Value Investing

Charlie Munger: Are You A One-Legged Investor In A Butt-Kicking Contest?

Charlie Munger: Are You A One-Legged Investor In A Butt-Kicking Contest?

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In a speech to a class of students at USC in 1994, Charlie Munger talked about a whole bunch of topics. One of them was about probability. In the speech (with excerpt below), Charlie Munger said, "If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest. You're giving a huge advantage to everybody else. One of the advantages of a fellow like Buffett, whom I've worked with all these years, is that he automatically thinks in terms of decision trees and the elementary math of permutations and combinations...."

Insurance, S&C Messina's area of focus, works because of probability - we'll go into the role of probability in insurance more in our next post.

But to give you something to chew on, please enjoy the excerpt below from Charlie Munger's speech in 1994:

Excerpt:

YOU'RE GIVING A HUGE ADVANTAGE TO OTHERS IF YOU DON'T LEARN THIS SIMPLE TECHNIQUE. ----

---- The great useful model is permutations & combinations.

Charlie Munger: First there's mathematics. Obviously, you've got to he able to handle numbers and quantities - basic arithmetic. And the great useful model, after compound interest, is the elementary math of permutations and combinations. And that was taught in my day in the sophomore year in high school. I suppose by now in great private schools, it's probably down to the eighth grade or so. It's very simple algebra. And it was all worked out in the course of about one year in correspondence between Pascal and Fermat. They worked it out casually in a series of letters. Your brain isn't designed to figure it out spontaneously.

Charlie Munger: It's not that hard to learn. What is hard is to get so you use it routinely almost everyday of your life. The Fermat/Pascal system is dramatically consonant with the way that the world works. And it's fundamental truth. So you simply have to have the technique. Many educational institutions - although not nearly enough - have realized this. At Harvard Business School, the great quantitative thing that bonds the first-year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real life problems. And the students love it. They're amazed to find that high school algebra works in life.... By and large. as it works out, people can't naturally and automatically do this. If you understand elementary psychology, the reason they can't is really quite simple: The basic neural network of the brain is there through broad genetic and cultural evolution. And it's not Fermat/Pascal. It uses a very crude, shortcut-type of approximation. It's got elements of Fermat/Pascal in it. However, it's not good. Without it, you're giving a huge advantage to others....

Charlie Munger: So you have to learn in a very usable way this very elementary math and use it routinely in life - just the way if you want to become a golfer, you can't use the natural swing that broad evolution gave you. You have to learn to have a certain grip and swing in a different way to realize your full potential as a golfer. If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest. You're giving a huge advantage to everybody else. One of the advantages of a fellow like Buffett, whom I've worked with all these years, is that he automatically thinks in terms of decision trees and the elementary math of permutations and combinations....

Charlie Munger Do Nothing Investing
Do Nothing Investing

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