Charlie Munger on being fair

From the Berkshire 2011 Annual Meeting (as quoted in Charlie Munger: The Complete Investor):

Generally speaking, where Berkshire has the power, we try to be more than fair to the minority who don’t have the power and who depend on us. You can say, “Aren’t they wonderful, moral people?” I’m not sure we get credit for a lot of morality because we early knew how advantageous that would be to get a reputation for doing the right thing and it’s worked out well for us. And my friend Peter Kaufman said, “If the rascals really knew how well honor worked, they would come to it.” It really has worked well. People make contracts with Berkshire all the time because they trust us to behave well where we have the power and they don’t. There’s an old expression on this subject, which is really an expression on moral theory: “How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.” It’s such a simple idea but it’s a correct idea. 

Links

Scott Adams: Try This Trick to Improve Focus (LINK)

A rare interview with Frank Martin, via the always excellent work of The Manual of Ideas (LINK)

Related link: Frank Martin's 2014 Annual Letter

The Brooklyn Investor comments on the Berkshire Hathaway Annual Report (LINK)

Related previous post: A few comments on the Berkshire Hathaway letter to shareholders

Tim Ferriss talks with Mark Hart and Raoul Pal on his podcast: Hedge Funds, Investing, and Optimizing Lifestyle (LINK)

The British Origins of the US Endowment Model (LINK)

Ross Ashcroft talks to George Cooper, author of Money, Blood and Revolution (audio) (LINK)

Five Good Questions for Scott Fearon about his book Dead Companies Walking (LINK)

An interview with Jony Ive: The man behind the Apple Watch (LINK)

StarTalk Live! Podcast: Evolution with Richard Dawkins and Bill Nye (Part 1) (LINK) [Related books, in what I think is a decent order in which to read them, HERE.]

Quote of the day, which has been posted on the blog before HERE, but is worth repeating many times over: “Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.” (The article it originally came from was a January 2014 article describing Peyton Manning, HERE.)

That quote also led me back to another excerpt from that same ECAM letter, which described one of the biggest sources of business (and investment) failure:

Overreaching is one of most common causes of death in trees as it creates an air pocket in the trees’ pipes, xylem, which is why trees will often rot from the inside out. 

Enduring businesses avoid this fate by employing resolute incremental growth. The stewards of these enduring businesses know that most business failures are the direct result of overreaching. Instead of incremental progress, they overreach in an effort to ‘get theirs now.’ Quite often, that unnecessary “extra” decays the organization from the inside out. If you study business failure, you can point to overreaching as the single biggest cause of dialectical materialism in business. We see it every day in the marketplace, in how management rewards themselves with options, and in how management teams follow inferior mergers and acquisitions strategies. How often do we see mergers and acquisitions work well in biology? It is a biologically flawed objective, so why should it work seamlessly in business? It is a short-cut strategy to produce growth that often creates that same embolism that will eventually rot the decent business as they try to merge contrasting DNAs. There are evolved business systems that can integrate mergers and acquisitions well, but they are outliers.

And both the quote and excerpt above also reminded me of a reply Peter Bevelin gave in one of my interviews with him:

As Munger says: “All I want to know is where I’m going to die so I’ll never go there.” When I hear them at the annual meeting, I am thinking about Einstein’s reply to a student. The student had challenged Einstein’s statement that the laws of physics should be simple by asking: “What if they aren’t simple?” Einstein replied, “Then I would not be interested in them.”  

They have a unique ability to distinguish masses of trivia from what is really important – to filter out situations, and find what’s at their core. They tell the simple, blunt truth rather than say things that sound good.

Links

There a connection I just noticed between Peter Kaufman's idea of ‘exploiting unrecognized simplicities’ and Nassim Taleb's idea of implementation and the half-invented, for those that also find it interesting.

Robert Shiller Spotted the Last Two Bubbles—Here’s What He Says About the Bond Boom (LINK)

Related book (soon-to-be-released 3rd edition): Irrational Exuberance

The Simple Concept of Intrinsic Value (LINK)

Kyle Bass: We'll go after drugmakers' patents (LINK)

Investment Firm 3G Capital Eyes Next Targets (LINK)

Darren Gee's Monthly Report for January 2015 - A Whole New World (LINK)

At year end, it wasn't the weaker gas prices that were particularly newsworthy - we've been there for a while - it was the new oil price which, if it stays here for long, creates a whole new world.

Miners face challenge tapping copper opportunities (LINK)

To meet global demand over the next decade, the industry “will have to add the equivalent of a new Escondida every 15 months”, says Jean-Sebastien Jacques, head of copper at Rio Tinto, which owns a minority stake in the mine. First Quantum, a mid-tier copper miner, says that if China, India and Brazil were to reach EU levels of copper use by 2020, it would imply nine new Escondidas. 

Such predictions explain why big UK miners are talking up their growth potential in copper, even though worries over Chinese demand have driven the price of the metal to its lowest since 2010. 

Both Rio and BHP believe the copper market is oversupplied now but will tighten from 2018, with growing deficits.

The real story behind Jeff Bezo’s Fire Phone debacle and what it means for Amazon’s future (LINK)

The Economics (and Nostalgia) of Dead Malls (LINK)

Author Says a Whole Culture—Not a Single 'Homer'—Wrote 'Iliad,' 'Odyssey' (LINK)

Related books: Why Homer Matters; The Odyssey; The Iliad

Book of the day, which I just added to the list of other books that I mentioned in the "Fundamentals..." post: Understanding Michael Porter: The Essential Guide to Competition and Strategy

East Coast Asset Management's Q3 2014 Investment Letter: Grove of Titans

Link to: Grove of Titans

In our third quarter letter you will find our portfolio update and general market observations. Each quarter we highlight one component of our investment process. This quarter, in the section titled Grove of Titans, I will discuss the attributes of what we think constitutes an enduring business.

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I recently invited Peter D. Kaufman, CEO of Glenair, Board Member of the Daily Journal, and Editor of Poor Charlie’s Almanac, to come speak to the Security Analysis class I teach at Columbia Business School. Peter Kaufman is an exceptional business operator and is also one of the great multidisciplinary thinkers of our time. On the topic of multidisciplinary learning and rational decision-making, Peter shared the approach he uses, which he refers to as his “three-bucket” framework, to arrive at universal principles that have high utility. Peter shared:

Every statistician knows that a large, relevant sample size is their best friend. What are the three largest, most relevant sample sizes for identifying universal principals? Bucket number one is inorganic systems, which are 13.7 billion years in size. It's all the laws of math and physics, the entire physical universe. Bucket number two is organic systems, 3.5 billion years of biology on Earth. And bucket number three is human history, you can pick your own number, I picked 20,000 years of recorded human behavior. Those are the three largest sample sizes we can access and the most relevant.

Peter then walked the class through how compounding and the law of reciprocity can be applied to these data sets and therefore applied to reason. A light immediately went on. Applying questions to these three large data sets simplified and strengthened how I was organizing and applying mental models. Kaufman’s approach provides a framework of general laws that have stood the test of time – invariant, unchanging lenses that we can use to focus and arrive at workable answers. A multidisciplinary framework helps shift the human paradigm to one of an empathetic perspective, as if we were looking from the outside in. Just as I began this letter with the three foundational insights of Dialectical Materialism, we want to be constantly searching for these types of invariant strategies that can serve us in rational decision-making.

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Seeing the Forest and the Trees:

One of the most limiting biases for individuals attempting to make sense of complex systems is that they are a part of the systems. When you are part of the system it becomes increasingly difficult to see the forest for the trees. Each individual tree’s uniqueness and complexity can lead to confusion and ambiguity. The key is to attempt to step outside of the system and see the forest and trees for the essence of what they are. How can we find these groves or islands of simplicity in an infinitely complex world?

Jason Zweig of the Wall Street Journal asked Charlie Munger to describe a key attribute of Berkshire Hathaway’s evolution over the years. His response: “There isn’t one novel thought in all of how Berkshire is run. It’s all about what [Mr. Munger’s friend] Peter [Kaufman] calls ‘exploiting unrecognized simplicities.” Peter Kaufman was sitting with Charlie during this interview after the recent Daily Journal annual meeting. The entire quote that Charlie was referencing was one that Peter attributes to a 28 year old writer for Sports Illustrated named Andy Benoit, who wrote these words to describe the essence of a particular quarterback’s genius: “Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.” This quote captures the essence of genius and can serve as a roadmap to the Grove of Titans.

Finding unrecognized simplicities requires one to step outside the forest, outside of the human system to see and measure holistically without biases

Jason Zweig: A Fireside Chat With Charlie Munger

Link to: A Fireside Chat With Charlie Munger

I don’t love Ben Graham and his ideas the way Warren does. You have to understand, to Warren — who discovered him at such a young age and then went to work for him — Ben Graham’s insights changed his whole life, and he spent much of his early years worshiping the master at close range. But I have to say, Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.

I think Ben Graham wasn’t nearly as good an investor as Warren Buffett is or even as good as I am. Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can’t do it with billions of dollars or even many millions of dollars. But he was a very good writer and a very good teacher and a brilliant man, one of the only intellectuals – probably the only intellectual — in the investing business at the time.

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Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing. Is it a skill that can be taught or learned? It probably can, if you have enough of a stake riding on the outcome. Some people are extraordinarily good at knowing the limits of their knowledge, because they have to be. Think of somebody who’s been a professional tightrope walker for 20 years – and has survived. He couldn’t survive as a tightrope walker for 20 years unless he knows exactly what he knows and what he doesn’t know. He’s worked so hard at it, because he knows if he gets it wrong he won’t survive. The survivors know.

Knowing what you don’t know is more useful than being brilliant.

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On how innovative Berkshire Hathaway has been:

There isn’t one novel thought in all of how Berkshire is run. It’s all about what [Mr. Munger’s friend] Peter [Kaufman] calls ‘exploiting unrecognized simplicities.’ We [Messrs. Buffett and Munger, their shareholders and the companies they have acquired] have selected one another. It’s a community of like-minded people, and that makes most decisions into no-brainers. Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points.

Nobody has a zero incidence of bad news coming to them too late, but that’s really low at Berkshire. Warren likes to say, ‘Just tell us the bad news, the good news can wait.’ So people trust us in that, and that helps prevent mistakes from escalating into disasters. When you’re not managing for quarterly earnings and you’re managing only for the long pull, you don’t give a damn what the next quarter’s earnings look like.