanford University.
- He contributed for the renovation of Green Library after wide-ranging harm by the Loma Prieta Earthquake.
- For lighting improvements in Hutchins Hall and the William W. Cook Legal Research, Charlie Munger donated 3 million dollars to the University of Michigan Law School in 2007.
- For restoration of Lawyers Club Residencies, Charlie Munger donated 23 million dollars, to the Lawyer School in 2011.
SPEECHES AND WRITINGS AS A PHILANTHROPIST
- Master’s Class: Berkshire Hathaway’s vice chairman shreds the conventional wisdom on foundation investing- March, 1999
- The Investment Practices of Charitable Foundations– 14 October, 1998
CHARLIE MUNGER QUOTES
- All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.
- The best thing a human being can do is to help another human being know more.
- Acquire worldly wisdom and adjust your behavior accordingly. If you are new, behavior gives you a little temporary unpopularity with your peer group then to hell with them.
- In my whole life, I have known no wise people (over a broad subject matter area) who did not read all the time – none, zero.
- Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. Then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available because of prudence and patience in the past.
- I find it quite useful to think of a free-Market economy – or partly free Market economy – as sort of the equivalent of an ecosystem. Just as animals flourish in niches, people who specialize in some narrow niche can do very well.
- The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you are paying for. Move only when you have an advantage.
- Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.
- It is not given to human beings to have such talent that they can just know everything about everything all the time. However, it is given to human beings who work hard at it. Who look and sift the world for a mispriced bet – that they can occasionally find one.
- In addition, 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 is just that simple.
- Mimicking the herd invites regression to the mean.
- Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.
- Acknowledging what you do not know is the dawning of wisdom.
- Above all, never fool yourself, and remember that you are the easiest person to fool.
- Determine value apart from price; progress apart from activity; wealth apart from size.
- Recognize reality even when you do not like it – especially when you don’t like it.
- Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.
- I think records of accomplishment are very important. If you start early trying to have a perfect one in some simple thing like honesty, you are well on your way to success in this world.
- We try more to profit from always remembering the obvious than from grasping the esoteric.
- Intelligent people make decisions based on opportunity costs.
- If all you succeed in doing in life is getting rich by buying little pieces of paper, it is a failed life. Life is more than being shrewd in wealth accumulation.
- Someone will always be getting richer faster than you. This is not a tragedy.
- Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.
- Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you are not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you will end up with one hell of a result.
- You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. Nevertheless, there are also cases where you have to recognize that you have no wisdom to add – and that your best course is to trust some expert.
- The safest way to try to get what you want is to try to deserve what you want. It is such a simple idea. It is the golden rule. You want to deliver to the world what you would buy if you were on the other end.
- I am not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I have reached that state.
- Thinking that what is good for you is good for the wider civilization, and rationalizing foolish or evil conduct, based on your subconscious tendency to serve yourself, is a terrible way to think.
- If you do not allow for self-serving bias in the conduct of others, you are, again, a fool.
- Avoid working directly under somebody you do not admire and don’t want to be like.
- Intense interest in any subject is indispensable if you are really going to excel in it.
- Never, ever, think about something else when you should be thinking about the power of incentives.
- Fixable but unfixed bad performance is bad character and tends to create more of it, causing more damage to the excuse giver with each tolerated instance.
- Everybody engaged in complex work needs colleagues. Just the discipline of having to put your thoughts in
- Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail.
- In my whole life, I have known no wise people who did not read all the time-none, zero. You would be amazed at how much Warren reads-and at how much I read. My children laugh at me, they think I’m a book with a couple of legs sticking out
BOOKS RECOMMENDED BY CHARLIE MUNGER
- Fiasco: The Inside Story of a Wall Street Trader by Frank Partnoy
- Ice Age by John & Mary Gribbin
- Deep Simplicity by John Gribbin
- How the Scots Invented the Modern World: The True Story of How Western Europe’s Poorest Nation Created Our World & Everything in It by Arthur Herman
- Models of My Life by Herb Simon
- A Matter of Degrees: What Temperature Reveals about the Past and Future of Our Species, Planet, and Universe by Gino Segre
- Andrew Carnegie by Joseph Frazier Wall
- Guns, Germs, and Steel: The Fates of Human SocietiesJared Diamond
- The Third Chimpanzee by Jared Diamond
- Influence: The Psychology of Persuasion by Robert B. Cialdini
- Autobiography of Benjamin Franklin
- Living within Limits: Ecology, Economics, and Population Taboos by Garrett Hardin
- The Selfish Gene by Richard Dawkins
- Titan: The Life of John D. Rockefeller, Sr., Sr. by Ron Chernow
- The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David S. Landes
- The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy by Robert Hagstrom
- Genome: The Autobiography of a Species in 23 Chapters (P.S.) by Matt Ridley
- Getting It Done: How to Lead When You’re Not in Charge by Roger Fisher and Alan Sharp
- Three Scientists and Their Gods: Looking for Meaning in an Age of Information by Robert Wright
- Only the Paranoid Survive by Andy Grove
BOOKS ON and By CHARLIE MUNGER
Seeking Wisdom: From Darwin to Munger by Peter Bevelin (2008)
Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger by Peter D. Kaufman (2008)
Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Januaret Lowe (2003)
Of Permanent Value by Andrew Kilpatrick
LETTERS TO SHAREHOLDERS
FROM CHARLES T. MUNGER, CHAIRMAN,
APPEARING IN ANNUAL REPORTS FOR YEARS SHOWN BELOW (WESCO was recently bought out by Warren Buffett’s Berkshire Hathaway)
SPEECHES AND LETTERS BY CHARLIE MUNGERR
1. Dueling Views of Reform – 21st June 2004
2. Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs – 3rd October, 2003
3. Munger on Human Misjudgments – 21st August, 2002
6. Letter to Wesco Shareholder -1989 (http://boards.fool.com/Message.asp?mid=13640415)
7. Resignation letter from the U.S. League of Savings Institutions – 30th May, 1989
8. How We Can Restore Confidence – 2009
CHARLIE MUNGER’S AUDIO INTERVIEW
80 minutes Audio interview of Charlie Munger on the Psychology of Human Misjudgment is accessible from the link given at http://futile.free.fr/cmeng.html
CHARLIE MUNGER IN NEWS
- BBC NEWS Business Charlie Munger Boom and Bust Is No
- CNBC With Charlie Munger and Mario Gabelli
- Charlie Munger: China, Bank Regulation and Lehman- CNN
CHARLIE MUNGER IN VIDEOS
Old News Articles That Includes Charlie Munger:
- Berkshire shares stumbles after billionaire’s remarks March 1996
- Buffet’s devotees stand by their men May 1997
- Even in the `Alice in Wonderland’ World of S&Ls, There’s Money to Be Made June 1989
- Your Money; 40,000 New Believers Welcomed; Investor: Buffett issues ‘owner’s manual’ outlining Berkshire Hathaway principles. June 1996
- A bearing bulletin from Omaha oracle March 1993