Poor Charlie’s Almanack – Audiobook - The Essential Wit and Wisdom of Charles T. Munger - Part 1

This is part one of the audio book Poor Charlie's Almanac by Peter D. Kaufman, presented by the legendary investor channel. In this video, you'll hear from the introduction through talk three.

Introduction by Peter D. Kaufman.

You are about to embark on an extraordinary journey toward better investing and decision-making. You may arrive at a better understanding of life as well. All thanks to the wit, wisdom, speeches, and writings of Charlie Munger, this generation's answer to Benjamin Franklin.

Charlie's unique worldview, what he calls his multi-disciplinary approach, is a self-developed model for clear and simple thinking. Yet, his concepts and models are anything but simplistic. Notice how well Charlie's thinking stands the test of time. The earliest talk in this collection is almost 20 years old, yet it is as relevant today as the day he first delivered it.

As you will soon discover, Charlie's observations and conclusions are based on fundamental human nature, basic truths, and core principles from a wide range of disciplines. Throughout the book, Charlie reveals his intellect, wit, values, and no end of rhetorical flare. His encyclopedic knowledge allows him to cite references from classical orators to 18th and 19th century European literati to pop culture icons of the moment. Where else would you find Damasanes and Cicero juxtaposed against Johnny Carson, or today's investment managers set against Nietzsche, Galileo, and a one-legged man in an ass-kicking contest? Or how about Ben Franklin versus Bernie Madoff in a battle of worldly wisdom?

Using self-deprecation and imagination to great effect, Charlie cheerfully compares himself to a counting horse, proposes Glotz's sugared caffeinated water as a marketing bereft label for Coca-Cola, and attests, "At least when I was young, I wasn't a total klutz." In one talk, "Practical Thought About Practical Thought," Charlie even takes on the challenge of building from scratch a $2 trillion business and then walks us through his diverse mental models to accomplish that mighty feat.

The quotes, talks, and speeches presented here are rooted in the old-fashioned Midwestern values for which Charlie has become known: lifelong learning, intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, willingness to test one's own beliefs, and many more. But his advice comes not in the form of centenarian admonishments. Instead, Charlie uses humor, inversions, following the directive of the great algebraist Carl Jacobi to "invert, always invert," and paradox to provide sage counsel about life's toughest challenges.

Charlie also employs historical and business case studies to great effect. In these presentations, he makes his points with subtlety and texture, often using a story-like context. Instead of abstract statements of theory, he regales his audience with humorous anecdotes and poignant tales rather than with a blizzard of facts and figures. He well knows and wisely exploits the traditional role of the storyteller as a purveyor of complex and detailed information. As a result, his lessons hang together in a coherent lattice work of knowledge available for recall and use when needed.

It is clear throughout these talks and speeches that Charlie places a premium on life decisions over investment decisions. His mental models, drawn from every discipline imaginable, recur repeatedly and in no way focus on business portfolio strategy or beta or CAPM. Rather, they center on fundamental truth, human accomplishment, human foibles, and the arduous path to wisdom. Charlie once said, "I wanted to get rich so I could be independent like Lord John Maynard Keynes." Independence is the end that wealth serves for Charlie, not the other way around.

About the book.

We open with a portrait biography that chronicles Charlie's progress from a modest Omaha childhood to prodigious financial success. Next, we summarize the Munger approach to life, learning, decision-making, and investing. This section details both Charlie's unconventional way of thinking and his extraordinary work ethic, the twin fonts of his amazing success.

In the balance of the book, Charlie speaks to his audience via speeches and talks he gave over a 20-year period. In the expanded third edition of the book, we added a new talk Charlie delivered at the USC Gould School of Law commencement on May 13th, 2007. So, the original 10 talks have grown to become a not-so-round 11 talks. These speeches and addresses cover a wide spectrum of Charlie's interests, ranging from how one acquires worldly wisdom to how his multiple mental models can be applied to business to how the investment strategies used by charitable foundations can be improved. The 11th talk is a special rendition of "The Psychology of Human Misjudgment" that Charlie created especially for this book.

Each talk is well worth your time, not only for the enjoyment it will provide you, but also for what you can absorb from the rich assortment of ideas and practices that Charlie relies on. You will probably never find a better opportunity to learn from someone so smart and so forthright. In his talks, Charlie simply opens up and tells it like it is.

A special note: Charlie's redundancy in expressions and examples is purposeful for the kind of deep fluency he advocates. He knows that repetition is the heart of instruction.

A word about the style and layout of the book.

Charlie is enormously curious about nearly everything he bumps into in life. Accordingly, as we ourselves bumped into people, places, and subjects mentioned by Charlie in his talks, we supplemented his text with related information. The end notes, peppered throughout the talks (not included in the audio edition), serve to explain concepts, add a supporting voice, or emphasize an important Munger idea. We hope these will not only inform but also amuse and even encourage you to further pursue these subjects on your own.

I wish you good reading and an appreciation of the brightness and dry humor that those of us who know Charlie Munger have come to treasure and expect from him.

Chapter 1. A Portrait of Charles T. Munger.

Behind the extraordinary story of Berkshire Hathaway are two financial geniuses: the widely acclaimed Warren Buffett and his silent partner, Charlie Munger, who relishes his obscurity. Charlie is Warren's friend, lawyer, advisor, devil's advocate. Warren once called him "the abominable no-man" and one of the largest stockholders in one of the most successful publicly traded companies in American business history.

Since 1964, when Warren, and some years later Charlie, assumed management of Berkshire, its market value has increased an astonishing 13,500 times, from $10 million to roughly $135 billion, without much of an increase in outstanding shares. Such phenomenal growth is the singular achievement of these two unassuming Midwesterners who combined their synergistic abilities to recognize and seize opportunities other businessmen consistently overlook. While Warren is one of the most admired and publicized business leaders in the country, Charlie has purposefully sidestepped the limelight, choosing relative anonymity instead.

To better understand this complex and highly private businessman, we must start at the beginning. Charles Thomas Munger was born on January 1st, 1924, in America's heartland, Omaha, Nebraska. Many notables share his Midwestern roots: Will Rogers, Henry Fonda, John Pershing, Harry Truman, Walt Disney, Ann Landers, Gerald Ford, and of course, Warren Buffett.

Charlie initially crossed paths with the Buffett family during the formative years of his life when he worked at Buffett and Son, an upscale grocery store in Omaha, about six blocks from the Munger household. The boss and part owner was Warren's grandfather, Ernest. A strict disciplinarian, he scheduled his young workers for 12-hour shifts with no meals or breaks. According to Charlie, his boss's staunch anti-socialist attitude was manifested in his rule requiring the boys to present two pennies at the end of their shifts to cover their share of the cost of the new Social Security Act. In return, they received a $2 daily wage along with a considerable lecture about the evils of socialism.

The arduous working conditions in the Buffett grocery store had a lasting influence on both Charlie and Warren. Warren, 6 years younger, served his hard times under Grandpa Ernest several years after his future business partner had moved on.

Charlie's formal education began at Dundy Elementary School, where he and his younger sisters, Mary and Carol, were indoctrinated with ethical homilies. Charlie's teachers remember a smart kid who was also inclined to be a bit of a wise guy. He enjoyed challenging the conventional wisdom of teachers and fellow students with his ever-increasing knowledge gained through voracious reading, particularly biographies. Today, he can't remember the first time he was exposed to the aphorisms of Ben Franklin, but they fueled an ineffable admiration for the eclectic and eccentric statesman and inventor.

Charlie's parents, Al and Florence Munger, encouraged reading and gave each of their children several books at Christmas, usually devoured by that night. At the nearby home of the Mungers' close friends, the Davis's, Charlie often read the medical journals belonging to Dr. Ed Davis, who was both his father's best friend and a family physician. Charlie's early exposure to Dr. Davis's medical library spawned a lifelong interest in science. By the time he was 14, the precocious learner had also become one of the doctor's best friends. Charlie became so interested in medicine that he watched motion pictures of Dr. Davis, a urologist, performing surgery and became fascinated with the statistical outcomes of similar procedures in the field.

At home, Charlie developed a fondness for raising hamsters and periodically traded them with other children. Even at an early age, Charlie showed a sagacious negotiating ability and usually gained a bigger specimen or one with unusual coloring. When his brood grew to 35 animals, his mother ordered an end to his hobby because of the pungent odor from his basement hamster farm. One of his sisters remembered years later that the family had to endure the incessant squeaking of hungry hamsters until Charlie arrived home from school to feed them.

Charlie attended Central High School, a very large public school that was recognized as a good college preparatory school. The teachers, mostly women, were dedicated to their work and to their students. The Central High curriculum provided a conventional classic education in which Charlie naturally excelled because of his logically driven, inquiring mind.

Throughout elementary and secondary school, Charlie was younger and smaller than his classmates, having been moved ahead in elementary school after his mother taught him to read phonically. Too small to compete in regular high school sports, he joined the rifle team, earned a varsity letter, and eventually became team captain. His letterman's sweater, a large letter on a very small chest, is, in Charlie's memory, attracted attention from co-eds who wondered how such a scrawny kid could earn a varsity letter. Fortunately for Charlie, his father was an avid outdoorsman and duck hunter and took joy in his son's marksmanship.

Omaha in the 1920s was the proverbial melting pot. Different races and religions mixed socially and commercially, and crime was practically unknown. Doors and vehicles were left unlocked, and a person's word was trusted implicitly. Kids played kick the can on warm summer evenings and went to Saturday matinees to see the latest talkies, such as King Kong, a favorite of 8-year-old Charlie.

The 1930s brought hard times, and Omaha experienced the severity of the Great Depression. Charlie's observations of the plight of those less fortunate made a lasting impression. He saw hobos roaming the streets looking for handouts and others who were willing to sweep a driveway or porch in exchange for a sandwich. Thanks to family connections, Charlie landed a boring job counting passers-by. It paid 40 cents an hour. Charlie preferred this work to carrying heavy boxes of groceries.

Charlie's grandfather was a respected federal judge, and his father followed in his footsteps to become a prosperous lawyer. Charlie's immediate family was not dramatically affected by the depression, but some members of Charlie's extended family were. This era provided real learning experiences for young Charlie. He witnessed the generosity and business acumen of his grandfather as he helped rescue a small bank in St. Paul, Nebraska, that was owned by Charlie's uncle Tom because of the miserable economy and drought-damaged crops. The bank's farm-based clients were defaulting on loans. Tom had rolled up $35,000 in uncollectible notes when he called upon Grandpa Munger for support. The judge risked nearly half of his assets by exchanging $35,000 in sound first mortgages for the bank's weak loans, thus enabling Tom to open his doors after Roosevelt's bank holiday. The judge eventually recovered most of his investment, but not until a great many years later. Judge Munger also sent his daughter's husband, a musician, to pharmacy school and helped him buy a well-located pharmacy that had closed because of the depression. The business prospered and secured the future for Charlie's aunt. Charlie learned that by supporting each other, the Mungers weathered the worst economic collapse in the nation's history.

Fortunately, Al Munger's law practice prospered during the depression and was given a boost when the United States Supreme Court agreed to review a tax case involving a small soap-making company he represented. Coincidentally, the huge Colgate-Palmolive Company was also affected by the court's decision. Concerned that the Midwestern attorney didn't have the requisite experience to argue successfully before the highest court, Colgate offered to pay Al liberally to step aside and allow a famous New York attorney to take his place. The big-city lawyer lost the case, while Al pocketed a substantial fee. Later, Al joked that he could have lost the case just as well for a much smaller fee. The amount of the fee has never been revealed, but it was enough, when combined with income Al earned from his other clients, to help keep the Mungers comfortable during the depression. Charlie also helped the family by working to earn his own spending money and thus learned firsthand the value of financial independence.

In 1941, as the war raged across the Atlantic, Charlie graduated from Central High School and left Omaha for the University of Michigan. There, he chose mathematics as his major, drawn by the appeal of numerical logic and reason. He also discovered physics after enrolling in a basic course to fulfill an academic requirement for science. Charlie was fascinated by the power of physics and its boundless reach. In particular, he was impressed by the process followed by physicists such as Albert Einstein to address the unknown. Physics, like problem-solving, was to become a passion for Charlie and is a skill he considers helpful in framing the problems of life. He has often stated that anyone who wants to be successful should study physics because its concepts and formulas so beautifully demonstrate the powers of sound theory.

College-aged men were then in high demand for military service. Days after turning 19 and completing his second year at Michigan, Charlie enlisted in the Army Air Corps in a program that would eventually make him a second lieutenant. He was sent to the Albuquerque campus of the University of New Mexico for studies in general science and engineering. Next, he was shuffled to the prestigious California Institute of Technology in Pasadena, California. He was schooled in thermodynamics and the science of meteorology, then essential to flyers, and trained to become a meteorologist. After completing his studies at Caltech, Charlie was dispatched to a permanent duty station in Nome, Alaska.

While still in the service, he married Nancy Huggins, a young woman from Pasadena, who was a good friend of his sister Mary at Scripps College. They were stationed in Albuquerque and then San Antonio until Charlie was discharged from the Army Air Corps in 1946. Soon, Charlie and Nancy had their first child, a boy whom they named Teddy.

Although he had attended several universities, Charlie still did not have a bachelor's degree. Nevertheless, using the GI Bill, he applied to Harvard Law School, where his father had preceded him. His lack of an undergraduate degree threatened to derail him. But a family friend, former Harvard Law School Dean Roscoe Pound, interceded on Charlie's behalf. Charlie was admitted despite the determination of the admissions office to first send him back to college.

As it turned out, Charlie had little trouble succeeding at Harvard, though he annoyed a few people along the way. Because of his intellect, the army measured his IQ at the top of the curve. Charlie had a tendency to be abrupt, which was often interpreted as rudeness. Actually, Charlie was just in a hurry, and the customary pleasantries of the classroom were of little concern to him. Even so, he was liked by most of his peers and fully enjoyed the social aspects of student life in Cambridge. Charlie graduated from Harvard Law School in 1948 and was one of 12 in his class of 335 to graduate magna cum laude.

He considered joining his father's law practice, but after a discussion with his father, both of them concluded that Charlie should try a larger city. He headed off to Southern California, a place he had liked. While a student at Caltech, after passing the California bar exam, he joined the firm of Wright and Garrett, later renamed Musick, Peeler, and Garrett. Charlie built a house designed by his architect uncle Frederick Scott in South Pasadena, where he and Nancy and their three children, Teddy, Molly, and Wendy, lived.

Despite outward appearances, all was not sunny in Charlie's world. His marriage was in trouble, and he and his wife finally divorced in 1953. Not long thereafter, Charlie learned that his adored son Teddy was terminally ill with leukemia. It was a significant burden for 29-year-old Charlie. In that era, before bone marrow transplants, there was no hope. A friend remembers that Charlie would visit his dying son in the hospital and then walk the streets of Pasadena crying.

During this sad time, his friend and law partner Roy Tols arranged through a friend for Charlie to meet Nancy Barry Borthwick, who lived in Los Angeles. She was a Stanford graduate and had two small boys close to the ages of his girls. Charlie and Nancy had much in common and had fun together, and after a few months of dating, became engaged. They were married in a small family wedding in January 1956, and all four children, his girls and her boys, aged 4 to 7, attended the wedding. Charlie and Nancy lived in her house in the hills of West Los Angeles for several years. Then, partly to shorten Charlie's daily commute, they moved to Hancock Park, where they still reside. The house they built there was large enough for their ever-expanding family: three more boys and a girl, for a total of eight. Fortunately, both liked children. They also liked golf, the beach, and social clubs. Charlie and Nancy were soon members of the University Club, the California Club, the Los Angeles Country Club, and the Beach Club.

With many new responsibilities, Charlie worked hard at his law practice. Even so, his earnings were unsatisfactory to him, as they were based on a combination of billable hours and seniority. He wanted more than what a senior law partner would be able to earn. He sought to be like his firm's leading capitalist clients, in particular the universally admired Harvey Mudd, later the founder of the college bearing his name. With Mudd's support, he turned to outside ventures and alternative ways to generate income. However, he never forgot the sound principles taught by his grandfather: to concentrate on the task immediately in front of him and to control spending.

Following this conservative approach, Charlie seized opportunities to build wealth. He began investing in stocks and acquired equity in one of his clients' electronics businesses, a practice common among lawyers in the mid-1950s and 1960s. This investment was mutually beneficial. Charlie gained invaluable knowledge about business, while his client enjoyed the proactive attention of a lawyer who knew more than just the law.

In 1961, Charlie tackled property development for the first time in partnership with Otis Booth, a client and friend. The venture, building condominiums on land near Caltech, was a smashing success, and the partners earned a handsome profit of $300,000 on a $100,000 investment. Charlie and Otis then undertook other successful construction and development projects in Pasadena. Later, Charlie participated in similar projects in Alhambra, California. He sharpened his business acumen by handling the negotiations and contracts. In all cases, he left all of his profits in real estate ventures so that bigger and bigger projects became possible. When he stopped in 1964, he had a nest egg of $1.4 million from real estate projects alone.

In February 1962, he joined four colleagues from Musick, Peeler, and Garrett in establishing a new law firm. The original partners were Roy Tols, Rod Hills, Dick Ebenshade, Fred Ward, and Charlie. They were joined by Rod's wife, Carla, and James T. Wood, a sole practitioner and friend of the Hills. They named the firm Munger, Tols, and Hills. Over the years, the firm had several names, always beginning with Munger, Tols. With the addition of Ron Olsen, it finally became Munger, Tols, and Olsen, shortened as Munger, Tols, or MTO.

The successful practice of law was by then a backstop rather than an ending objective for Charlie. At about the time that he was launching his new law firm, he was carefully crafting his exit plan. Charlie set up an investment partnership with Jack Wheeler, and they were later joined by Al Marshall. The idea for this partnership arose a few years earlier when the death of Charlie's father required him to return to Omaha to administer the estate. To welcome him home, the children of Charlie's friend and medical mentor, Dr. Ed Davis, arranged for a dinner party. Both of the Davis boys, Eddie Jr. and Neil, were former childhood chums of Charlie and were now physicians, while their sister Willa had married an Omaha businessman, Lee Seaman. The dinner party included Willa and Lee, Neil and his wife Joan, and a fellow named Warren Buffett.

Charlie recognized Warren's family name from his days at Buffett and Son, and Warren had heard of Charlie a few years earlier when he was raising investment capital in Omaha. At one point, Warren had met with Dr. Davis and his wife Dorothy to explain his investment philosophy, and they agreed to place a large part of their life savings, $100,000, with him. Why? The doctor explained that Warren reminded him of Charlie Munger. Warren didn't know Charlie, but already had at least one good reason to like him.

During the homecoming dinner, Charlie and Warren realized they shared many ideas. It also became evident to the others at the table that this was going to be a two-way conversation. As the evening progressed, the two young men, Warren was 29, and Charlie, 35, became engrossed in a wide-ranging dialogue covering many aspects of business, finance, and history. Where one was knowledgeable, the other was just as excited to learn. Warren was unenthusiastic about Charlie's continued practice of law. He said that while law might be a good hobby for Charlie, it was a far less promising business than what Warren was doing. Warren's logic helped Charlie to decide to quit law practice at the earliest point he could afford to do so.

When Charlie returned to Los Angeles, the conversations continued via telephone and lengthy letters, sometimes as long as nine pages. It was evident to both that they were meant to be in business together. There was no formal partnership or contractual relationship. The bond was created by a handshake and backed by two Midwesterners who understood and respected the value of one's word. There were many benefits to their partnership: friendship, investment opportunities, and the unique ability to grasp each other's ideas and observations. Later, the two organizations they headed were also beneficiaries. As Warren was investing in and acquiring companies, he sent business to Munger, Tols, a practice that allowed him over time to benefit from having one of the nation's top law firms at his disposal. Munger, Tols meanwhile not only got Buffett's legal fees but also gained because its reputation attracted other blue-chip clients to the firm.

Munger, Tols is not just about money, though, mirroring the way Charlie conducts his personal life. The firm has an enviable record of quietly providing pro bono assistance to support groups for impoverished and disadvantaged people in the Los Angeles community. To this day, Charlie continues to influence the firm's attorneys, reminding them, "You don't need to take the last dollar and choose clients as you would friends." Though Charlie left the firm as an active partner in 1965 after only 3 years, his indelible influence remains, as indicated by the fact that his name still heads the listing of 175 attorneys. When he left, he didn't take his share of the firm's capital. Instead, he directed that his share go to the estate of his young partner, Fred Ward, who left behind a wife and children when he died of cancer.

Charlie's plan for financial independence was soon working with great success. He spent much time building the asset base of Wheeler, Munger, and Company, his investment partnership with Jack Wheeler. He also spent time working in various real estate developments. All was going as planned with no significant reverses.

At Wheeler, Munger, and Company, Charlie was investing in stocks, partly with his own money and partly with other people's money. Charlie concentrated more on putting his capital to work than attracting new clients. Because Jack Wheeler held two seats on the Pacific Coast Stock Exchange, the partnership paid low trading commissions, while Wheeler, Munger kept the overhead cost at close to zero.

As time passed, Charlie and Warren kept up their frequent telephone conversations and letters, sharing ideas and investment concepts. Sometimes they would agree to invest in the same company. Other times they went in different directions. In time, their independent portfolios had overlapping investments. Warren invested in the Blue Chip Stamp Company and became the largest single shareholder. Charlie became the second largest shareholder, and eventually Berkshire Hathaway ended up acquiring the company.

Charlie built the Wheeler, Munger Partnership from 1962 through 1975. It did exceptionally well for the first 11 years, compounding at 28.3% gross, 20% net, versus 6.7% for the DAO, without a single down year. But the partnership was hit hard in the vicious bear market of 1973 and 1974, when it fell 31.9% and 31.5% in back-to-back years, as the partnership's largest holdings, Blue Chip Stamps and New America Fund, fell sharply. This decline was despite, as Charlie puts it, "having its major investments virtually sure of eventually being salable at prices higher than the quoted market prices." But the partnership rebounded strongly in 1975, rising 73.2%, 2%, bringing the overall record over 14 years to 19.8%, 13.7% net compounded annual returns versus 5% for the DAO.

After this difficult experience, Charlie followed Warren in concluding that he no longer wanted to manage funds directly for investors. Warren had closed his own partnerships in 1969. Instead, they resolved to build equity through stock ownership in a holding company. When Wheeler, Munger was liquidated, its stakeholders received shares in Blue Chip Stamps and Diversified Retailing. Later, these shares were converted into Berkshire Hathaway stock, which ended 1975 at $38. Today, each share is worth more than $85,000, making Charlie a member of the Forbes list of the 400 wealthiest individuals. While he doesn't mind the wealth, he regrets having his name on any such list. Despite his healthy self-image, Charlie would prefer to be anonymous.

The story of Berkshire Hathaway's extraordinary success under Warren and Charlie's leadership has been told many times elsewhere, so the details won't be repeated here. To summarize, however, they have a spectacular track record of identifying undervalued companies and then either buying large stakes in the public markets or acquiring them outright. Regarding the latter, they have acquired a diverse assortment of businesses such as John's Manville, the Buffalo Evening News, Flight Safety International, NetJets, Shaw Carpet, Benjamin Moore, Geico, and Dairy Queen. In addition, they have purchased meaningful stakes in public companies such as The Washington Post, Coca-Cola, Gillette, and American Express. For the most part, they have held their major investments for the long term. In fact, they still own almost every business they've ever acquired outright.

Charlie's affinity for Benjamin Franklin's expansive career in government, business, finance, and industry can be found in his many speeches and whenever he holds an audience, large or small. At the 75th anniversary of See's Candies, Charlie said, "I am a biography nut myself, and I think when you're trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead. But if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education. It's way better than just giving the basic concepts." Franklin used his self-made wealth to achieve financial independence so he could concentrate on societal improvement. Charlie admires that trait in his mentor and strives to emulate Franklin. He has had a long involvement with Good Samaritan Hospital and Harvard-Westlake School, both in Los Angeles, and has chaired the boards of each. He and Nancy have also long supported Stanford University and the Huntington Library, Art Collections, and Botanical Gardens in San Marino, California. They provided funding for a major expansion to the Huntington called the Munger Research Center. Although Charlie is a self-described conservative Republican, chief among his causes is Planned Parenthood; he believes that every child deserves to be born to a welcoming mother. He also supports efforts to improve the environment and the quality of education. As the father of eight and grandfather of 16, Charlie regards his legacy as helping future generations inherit a better world.

Chapter 2. Remembering the Children on Charlie from Charles T. Munger Jr.

On the last day of a family ski vacation in Sun Valley, when I was 15 or so, my dad and I were driving back in the snow when he took a 10-minute detour to gas the red Jeep we were driving. He was pressed for time to have our family catch the plane home. So I was surprised to notice as he pulled into the station that the tank was still half full. I asked my dad why we had stopped when we had plenty of gas, and he admonished me, "Charlie, when you borrow a man's car, you always return it with a full tank of gas."

My freshman year at Stanford, an acquaintance lent me his car, more because friends we had in common twisted his arm than because he knew me all that well. The tank was half full, and the Audi Fox was red. So I remembered the Jeep and topped up the tank before I brought the car back. He noticed. We've had a lot of good times since, and he stood as a groomsman at my wedding. After Stanford, I learned that on that vacation we had been staying at Rick Garin's house and driving Rick Garin's Jeep. Rick is one of my dad's friends who, on his return to Sun Valley, certainly wouldn't have been troubled and was unlikely even to notice if his Jeep had had less gas than when he left it. My dad still didn't skip a point of fairness and consideration. So I was taught that day not only how to get a good friend but also how to keep one.

From Wendy Munger.

My dad often used the forum of the family dinner table to try to educate his children. His favorite educational tools were the morality tale, in which someone faced an ethical problem and chose the correct path, and the downward spiral tale, in which someone made the wrong choice and suffered an inevitable series of catastrophic personal and professional losses. His specialty was the downward spiral tale. He could really warm to the topic of apocalyptic consequences. He used such extreme and horrific examples that we were often simultaneously groaning and laughing by the time he finished. He's in a league of his own when it comes to describing negative outcomes and the lessons to be learned from them.

His morality tales were more straightforward. I remember the story my dad told his kids (then ranging from age 5 to 25) about a financial officer at one of his companies who made a mistake that resulted in the loss of hundreds of thousands of dollars to the company. As soon as this officer realized his mistake, he went to the president of the company and told him about it. My dad told us that the president then said, "This was a terrible mistake, and we don't want you ever to make another one like it. But people make mistakes, and we can forgive that. You did the right thing, which was to admit your mistake. If you had tried to hide the mistake or cover it up for even a short time, you would be out of this company. As it is, we'd like you to stay." I think back on this story every time I hear of yet another government official who chose the cover-up instead of the honest confession after making a mistake.

I don't know why I use the past tense in describing my dad's educational efforts at the dinner table. His oldest children are heading toward their 60s. The table is now crowded with grandchildren, and he's still using his distinctive style of storytelling to keep us on the side of the angels. We're very lucky to have him at the head of our table.

From William H. Hal Borthwick.

It has been a fascinating and wonderful 50 years, nearly, since Charlie and my mother were married. There were many opportunities that I offered Charlie for formative education. Here are a couple:

"Do the job right the first time." This story goes back to Minnesota times. One of my jobs as a driving-age teen was to pick up and deliver the housekeeper from the town of Cass Lake. This wasn't just a drive down the street. The boat had to be driven across the lake to the marina, where I would hop into the car to drive to town, and then the process was reversed. Part of my job in the morning was to pick up a newspaper while I was in town. Well, one day a big storm blew in: rain, waves, wind, etc. Big time. With all the excitement and difficulty, I did get to town in the morning and returned with the maid, but I forgot the paper. Charlie and I had a 1-second or so discussion after I answered the question, "Where's my paper?" in the negative. "Go back and get the paper and never forget it again." So back I went through the storm to get the paper, bouncing in the waves with rain sheeting off the boat, thinking to myself that I wasn't going to allow anything like this ever to happen again.

[Music]

"Be responsible." Charlie's mother drove herself from Omaha to Minnesota each summer. When she was there, we used her car for errands. There was but one set of keys, and while I was playing with friends in a sailing boat on the lake, the keys fell out of my pocket into 5 ft of murky water. I went home and confessed. Of course, in the Great North Woods, there aren't many locksmiths, and with Charlie, there wasn't patience for such stupidity. The solution, again in about a second, was: "Go out with your friends and keep diving till you get those keys, and don't come home without them." After about two hours of diving, with the sun sinking like a stone, the miraculous glint of metal in the weeds was before my eyes, and I could go home.

There are a lot of these gems from Minnesota because in those days, when Charlie worked so hard and so long, that was the only meaningful time we spent with him. During the work weeks, he was off before dawn and home about dinner time, and then studied standard and Pors, and later would spend a couple of hours on the phone with Warren.

From David Borthwick.

Many years ago, father decided our Minnesota lake cabin absolutely had to have a tennis ball practice machine for the court that had been built a few years earlier. While he certainly wanted the children to groove their ground strokes, there was a bit more to it than that, for it was father who was out on the court more than anyone, with the machine positioned so he could endlessly practice volley close by the net. Before long, he mastered the well-placed, easy put-away volleys, the kinds of shots everyone else instinctively tried to kill, but usually hit into the net or 10 ft out. By working on the tennis version of golf's short game, which few others could be bothered to practice, father, as he's done throughout his life, gave himself a fair, if maddening, competitive advantage. I really dreaded playing against him, especially in doubles, where the net play really counts. Thank God it was tennis, not business.

Thinking about father made me remember a long-ago humorous TV beer ad in which a smartly dressed man at a table is so engrossed in his glass of beer as to be oblivious to a rampaging bull charging a bullfighter right in front of him. He doesn't flinch even when the bull smashes the table into matchsticks. The announcer's tagline was "Try this beer for a truly unique experience" or something like that. Take away the beer and substitute the financial market listings, architectural plans, or a scholarly biography of Keynes, and you have a dead-on comedic take on father night after night in his favorite chair pouring over something, all but deaf to the roughhousing younger children, blaring TV, and Mom trying to summon him to dinner. Even when not reading, father was often so deep in contemplation that a routine drive to take Molly and Wendy back to Pasadena could have turned into an excursion to San Bernardino without Mom calling out the correct freeway turnoffs. Whatever was on his mind, it wasn't the outcome of a football game or a botched golf shot. Father's ability to Chinese wall off the most intrusive distractions from whatever mental task he was engaged in, a practice alternately amusing and irritating if you were trying to get his attention, accounts as much as anything else for his success.

From Molly Munger.

When I went to college in 1966, I was very lucky to have been thoroughly steeped in Daddy's influence. In an angry and radical era, I would buy the Wall Street Journal or Fortune at the subway kiosk just outside the college gates, tuck it under my Oxford cloth arm, and stride off to economics and business classes. People were occupying the dean's office, going to jail. I was in the basement of the Lamont Library learning how to read a balance sheet. Daddy raised us to be skeptical, even contrarian, and that was a particularly helpful way of thinking to carry into the maelstrom of the late '60s. Over many years, sitting in the library at our house on June Street, he had told us often funny stories of people who either followed the group too blindly or lashed out too reflexively. "Crazy, maladjusted, pompous, self-satisfied." We knew from his adjectives what he thought we should avoid.

In Minnesota, he found a way to hardwire the same message into our very bodies. He had arranged for the old Larsson Boat Works to make us an aqua plane, a heavy wooden affair we stood on as he towed it behind the boat. He would make sharp turns to see if we could hold on, and the only way to avoid the disgrace of a fall was to keep shifting our weight to compensate for the extreme angles. Then, and on into the future, I would always be viscerally terrified if it seemed any thought or activity was getting out of hand in one direction or another.

When I was in college, Daddy had seven other children to raise, worked in a seedy part of Spring Street, and owned but one company, a small, grimy outfit that made motor additive. But he saw these were unhinged times. He sent me the allowance of a much richer father, keeping me in professionally ironed shirts and making me feel sharp as a bandbox. From 3,000 miles away, he continued to help me keep my balance. I could go on. Suffice it to say that our father has always known what he was doing. As a parent, as in so much else, I appreciated it greatly. I still do.

From Emily Ogden.

"You have your father's hands," my husband remarked out of the blue as we shared a glass of wine. I looked at him a little stunned, not by the comparison, but by his telepathy. I had been devising a short piece about my father, and the very subject had been on my mind. I had already noticed that my oldest son's hands are like his grandfather's, with fingertips slightly squared and nail beds shaped like teacups rather than ovals. But it's something about the way our hands take positions that first sparks the comparison. My father, my son, and I all cross our hands behind us in the same distinct manner: the left hand holding the wrist of the right as we walk, minds elsewhere.

"What is it about my hands exactly that reminds you of my father's?" I asked. "It's in the 'U' where your index finger curves into your thumb," he said, showing me. "It's the way you hold things there."

My father is holding his hands out above me. His fingers are curled, and his thumbs are pointing at each other like handles on a bike. I reach my girl arms up straight and I grasp each of his thumbs as he lifts me off the ground. I hang on delighted until my strength is spent. And when one child is too big for thumbs, there is always another down through the line of grandchildren. Sometimes we'd get him to put down the Wall Street Journal and play "sandwich." As he sits in the green armchair in the library, we pile on like the bacon, lettuce, and tomato of a BLT. His hands squeezing us together in a multi-layered hug.

My father holds a perfect chicken egg. We've won the father-daughter egg toss, earning me one of my favorite possessions: a marble cube sprouting gladiolus leaves with a life-sized golden replica of an egg on top. This trophy sits on my desk, reminding me of the sunny day when my dad was so present and so gentle as to keep a flying egg from breaking in either of our hands.

My father's hands knew the tensile strength of different fishing lines by feel. They tie on a chartreuse jig or a plain old hook. His hands rise to his lips where he cinches his knots with his teeth and bites off the extra line. His hands get wet, reaching into tin bait buckets. They pinch twisting black leeches or one of Leroy's famous minnows guaranteed to catch fish or die trying. His hands hold yellow-green zingers, pickles so spicy hot a bite will bring a laugh, and peanut butter mustard sandwiches.

My father's hands rise early with the rest of him and appear at the edges of the business pages. In Minnesota, he might crumple this newsprint into loose balls, build kindling pyramids, strike long hearth matches, and press spade-shaped wooden bellows. With the fire lit, he might cook blueberry buckwheat pancakes on the Ben Franklin wood stove using an old wood-handled spatula with chipped red paint. But if you play Password and give the clue "Charlie Munger's hands," anyone will first answer "books." No matter where he is, his hands are always holding open a volume, typically a Ben Franklin biography or the latest treatise on genetics. One might also answer "graph paper" for the buildings he's been designing.

When I think of my father's hands, I also see them up on stage in front of thousands in Omaha every year. His fingers encircle a Diet Coke, pinch peanut brittle, or the stick of a Dilly Bar, or try to search incognito through a seized candy box, zeroing in on the rum nougat. His hands are crossed in front of him as he shakes his head, saying, "I have nothing to add," or they move to the rhythm of a longer philosophical answer, making all the hands in the stadium clap together. My father's hands, gesturing alongside every colorful joke and guiding story, have molded me as surely as a sculptor's. I can be nothing but glad and grateful for the touch of my father's hands in mine and in my sons'.

From Barry Munger.

Several years ago, I came across a book by Calvin Trillin called *Messages from My Father*. A memoir about Trillin's father, Abe, who was born in Ukraine, grew up in Missouri, and spent much of his career operating neighborhood grocery stores in Kansas City. Abe Trillin regarded thrift as a moral virtue, paid his bills the day they arrived, and got up at 4 in the morning, 6 days a week, to pick the produce for his stores. A man of few words, he was nevertheless convivial, trenchantly funny, and spoke naturally to small children. He was skilled at cards. He was sardonic, but had an underlying optimism that one could get along in the world with the proper outlook and character.

The fact that my father shares many of these qualities, even if he's not known for his discernment about produce, does not fully explain my attachment to this light, deft, and anecdotal little book. Reading it somehow conjures my father for me, even though in the broad outlines of his life, my father has almost nothing in common with Abe Trillin. Other than the fact that my father once worked part-time at a Midwestern grocery store, Buffett and Son in Omaha.

Like my father, Abe Trillin had a fundamental reserve, partially Midwestern in origin, that was at odds with his personable qualities. He did not regard a long drive in a car or a fishing outing as an opportunity to catch up. He did not linger on the telephone. His son eventually came to marvel at how much my father managed to get across to me without those heart-to-hearts that I've read about fathers and sons having in the study or in the rowboat or in the car.

The title *Messages from My Father* comes from the author's surmise that his father must have been communicating his expectations through coded messages. It's possible that my father had a code so subtle that I didn't know of its existence. He writes, "Anyone who knows my father knows that his manner of expression is not always subtle, but he has many ways of sending his messages. If he doesn't like the way his bridge partner plays out a hand, for example, he might say, 'You played that like a plumber.' But if he wants to offer serious counsel to one of his children, he is more likely to couch the message in an anecdote, preferably delivered in a group setting so that no one is singled out." In both instances, he appears blunt and vernacular, that inimitable Charlie. But at the card table, he uses a lack of indirection for harmless ribbing. And at the dinner table, he uses indirection to spare feelings. He's more subtle than he appears.

A friend of mine recently began an anecdote about my father by saying, "So your dad's sitting in his chair like Rushmore?" I knew exactly what he meant. Not many people can.

Summon up the image of a 5,700 ft granite mountain and the faces of four presidents, simply by taking possession of an upholstered chair. But my father can. All of the Munger children have at one time or another approached Rushmore to make a request and felt like Dorothy approaching Oz, except that Oz was more valuable. Rushmore did not always respond. Sometimes my father made a low, steady noise from somewhere around his larynx, as though Rushmore had gone volcanic. But that was not so easy to interpret. Can you be more subtle than silent?

Unlike a Trillin, perhaps, my father really does send messages in the form of speeches he has written, letters he has received and sent, and articles from various sources about social policy, psychology, business ethics, and law, among other topics. Many of them appear in this book. What doesn't appear is the note my father scrolled on the enclosure. The note is usually extremely brief and often just a send-to list, but every once in a while, the note will have a wry, "Phillip-like" this one from 1996, which was appended to a long, appreciative letter from a Berkshire Hathaway shareholder in Sweden. "I hope you find this amusing," my father wrote. "If only I had the influence with my wife and children that I have in some other quarters."

When I finished the Trillin book, I sent it to my father. Even if he didn't recognize himself in it, I figured he would enjoy the book's Midwestern milieu, the immigrant striving of the Trillin family, and the humor. The book is written with so much affection that I thought I could even use it to communicate such feelings to my dad indirectly, which is the preferred route. At the very least, I thought the book might reassure my father that his messages were being received, even if they were not always heeded.

About a week later, the book came back in a padded envelope with an address label supplied by his secretary. There was no note, so I wasn't sure whether he had read the book or rejected it. It seemed untouched, so I concluded that my message had gone unreceived. Loose pages tossed on Rushmore? Not much escapes my father, however. It turned out that he had simply instructed his secretary to send copies to the whole family.

From Philip Munger.

Some of my most affectionate memories of my father are of shopping for clothes at Brooks Brothers and Marks and Spencer. Most people already know that father is not a big fashion man. He once said that he was nonconformist enough in his behavior and opinions that it made sense to chart a very straight course in attire. His going along with normal social customs and his sense of humor, he said, were what allowed his otherwise sometimes prickly temperament to harmonize with other people.

I vividly recall going with my father to Brooks Brothers when it was still housed in that beautiful old wood-paneled building in downtown Los Angeles, to buy my first serious suit. I must have been about 11 or 12. I can see those polished brass elevator doors opening. We looked through the racks. Father picked out a pinstriped charcoal gray suit. When I was 16, we went to buy another suit, this time a three-piece, which I wore religiously during my debate days. It kept the icy wind blowing off the lake at Northwestern during a tournament at bay. We bought at the same time a pair of wingtip shoes for my summer stint at the Daily Journal, a coming-of-age ceremony required by father for each boy. Shoes which have lasted to this day.

There is another theme here. When we bought a brown tweed coat at Marks and Spencer in London, father said, "This will always keep its crease." He admired both stores because they were durable institutions and because their merchandise was too, and fairly priced. Durability has always been a first-rate virtue in my father's view, along with ritual and tradition. He never had a desire to change his primary habits, sartorial or otherwise, once he had, like Franklin, acquired them.

I still shop at Brooks, partly because each year at Christmas, Father gives every child a gift card, which is perfectly timed for the winter sale. But I always end up going more often than that. One year I used his large S to purchase trousers with pleats. My father looked at them askance and said, "Do you want to look like a jazz drummer?" In New York, Brooks is still housed in its grand old building. I think of my father every time I go. I'm very attached to the place.

When I went to study at Oxford in winter 1988, he gave me an old Brooks coat of his dating from the '40s, of a sort of tannish olive hue, I think, with a warm zip-in lining. As I walked home from the Bodleian Library each night, that nasty, damp, penetrating English cold would not get through. When I returned it to the United States, I realized I had left the coat on a bus. I wept at the loss. Even now, I wish I had that coat.

Chapter 3. The Munger Approach to Life, Learning, and Decisionmaking.

Despite being largely self-taught, Ben Franklin was spectacularly successful in such diverse fields as journalism, publishing, printing, philanthropy, public service, science, diplomacy, and inventing. Much of Franklin's success was due to the essential nature of the man, most especially his appetite for hard work, but also his insatiable curiosity and patient demeanor. Above all, he possessed a quick and willing mind that enabled him to easily master each new field of endeavor he chose to undertake. It is not surprising that Charlie Munger considers Franklin his greatest hero. For Munger is also largely self-taught and shares many of Franklin's unique characteristics. Like Franklin, Charlie has made himself into a grand master of preparation, patience, discipline, and objectivity. He has parlayed these attributes into great success in both his personal and business endeavors, especially in his investing. To Charlie, successful investing is simply a byproduct of his carefully organized and focused approach to life. Warren Buffett once said, "Charlie can analyze and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in 60 seconds. He is a perfect partner." Why does Buffett proffer such high praise? The answer lies in the markedly original approach Munger applies to life, learning, and decisionmaking, the principal subject of this overview.

A word to the wise before we begin. Given the complexity of Charlie's approach, what follows is not intended as a how-to lesson for the aspiring investor. Instead, it is a general overview of how he seems to do it. Our goal here is to present the basic outline of Charlie's approach to prepare you for the voluminous details that follow in the rest of the book. If you are anxious to get to the heart of the matter, the 11 talks section, presented verbatim in Charlie's own words, is the best source for exacting how-to advice on a broad range of topics. Here, we will content ourselves with a presentation of the general thought processes Charlie employs when considering an investment, followed by an outline of his guiding investment principles.

Munger's Multiple Mental Models Approach to Business Analysis and Assessment.

Charlie's approach to investing is quite different from the more rudimentary systems used by most investors. Instead of making a superficial, standalone assessment of a company's financial information, Charlie conducts a comprehensive analysis of both the internal workings of the investment candidate as well as the larger, integrated ecosystem in which it operates. He calls the tools he uses to conduct this review his "multiple mental models." These models, discussed at length in several of the talks, especially Talks 2, 3, and 4, serve as a framework for gathering, processing, and acting on information. They borrow from and neatly stitch together the analytical tools, methods, and formulas from such traditional disciplines as history, psychology, physiology, mathematics, engineering, biology, physics, chemistry, statistics, economics, and so on.

The Unassailable Logic of Charlie's Ecosystem Approach to Investment Analysis.

Just as multiple factors shape almost every system, multiple models from a variety of disciplines applied with fluency are needed to understand that system. As John Muir observed about the interconnectedness of nature, "When we try to pick out anything by itself, we find it hitched to everything else in the universe." Charlie seeks to discover the universe hitched to each of his investment candidates by gaining a firm grasp on all, or at least most, of the relevant factors comprising both its internal and external environment. When properly collected and organized, his multiple mental models, about a hundred in number, he estimates, provide a context or lattice work that leads to remarkable insights as to the purpose and nature of life. More pertinent to our purpose here, his models supply the analytical structure that enables him to reduce the inherent chaos and confusion of a complex investment problem into a clarified set of fundamentals. Especially important examples of these models include the redundancy and backup system models from engineering, the compound interest model from mathematics, the breakpoint, tipping point, and autocatalysis models from physics and chemistry, the modern Darwinian synthesis model from biology, and cognitive misjudgment models from psychology.

The net result of this broad-spectrum analysis is a heightened understanding of how the many factors affecting an investment candidate blend and link to one another. Sometimes this understanding reveals the existence of second-order ripple or spillover effects. Other times, the factors employed combine to create enormous "La Palooa" level results, good or bad. By applying this framework, Charlie lives in a different world from most investors when it comes to investment analysis. His approach accepts the reality that investment problems are inherently complex, and in a manner more in keeping with the rigors of scientific inquiry than conventional investing, he attacks them with a staggering degree of preparation and broad-based research.

Charlie's "Big Ideas from the Big Disciplines" Approach to Investment Evaluation is certainly unique in the business world, as is its origin. Not finding any existing approach adequate to the task, Charlie painstakingly created his own, largely self-taught system. The self-taught statement is no exaggeration. He once said, "To this day, I have never taken any course anywhere in chemistry, economics, psychology, or business." And yet these disciplines, especially psychology, form the foundation upon which his system is built. It is this signature approach, backed by Charlie's formidable intellect, temperament, and decades of relevant experience, that have made him the virtuoso of business pattern recognition so valued by Buffett. Like a chess grandmaster, through logic, instinct, and intuition, he determines the most promising investment moves, all the while projecting the illusion that the insight came easily, even simply. But make no mistake, this simplicity comes only at the end of a long journey toward understanding, not at the beginning. His clarity is hard-won, the product of a lifetime of studying the patterns of human behavior, business systems, and a myriad of other scientific disciplines.

Charlie counts preparation, patience, discipline, and objectivity among his most fundamental guiding principles. He will not deviate from these principles regardless of group dynamics, emotional itches, or popular wisdom that "this time around it's different." When faithfully adhered to, these traits result in one of the best-known Munger characteristics: not buying or selling very often. Munger, like Buffett, believes a successful investment career boils down to only a handful of decisions. So when Charlie likes a business, he makes a very large bet and typically holds the position for a long period. Charlie calls it "sit on your ass investing" and cites its benefits: "You're paying less to brokers. You're listening to less nonsense. And if it works, the tax system gives you an extra 1, 2, or 3 percentage points per annum." In his view, a portfolio of three companies is plenty of diversification. Accordingly, Charlie is willing to commit uncommonly high percentages of his investment capital to individual, focused opportunities. Find a Wall Street organization, financial advisor, or mutual fund manager willing to make that statement.

Given Charlie's record of success, not to mention Buffett's endorsement, why aren't his investment practices more routinely emulated by others? Perhaps the answer is that for most people, Charlie's multidisciplinary approach is simply too hard. Further, few investors share Charlie's willingness to appear foolish by not following the herd. Religious in his objectivity, Charlie is content to swim imperturbably against the tide of popular opinion, indefinitely, if necessary, which is a rare attribute in the average investor. And while this behavior can at times appear simply stubborn or contrarian, that is not the defining characteristic. Charlie is simply content to trust his own judgment, even when it runs counter to the wisdom of the herd. This lone wolf aspect of Charlie's temperament is a rarely appreciated reason why he consistently outperforms the larger investment community. Indeed, if temperament chiefly arises from inborn tendencies, it may be that hard work, intellect, and experience, regardless of their intensity, are by themselves insufficient to make a great investor like Charlie Munger. As we shall witness through the remainder of this book, the right kind of genetically predetermined wiring is needed as well.

At the 2004 Berkshire Hathaway annual meeting, a young shareholder asked Buffett how to succeed in life. After Buffett shared his thoughts, Charlie chimed in, "Don't do cocaine, don't race trains, and avoid AIDS situations." Many would dismiss his seemingly flippant answer as merely humorous, which it certainly was, but in fact, it faithfully reflects both his general views on avoiding trouble in life, and his particular method for avoiding missteps in investing. Often, as in this case, Charlie generally focuses first on what to avoid—that is, on what not to do—before he considers the affirmative steps he will take in a given situation. "All I want to know is where I'm going to die, so I'll never go there," is one of his favorite quips. In business, as in life, Charlie gains enormous advantage by summarily eliminating the unpromising portions of the chessboard, freeing his time and attention for the more productive regions.

Charlie strives to reduce complex situations to their most basic, unemotional fundamentals. Yet within this pursuit of rationality and simplicity, he is careful to avoid what he calls "physics envy"—the common human craving to reduce enormously complex systems such as those in economics to one-size-fits-all Newtonian formulas. Instead, he faithfully honors Albert Einstein's admonition, "A scientific theory should be as simple as possible, but no simpler." Or, in his own words, "What I'm against is being very confident and feeling that you know for sure that your particular action will do more good than harm. You're dealing with highly complex systems wherein everything is interacting with everything else."

Another Benjamin Graham, not Franklin, played a significant role in forming Charlie's investing outlook. One of the most enduring concepts in Graham's *The Intelligent Investor* is Mr. Market. Usually, Mr. Market is a temperate and reasonable fellow, but some days he is gripped by irrational fear or greed. Graham cautioned the investor to carefully use his own unemotional judgment of value instead of relying on the often manic-depressive behavior of the financial markets. Similarly, Charlie recognizes that even among the most competent and motivated of people, decisions are not always made on a purely rational basis. For this reason, he considers the psychological factors of human misjudgment some of the most important mental models that can be applied to an investment opportunity. Personally, I've gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain, at a subconscious level, is automatically doing these things which by and large are useful but which often misfunction. One approach is rationality, the way you'd work out a bridge problem by evaluating the real interests, the real probabilities, and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions, many of which are wrong." For more specifics on this topic, see Talk 11, in which Charlie applies mental models from the field of psychology to illustrate 25 common causes of human misjudgment.

Obviously, the methods described to this point can't be learned in a university classroom or on Wall Street. They were developed by Charlie from scratch to satisfy his own exacting requirements. They probably deserve a title of their own, something like: "Quickly eliminate the big universe of what not to do. Follow up with a fluent, multidisciplinary attack on what remains. Then act decisively when and only when the right circumstances appear." Is it worth the effort to develop and adhere to such an approach? Charlie seems to think so. "It's kind of fun to sit there and outthink people who are way smarter than you are because you've trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience."

[Music]

Munger's Investment Evaluation Process.

As we've noted, Charlie doesn't make a lot of investments. His approach is perhaps best summarized by Thomas Watson, Sr., the founder of IBM: "I'm no genius. I'm smart in spots and I stay around those spots." If Charlie knows anything, he knows his spots—his carefully identified circles of competence. To stay within these circles, he first applies a basic, overall screen designed to limit his investment field to only simple, understandable candidates. As he says, "We have three baskets for investing: Yes, No, and Too Tough to Understand." To identify potential "Yes" candidates, Charlie looks for an easy-to-understand, dominant business franchise that can sustain itself and thrive in all market environments. Understandably, few companies survive this first cut. Many investor favorites, such as pharmaceuticals and technology, for example, go straight to the "Too Tough to Understand" basket. Heavily promoted deals and IPOs earn immediate "Nos." Those that do survive this first winnowing are subjected to the screens and filters of Charlie's mental models approach. The process is intense and Darwinian, but also efficient. Charlie detests placer mining—the process of sifting through piles of sand for specks of gold. Instead, he applies his "Big Ideas from the Big Disciplines" to find the large, unrecognized nuggets of gold that sometimes lie in plain sight on the ground.

Throughout his exhaustive evaluation, Charlie is no slave to a database. He takes into account all relevant aspects, both internal and external to the company and its industry, even if they are difficult to identify, measure, or reduce to numbers. His thoroughness, however, does not cause him to forget his overall ecosystem theme. Sometimes the maximization or minimization of a single factor—notably specialization, as he likes to point out regarding Costco's discount warehouses—can make that single factor disproportionately important.

Charlie treats financial reports and their underlying accounting with a Midwestern dose of skepticism. At best, they are merely the beginning of a proper calculation of intrinsic valuation, not the end. The list of additional factors he examines is seemingly endless and includes such things as the current and prospective regulatory climate, the state of labor, supplier, and customer relations, the potential impact of changes in technology, competitive strengths and vulnerabilities, pricing power, scalability, environmental issues, and, notably, the presence of hidden exposures. Charlie knows that there is no such thing as a riskless investment candidate. He's searching for those with few risks that are easily understandable. He recasts all financial statement figures to fit his own view of reality, including the actual free or owner's cash being produced, inventory and other working capital assets, fixed assets, and such frequently overstated intangible assets as goodwill. He also completes an assessment of the true impact, current and future, of the cost of stock options, pension plans, and retiree medical benefits. He applies equal scrutiny to the liability side of the balance sheet. For example, under the right circumstances, he might view an obligation such as insurance float (premium income that may not be paid out in claims for many years) more properly as an asset. He especially assesses a company's management, well beyond conventional number crunching. In particular, the degree to which they are able, trustworthy, and owner-oriented. For example, how do they deploy cash? Do they allocate it intelligently on behalf of the owners? Or do they overcompensate themselves or pursue ego-oriented growth for growth's sake? Above all, he attempts to assess and understand competitive advantage in every respect—products, markets, trademarks, employees, distribution channels, societal trends, and so on—and the durability of that advantage. Charlie refers to a company's competitive advantage as its "moat," the virtual physical barrier it presents against incursions. Superior companies have deep moats that are continuously widened to provide enduring protection. In this vein, Charlie carefully considers competitive destruction forces that over the long term lay siege to most companies. Munger and Buffett are laser-focused on this issue. Over their long business careers, they have learned, sometimes painfully, that few businesses survive over multiple generations. Accordingly, they strive to identify and buy only those businesses with a good chance of beating these tough odds.

Finally, Charlie seeks to calculate the intrinsic value of the whole business and, with allowance for potential dilution, etc., to determine an approximate value per share to compare to market prices. This latter comparison is the fundamental purpose of the whole process: comparing value (what you get) with price (what you pay). On this subject, he is famous for his viewpoint that "a great business at a fair price is superior to a fair business at a great price." Warren Buffett often credits Charlie with convincing him of the wisdom of this approach. Charlie understood this early: "I was a slow learner." Charlie's insight helped Buffett move from pure Benjamin Graham-style investing to focusing on great businesses such as the Washington Post, Geico, Coca-Cola, Gillette, and others.

Though extremely thorough, Charlie is able to ignore insignificant detail and the distractions to which others sometimes fall victim. Investment variables, just like all other variables, go through their own process of elimination. By the time he is finished with his analysis, he has reduced the candidate to its most salient elements and achieved a remarkable degree of confidence about whether or not to act. The evaluation finally becomes not so much mathematical as philosophical. Ultimately, a "feel" emerges, a function of both the analysis itself and Charlie's lifetime of accumulated experience and skill in recognizing patterns. At this point, only an exceptionally superior investment candidate will still be in the running. But Charlie does not immediately rush out and buy it. Knowing that a necessary companion to proper valuation is proper timing, he applies yet a finer screen, a "prior to pulling the trigger" checklist, which is especially useful in evaluating what he refers to as "close calls." The checklist includes such items as: What are the current price, volume, and trading considerations? What disclosure timing or other sensitivities exist? Do contingent exit strategies exist? Are better uses of capital currently or potentially available? Is sufficient liquid capital currently on hand, or must it be borrowed? What is the opportunity cost of that capital, and so on?

Charlie's exhaustive screening process requires considerable self-discipline and results in long periods of apparent inactivity. But as Charlie says, "Hard work is an essential element in tracking down and perfecting a strategy or in executing it." For Charlie and Warren, the hard work is continuous, whether it results in current investing activity or not, and usually, it does not. This habit of committing far more time to learning and thinking than to doing is no accident. It is the blend of discipline and patience exhibited by true masters of a craft.

An Uncompromising Commitment to Properly Playing the Hand.

Like world-class bridge player Richard Zehouser, Charlie scores himself not so much on whether he won the hand, but rather on how well he played it. While poor outcomes are excusable in the Munger-Buffett world, given the fact that some outcomes are outside of their control, sloppy preparation and decisionmaking are never excusable because they are controllable. On those relatively few occasions when all the circumstances are just right and Charlie does invest, he will likely make a large, decisive bet. He does not pick around the edges, take initial positions, or make small speculative investments. Such behavior implies uncertainty. And Charlie's moves, few as they are, are anything but uncertain. As he says, he practices "extreme patience combined with extreme decisiveness."

Charlie's self-confidence is based not on who or how many agree or disagree with him, but on his ability to objectively view and measure himself. This self-mastery affords him rare objectivity in gauging his actual knowledge, experience, and correctness of thought. Again, we see the important role played by the right kinds of temperamental qualities: self-discipline, patience, calm, independence. Charlie's level of investment performance is arguably impossible without them.

What Makes a Great Business Model for Charlie?

His recommended reading materials provide some guidance. *Guns, Germs, and Steel*, *The Selfish Gene*, *Ice Age*, and *Darwin's Blind Spot* all have a certain theme: a focus on the issue of competitive destruction and an examination of why some entities are nevertheless able to adapt, survive, and even dominate over time. When this theme is extrapolated into investment selection, the preferred Munger business emerges. Some thrive by out-competing (à la *The Selfish Gene*), and others by out-cooperating (à la *Darwin's Blind Spot*). Once again, we see Charlie's rich fluency across a broad range of disciplines at work. How many investors ever consider, as Charlie routinely does, such a broad and sophisticated spectrum of factors? To name but a few: He routinely considers factors such as conversion (that is, how the laws of thermodynamics intersect with laws of economics, for instance, how paper and petroleum become a newspaper delivered to a front door), psychological tendencies and incentives (notably the extreme behavioral pressures they create, both good and bad), and fundamental sustainability over time (the constant and often deadly interplay between positive factors such as moats and the ravages of competitive destruction). Charlie is possibly without peer when it comes to the checklist of atypical investment factors he considers and his deep fluency in the diverse disciplines from which they are drawn.

An Investing Principles Checklist.

We have now examined Charlie's approach to thinking in general and to investing in particular. In keeping with our intent to observe how he "seems to do it," we will recap his approach by using the checklist methodology he advocates for Charlie's own words of wisdom on the value and importance of checklists. See Talk 5. Note, however, that the following principles are most certainly not employed by Charlie in a one-by-one or one-time fashion, as the checklist format might seem to imply, nor can they necessarily be prioritized in terms of any apparent or relative importance. Rather, each must be considered as part of the complex whole or gestalt of the investment analysis process, in much the same way that an individual tile is integral to the larger mosaic in which it appears.

* **Risk.** All investment evaluations should begin by measuring risk, especially reputational. Incorporate an appropriate margin of safety. Avoid dealing with people of questionable character. Insist upon proper compensation for risk assumed. Always beware of inflation and interest rate exposures. Avoid big mistakes. Shun permanent capital loss.

* **Independence.** Only in fairy tales are emperors told they are naked. Objectivity and rationality require independence of thought. Remember that just because other people agree or disagree with you doesn't make you right or wrong. The only thing that matters is the correctness of your analysis and judgment. Mimicking the herd invites regression to the mean, merely average performance.

* **Preparation.** The only way to win is to work, work, work, work and hope to have a few insights. Develop into a lifelong self-earner through voracious reading. Cultivate curiosity and strive to become a little wiser every day. More important than the will to win is the will to prepare. Develop fluency in mental models from the major academic disciplines. If you want to get smart, the question you have to keep asking is "Why? Why? Why?"

* **Intellectual Humility.** Acknowledging what you don't know is the dawning of wisdom. Stay within a well-defined circle of competence. Identify and reconcile disconfirming evidence. Resist the craving for false precision, false certainties, etc. Above all, never fool yourself and remember that you are the easiest person to fool.

* **Analytic Rigor.** Use of the scientific method and effective checklists minimizes errors and omissions. Determine value apart from price, progress apart from activity, wealth apart from size. It is better to remember the obvious than to grasp the esoteric. Be a business analyst, not a market, macroeconomic, or security analyst. Consider the totality of risk and effect. Look always at potential second- and higher-level impacts. Think forward and backward. Invert. Always invert.

* **Allocation.** Proper allocation of capital is an investor's number one job. Remember that the highest and best use is always measured by the next best use, opportunity cost. Good ideas are rare. When the odds are greatly in your favor, bet/allocate heavily. Don't fall in love with an investment. Be situation-dependent and opportunity-driven.

* **Patience.** Resist the natural human bias to act. Compound interest is the eighth wonder of the world. Einstein. Never interrupt unnecessarily. Avoid unnecessary transactional taxes and frictional costs. Never take action for its own sake. Be alert for the arrival of luck. Enjoy the process along with the proceeds because the process is where you live.

* **Decisiveness.** When proper circumstances present themselves, act with decisiveness and conviction. Be fearful when others are greedy and greedy when others are fearful. Opportunity doesn't come often, so seize it when it does. Opportunity meeting the prepared mind. That's the game.

* **Change.** Live with change and accept unresolvable complexity. Recognize and adapt to the true nature of the world around you. Don't expect it to adapt to you. Continually challenge and willingly amend your best-lodged ideas. Recognize reality even when you don't like it, especially when you don't like it.

* **Focus.** Keep things simple and remember what you set out to do. Remember that reputation and integrity are your most valuable assets and can be lost in a heartbeat. Guard against the effects of hubris and boredom. Don't overlook the obvious by drowning in minutiæ. Be careful to exclude unneeded information or slop. A small leak can sink a great ship. Face your troubles. Don't sweep them under the rug.

Since human beings began investing, they have been searching for a magic formula or easy recipe for instant wealth. As you can see, Charlie's superior performance doesn't come from a magic formula or some business school-inspired system. It comes from what he calls his "constant search for better methods of thought," from a willingness to prepay through rigorous preparation, and from the extraordinary outcomes of his multidisciplinary research model. In the end, it comes down to Charlie's most basic guiding principles: his fundamental philosophy of life: preparation, discipline, patience, decisiveness. Each attribute is in turn lost without the other, but together they form the dynamic critical mass for a cascading of positive effects for which Munger is famous. The "La Palooa."

Finally, a word or two on why this overview of Charlie's investment philosophy has focused so much on the subject of what to buy and so little on when to sell. The answer, in Charlie's own words, serves as a wonderful summation of the Munger school of highly concentrated, focused investing described here: "We're partial to putting out large amounts of money where we won't have to make another decision. If you buy something because it's undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That's hard. But if you can buy a few great companies, then you can sit on your ass. That's a good thing." Like his hero Benjamin Franklin, Charlie Munger painstakingly developed and perfected unique approaches to personal and business endeavors. Through these methods and through the development and maintenance of sound, lifelong habits, he has achieved extraordinary success.

Chapter 4. 11 Talks.

Charlie Munger is not the least bit shy when it comes to offering both frank criticism and constructive advice. When he sets his sights on an issue, be it a corrupt business practice, an academic failing, or a financial scandal, he lets loose with both barrels. Which is not to say he spends all his time focused on life's failings. He is equally at home discussing the values of lifelong learning or the joys of a successful marriage. But whatever the topic, Charlie is apt to tell it like it is, which is exactly what he has done in over two decades of public speaking. Here then are 11 of Charlie's best talks, including a special compilation he has prepared exclusively for this book. Enjoy.

1. Harvard School Commencement Speech

2. A Lesson on Elementary Worldly Wisdom

3. A Lesson on Elementary Worldly Wisdom Revisited

4. Practical Thought About Practical Thought

5. Harvard Law School 50th Reunion Address

6. Investment Practices of Leading Charitable Foundations

7. Philanthropy Roundtable

8. The Great Financial Scandal of 2003

9. Academic Economics

10. USC Gould School of Law Commencement Address

11. The Psychology of Human Misjudgment (A special compilation talk with material written by Charlie exclusively for this book)

Talk 1, Harvard School Commencement Speech. June 13, 1986. Harvard School, Los Angeles.

In a vow that students the world over may hope he renounces, Charlie delivered the one and only graduation speech I will ever make in 1986 at the Harvard School in Los Angeles. The occasion was the graduation of Philip Munger, the last of five Munger family sons to matriculate at this prep school, originally an all-boys institution and now the co-educational school called Harvard-Westlake. Despite Charlie's self-deprecating protestations about lacking significant public speaking experience, he demonstrates imposing rhetorical talents in this short speech. We also get a good taste of both Charlie's value system and his wit.

Most graduation speakers choose to lay out a prescription for attaining a happy life. Charlie, using the inversion principle he recommends in the speech, compellingly makes the opposite case by setting forth what a graduate may do to reach a state of misery. For those of you who want to remain unenlightened and Munger-less, do not under any circumstances read this selection.

Now that Headmaster Barisford has selected one of the oldest and longest-serving trustees to make a commencement speech, it behooves the speaker to address two questions in every mind. One, why was such a selection made? Two, how long is the speech going to last? I will answer the first question from long experience alongside Barisford. He is seeking enhanced reputation for our school in the manner of the man who proudly displays his horse that can count to seven. The man knows that counting to seven is not much of a mathematical feat, but he expects approval because doing so is creditable, considering the performer is a horse. The second question regarding the length of the speech I am not going to answer in advance. It would deprive your upturned faces of lively curiosity and obvious keen anticipation which I prefer to retain regardless of source. But I will tell you how my consideration of speech length created the subject matter of the speech itself.

I was puffed up when invited to speak. While not having significant public speaking experience, I do hold a black belt in Hutzpah, and I immediately considered Demosthenes and Cicero as role models, and anticipated trying to earn a compliment like Cicero gave when asked which was his favorite among the orations of Demosthenes. Cicero replied, "The longest one." However, fortunately for this audience, I also thought of Samuel Johnson's famous comment when he addressed Milton's poem *Paradise Lost* and correctly said, "No one ever wished it longer." And that made me consider which of all the 20 Harvard School graduation speeches I had heard that I had wished longer. There was only one such speech, given by Johnny Carson, specifying Carson's prescriptions for guaranteed misery in life. I therefore decided to repeat Carson's speech, but in expanded form, with some added prescriptions of my own. After all, I am much older than Carson was when he spoke, and I have failed and been miserable more often and in more ways than was possible for a charming humorist speaking at a younger age. I am plainly well-qualified to expand on Carson's theme.

What Carson said was that he couldn't tell the graduating class how to be happy, but he could tell them from personal experience how to guarantee misery. Carson's prescription for sure misery included: one, ingesting chemicals in an effort to alter mood or perception; two, envy; three, resentment. I can still recall Carson's absolute conviction as he told how he had tried these things on occasion after occasion and had become miserable every time. It is easy to understand Carson's first prescription for misery, ingesting chemicals. I add my voice. The four closest friends of my youth were highly intelligent, ethical, humorous types, favored in person and background. Two are long dead with alcohol a contributing factor, and a third is a living alcoholic if you call that living. While susceptibility varies, addiction can happen to any of us through a subtle process where the bonds of degradation are too light to be felt until they are too strong to be broken. And yet I have yet to meet anyone in over six decades of life whose life was worsened by fear and avoidance of such a deceptive pathway to destruction.

Envy, of course, joins chemicals in winning some sort of quantity prize for causing misery. It was wreaking havoc long before it got bad press in the laws of Moses. If you wish to retain the contribution of envy to misery, I recommend that you never read any of the biographies of that good Christian Samuel Johnson, because his life demonstrates in an enticing way the possibility and advantage of transcending envy. Resentment has always worked for me exactly as it worked for Carson. I cannot recommend it highly enough to you if you desire misery. Johnson spoke well when he said that "life is hard enough to swallow without squeezing in the bitter rind of resentment." For those of you who want misery, I also recommend refraining from the practice of the Israeli compromise designed for people who find it impossible to quit resentment cold turkey. Benjamin Disraeli, as he rose to become one of the greatest prime ministers, learned to give up vengeance as a motivation for action. But he did retain some outlet for resentment by putting the names of people who wronged him on pieces of paper in a drawer. Then, from time to time, he reviewed these names and took pleasure in noting the way the world had taken his enemies down without his assistance. Well, so much for Carson's three prescriptions.

Here are four more prescriptions from Munger. First, be unreliable. Do not faithfully do what you have engaged to do. If you will only master this one habit, you will more than counterbalance the combined effect of all your virtues, howsoever great. If you like being distrusted and excluded from the best human contribution and company, this prescription is for you. Master this one habit and you will always play the role of the hare in the fable. Except that instead of being outrun by one fine turtle, you will be outrun by hordes and hordes of mediocre turtles and even some mediocre turtles on crutches. I must warn you that if you don't follow my first prescription, it may be hard to end up miserable, even if you start disadvantaged. I had a roommate in college who was and is severely dyslexic, but he is perhaps the most reliable man I have ever known. He has had a wonderful life so far: an outstanding wife and children, chief executive of a multi-billion dollar corporation. If you want to avoid a conventional main-culture establishment result of this kind, you simply can't count on your other handicaps to hold you back if you persist in being reliable. I cannot here pass by a reference to a life described as "wonderful so far" without reinforcing the "so far" aspects of the human condition by repeating the remark of Croesus, once the richest king in the world, later in ignominious captivity as he prepared to be burned alive: he said, "Well now do I remember the words of the historian Solon: 'No man's life should be accounted a happy one till it is over.'"

My second prescription for misery is to learn everything you possibly can from your own experience, minimizing what you learn vicariously from the good and bad experiences of others, living and dead. This prescription is a sure-fire producer of misery and second-rate achievement. You can see the results of not learning from others' mistakes by simply looking about you. How little originality there is in the common disasters of mankind: drunk driving deaths, reckless driving maimings, incurable venereal diseases, conversion of bright college students into brainwashed zombies as members of destructive cults, business failures through repetition of obvious mistakes made by predecessors, various forms of crowdf. I recommend as a memory clue to finding the way to real trouble from heedless, unoriginal error the modern saying, "If at first you don't succeed, well, so much for hang gliding." The other aspect of avoiding vicarious wisdom is the rule of not learning from the best work done before yours. The prescription is to become as non-educated as you reasonably can. Perhaps you will better see the type of non-miserable result you can thus avoid if I render a short historical account. There once was a man who assiduously mastered the work of his best predecessors despite a poor start and very tough time in analytical geometry. Eventually his own work attracted wide attention, and he said of his work, "If I have seen a little farther than other men, it is because I stood on the shoulders of giants." The bones of that man lie buried now in Westminster Abbey, under an unusual inscription: "Here lie the remains of all that was mortal in Sir Isaac Newton."

My third prescription to you for misery is to go down and stay down when you get your first, second, or third severe reverse in the battle of life. Because there is so much adversity out there, even for the lucky and wise, this will guarantee that in due course you will be permanently mired in misery. Ignore at all cost the lesson contained in the accurate epitaph written for himself by Epictetus: "Here lies Epictetus, a slave maimed in body, the ultimate in poverty and favored by the gods."

My final prescription to you for a life of fuzzy thinking and infelicity is to ignore a story they told me when I was very young about a rustic who said, "I wish I knew where I was going to die, and then I'd never go there." Most people smile, as you did, at the rustic's ignorance and ignore his basic wisdom. If my experience is any guide, the rustic's approach is to be avoided at all cost by someone bent on misery. To help fail, you should discount as mere quirk with no useful message the method of the rustic, which is the same one used in Carson's speech. What Carson did was to approach the study of how to create X by turning the question backward, that is, by studying how to create non-X. The great algebraist Jacobi had exactly the same approach as Carson and was known for his constant repetition of one phrase: "Invert. Always invert." It is in the nature of things, as Jacobi knew, that many hard problems are best solved only when they are addressed backward. For instance, when almost everyone else was trying to revise the electromagnetic laws of James Clerk Maxwell to be consistent with the motion laws of Newton, Einstein discovered special relativity as he made a 180° turn and revised Newton's laws to fit Maxwell's. It is my opinion, as a certified biography nut, that Charles Robert Darwin would have ranked near the middle of the Harvard School graduating class of 1986. Yet he is now famous in the history of science. This is precisely the type of example you should learn nothing from if bent on minimizing your results from your own endowment. Darwin's result was due in large measure to his working method, which violated all my rules for misery and particularly emphasized a backward twist in that he always gave priority attention to evidence tending to disconfirm whatever cherished and hard-won theory he already had. In contrast, most people early achieve and later intensify a tendency to process new and disconfirming information so that any original conclusion remains intact. They become people of whom Philip Wykeham observed, "You couldn't squeeze a dime between what they already know and what they will never learn." The life of Darwin demonstrates how a turtle may outrun a hare, aided by extreme objectivity, which helps the objective person end up like the only player without a blindfold in a game of pin the tail on the donkey. If you minimize objectivity, you ignore not only a lesson from Darwin, but also one from Einstein. Einstein said that his successful theories came from curiosity, concentration, perseverance, and self-criticism. And by self-criticism, he meant the testing and destruction of his own well-loved ideas. Finally, minimizing objectivity will help you lessen the compromises and burden of owning worldly goods. Because objectivity does not work only for great physicists and biologists. It also adds power to the work of a plumbing contractor in Boise. Therefore, if you interpret being true to yourself as requiring that you retain every notion of your youth, you will be safely underway not only toward maximizing ignorance, but also toward whatever misery can be obtained through unpleasant experiences in business. It is fitting that a backward sort of speech end with a backward sort of toast, inspired by Elihu Root's repeated accounts of how the dog went to do leg over leg. To the class of 1986, gentlemen, may each of you rise by spending each day of a long life aiming low.

Talk 1 Revisited.

As I review in 2006 this talk made in 1986, I would not revise a single idea. If anything, I now believe even more strongly that: One, reliability is essential for progress in life. And two, while quantum mechanics is unlearnable for a vast majority, reliability can be learned to great advantage by almost anyone. Indeed, I have often made myself unpopular on elite college campuses by pushing this reliability theme. What I say is that McDonald's is one of our most admirable institutions. Then, as signs of shock come to surrounding faces, I explain that McDonald's, providing first jobs to millions of teenagers, many troubled over the years, has successfully taught most of them the one lesson they most need: to show up reliably for responsible work. Then I usually go on to say that if the elite campuses were as successful as McDonald's in teaching sensibly, we would have a better world.

Talk 2, A Lesson on Elementary Worldly Wisdom as it Relates to Investment Management and Business. April 14th, 1994. The University of Southern California Marshall School of Business. (Well known because it was published in *Outstanding Investor Digest*, May 5th, 1995.)

This talk was given in 1994 to Professor Guilford Babcock's business class at the University of Southern California. Charlie ranges in the talk from education systems to psychology to the importance of possessing both common and uncommon sense. Dissecting business management, he brilliantly describes psychological impacts.

That can damage or benefit a firm. He also presents an outstanding set of principles for investment, business management, and most importantly from Charlie's perspective, decision-making in everyday life. Your time investment in reading this talk will be paid back quickly via the effect it will have on your own decision-making abilities.

I am going to play a minor trick on you today because the subject of my talk is the art of stock-picking as a subdivision of the art of worldly wisdom. That enables me to start talking about worldly wisdom. A much broader topic that interests me because I think all too little of it is delivered by modern educational systems, at least in an effective way. And therefore, the talk is sort of along the lines that some behaviorist psychologists call "Grandma's Rule," after the wisdom of grandma when she said that you have to eat the carrots before you get the dessert. The carrot part of this talk is about the general subject of worldly wisdom, which is a pretty good way to start. After all, the theory of modern education is that you need a general education before you specialize. And I think to some extent, before you're going to be a great stock-picker, you need some general education. So, emphasizing what I sometimes waggishly call remedial worldly wisdom, I'm going to start by waltzing you through a few basic notions.

What is elementary worldly wisdom? Well, the first rule is that you can't really know anything if you just remember isolated facts and try and bang them back. If the facts don't hang together on a lattice-work of theory, you don't have them in a usable form. You've got to have models in your head. And you've got to array your experience, both vicarious and direct, on this lattice-work of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and fail in life. You've got to hang experience on a lattice-work of models in your head.

What are the models? Well, the first rule is that you've got to have multiple models. Because if you have just one or two that you're using, the nature of human psychology is such that you'll torture reality so that it fits your models, or at least you'll think it does. You become the equivalent of a chiropractor, who, of course, is the great boob in medicine. It's like the old saying, "To the man with only a hammer, every problem looks like a nail." And of course, that's the way the chiropractor goes about practicing medicine. But that's a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So, you've got to have multiple models. And the models have to come from multiple disciplines because all the wisdom of the world is not to be found in one little academic department. That's why poetry professors, by and large, are so unwise in a worldly sense. They don't have enough models in their heads. So, you've got to have models across a fair array of disciplines.

You may say, "My God, this is already getting way too tough." But fortunately, it isn't that tough because 80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person. And of those, only a mere handful really carry very heavy freight. So, let's briefly review what kinds of models and techniques constitute this basic knowledge that everybody has to have before they proceed to being really good at a narrow art like stock-picking.

First, there's mathematics. Obviously, you've got to be able to handle numbers and quantities. Basic arithmetic and the great useful model after compound interest is the elementary math of permutations and combinations 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 Bles Pascal and Pierre de Ferma. They worked it out casually in a series of letters. It's not that hard to learn. What is hard is to get so you use it routinely, almost every day of your life. The Fermat-Pascal system is dramatically consonant with the way the world works, and it's a 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. So, you have to learn in a very usable way this very elementary math and use it routinely in life. Just the way that 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.

Obviously, you have to know accounting. It's the language of practical business life. It was a very useful thing to deliver to civilization. I've heard it came to civilization through Venice, which of course was once the great commercial power in the Mediterranean. However, double-entry bookkeeping was a hell of an invention. And it's not that hard to understand, but you have to know enough about it to understand its limitations. Because although accounting is the starting place, it's only a crude approximation. And it's not very hard to understand its limitations. For example, everyone can see that you have to more or less just guess at the useful life of a jet airplane or anything like that. Just because you express the depreciation rate in neat numbers doesn't make it anything you really know.

In terms of the limitations of accounting, one of my favorite stories involves a very great businessman named Carl Braun, who created the C.F. Braun Engineering Company. It designed and built oil refineries, which is very hard to do. And Braun would get them to come in on time and not blow up and have efficiencies and so forth. This is a major art. Braun, being the thorough Teutonic type that he was, had a number of quirks. One of them was that he took a look at standard accounting and the way it was applied to building oil refineries, and he said, "This is asinine." So, he threw all of his accountants out and he took his engineers and said, "Now, we'll devise our own system of accounting to handle this process." And in due time, accounting adopted a lot of Carl Braun's notions. So, he was a formidably willful and talented man who demonstrated both the importance of accounting and the importance of knowing its limitations.

He had another rule from psychology, which, if you're interested in wisdom, ought to be part of your repertoire like the elementary mathematics of permutations and combinations. His rule for all the Braun Company's communications was called the "Five W's." You had to tell who was going to do what, where, when, and why. And if you wrote a letter or directive in the Braun Company telling somebody to do something and you didn't tell them why, you could get fired. In fact, you would get fired if you did it twice. You might ask, why is that so important? Well, again, that's a rule of psychology. Just as you think better if you array knowledge on a bunch of models that are basically answers to the question, "Why? Why? Why?" If you always tell people why, they'll understand it better. They'll consider it more important, and they'll be more likely to comply. Even if they don't understand your reason, they'll be more likely to comply. So, there's an iron rule that just as you want to start getting worldly wisdom by asking why, why, why, in communicating with other people about everything, you want to include why, why, why. Even if it's obvious, it's wise to stick in the why.

Which models are the most reliable? Well, obviously, the models that come from hard science and engineering are the most reliable models on this earth. And engineering quality control, at least the guts of it that matters to you and me and people who are not professional engineers, is very much based on the elementary mathematics of Fermat and Pascal. It costs so much, and you get so much less likelihood of it breaking if you spend this much. It's all elementary high school mathematics. And an elaboration of that is what W. Edwards Deming brought to Japan for all of that quality control stuff. I don't think it's necessary for most people to be terribly fluent in statistics. For example, I'm not sure that I can even pronounce the Gaussian distribution, although I know what it looks like and I know that events and huge aspects of reality end up distributed that way. So, I can do a rough calculation. But if you ask me to work out something involving a Gaussian distribution to 10 decimal points, I can't sit down and do the math. I'm like a poker player who's learned to play pretty well without mastering Pascal. And by the way, that works well enough. But you have to understand that bell-shaped curve, at least roughly as well as I do. And of course, the engineering idea of a backup system is a very powerful idea. The engineering idea of break points, that's a very powerful model, too. The notion of a critical mass that comes out of physics is a very powerful model. All of these things have great utility in looking at ordinary reality. And all of this cost-benefit analysis. Hell, that's all elementary high school algebra. It's just been dolled up a little bit with fancy lingo. And you can demonstrate that point quite simply. There's not a person in this room viewing the work of a very ordinary professional magician who doesn't see a lot of things happening that aren't happening and not see a lot of things happening that are happening.

I suppose the next most reliable models are from biology and physiology because, after all, we are programmed by our genetic makeup to be much the same. Then, when you get into psychology, of course, it gets very much more complicated. But it's an ungodly important subject if you're going to have any worldly wisdom. And the reason why is that the perceptual apparatus of man has shortcuts in it. The brain cannot have unlimited circuitry. So, someone who knows how to take advantage of those shortcuts and cause the brain to miscalculate in certain ways can cause you to see things that aren't there. Now, you get into the cognitive function as distinguished from the perceptual function, and there you are equally, more than equally, in fact, likely to be misled. Again, your brain has a shortage of circuitry and so forth, and it's taking all kinds of little automatic shortcuts. So, when circumstances combine in certain ways, or more commonly, when your fellow man starts acting like the magician and manipulates you on purpose by causing you cognitive dysfunction, you're a goner. And so, just as a man working with a tool has to know its limitations, a man working with his cognitive apparatus has to know its limitations. And this knowledge, by the way, can be used to control and motivate other people. So, the most useful and practical part of psychology, which I personally think can be taught to any intelligent person in a week, is ungodly important, and nobody taught it to me, by the way. I had to learn it later in life, one piece at a time, and it was fairly laborious. It's so elementary, though, that when it was all over, I just felt like a total horse's ass. And yeah, I'd been educated at Caltech and the Harvard Law School and so forth. So, very eminent places miseducated people like you and me. The elementary part of psychology, the psychology of misjudgment, as I call it, is a terribly important thing to learn. There are about 20 little principles, and they interact. So, it gets slightly complicated, but the guts of it is unbelievably important. Terribly smart people make totally bonkers mistakes by failing to pay heed to it. In fact, I've done it several times during the last two or three years in a very important way. You never get totally over making silly mistakes.

There's another saying that comes from Pascal that I've always considered one of the really accurate observations in the history of thought. Pascal said, "The mind of man, at one and the same time, is both the glory and the shame of the universe." And that's exactly right. It has this enormous power. However, it also has these standard misfunctions that often cause it to reach wrong conclusions. It also makes man extraordinarily subject to manipulation by others. For example, roughly half of the army of Adolf Hitler was composed of believing Catholics. Given enough clever psychological manipulation, what human beings will do is quite interesting. Personally, I've gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain, at a subconscious level, is automatically doing these things which by and large are useful, but which often misfunction. One approach is rationality, the way you'd work out a bridge problem by evaluating the real interests, the real probabilities, and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions, many of which are wrong.

Now, we come to another somewhat less reliable form of human wisdom: microeconomics. Here, I find it quite useful to think of a free market economy or a partly free market economy as sort of the equivalent of an ecosystem. This is a very unfashionable way of thinking because, early in the days after Darwin came along, people like the robber barons assumed that the doctrine of the survival of the fittest authenticated them as deserving power. You know, "I'm the richest, therefore I'm the best, God's in his heaven," etc. And that reaction of the robber barons was so irritating to people that it made it unfashionable to think of an economy as an ecosystem. But the truth is that it is a lot like an ecosystem, and you get many of the same results. Just as in an ecosystem, people who narrowly specialize can get terribly good at occupying some little niche. Just as animals flourish in niches, people who specialize in the business world and get very good because they specialize, frequently find good economics that they wouldn't get any other way. And once we get into microeconomics, we get into the concept of advantages of scale. Now, we're getting closer to investment analysis because, in terms of which businesses succeed and which businesses fail, advantages of scale are ungodly important. For example, one great advantage of scale taught in all of the business schools of the world is cost reductions along the so-called experience curve. Just doing something complicated in more and more volume enables human beings who are trying to improve and are motivated by the incentives of capitalism to do it more and more efficiently. The very nature of things is that if you get a whole lot of volume through your operation, you get better at processing that volume. That's an enormous advantage, and it has a lot to do with which businesses succeed and fail.

Let's go through a list, albeit an incomplete one, of possible advantages of scale. Some come from simple geometry. If you're building a great circular tank, obviously, as you build it bigger, the amount of steel you use in the surface goes up with the square, and the cubic volume goes up with the cube. So, as you increase the dimensions, you can hold a lot more volume per unit area of steel. There are all kinds of things like that where the simple geometry, the simple reality, gives you an advantage of scale. For example, you can get advantages of scale from TV advertising. When TV advertising first arrived, when talking color pictures first came into our living rooms, it was an unbelievably powerful thing. And in the early days, we had three networks that had, whatever it was, say, 90% of the audience. Well, if you were Procter & Gamble, you could afford to use this new method of advertising. You could afford the very expensive cost of network television because you were selling so damn many cans and bottles. Some little guy couldn't. And there was no way of buying it in part. Therefore, he couldn't use it. In effect, if you didn't have a big volume, you couldn't use network TV advertising, which was the most effective technique. So, when TV came in, the branded companies that were already big got a huge tailwind. Indeed, they prospered and prospered and prospered until some of them got fat and foolish, which happens with prosperity, at least to some people.

And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz's chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don't know anything about Glotz's. So, if one is 40 cents and the other is 30 cents, am I going to take something I don't know and put it in my mouth, which is a pretty personal place, after all, for a lousy dime? So, in effect, Wrigley, simply by being so well-known, has advantages of scale, what you might call an informational advantage. Another advantage of scale comes from psychology. Psychologists use the term "social proof." We are all influenced subconsciously and to some extent consciously by what we see others do and approve. Therefore, if everybody's buying something, we think it's better. We don't like to be the one guy who's out of step. Again, some of this is at a subconscious level, and some of it isn't. Sometimes we consciously and rationally think, "Gee, I don't know much about this. They know more than I do. Therefore, why shouldn't I follow them?" The social proof phenomenon, which comes right out of psychology, gives huge advantages to scale. For example, with very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it's available almost everywhere in the world. Well, suppose you have a little soft drink. Exactly. How do you make it available all over the earth? The worldwide distribution setup, which is slowly won by a big enterprise, gets to be a huge advantage. And if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you.

There's another kind of advantage to scale. In some businesses, the very nature of things is to sort of cascade toward the overwhelming dominance of one firm. The most obvious one is daily newspapers. There's practically no city left in the United States, aside from a few very big ones, where there's more than one daily newspaper. And again, that's a scale thing. Once I get most of the circulation, I get most of the advertising. And once I get most of the advertising and circulation, why would anyone want the thinner paper with less information in it? So, it tends to cascade to a winner-take-all situation, and that's a separate form of the advantages of scale phenomenon. Similarly, all these huge advantages of scale allow greater specialization within the firm. Therefore, each person can be better at what he does. And these advantages of scale are so great, for example, that when Jack Welch came into General Electric, he just said, "To hell with it. We're either going to be number one or number two in every field we're in, or we're going to be out. I don't care how many people I have to fire and what I have to sell. We're going to be number one or number two, or out." That was a very tough-minded thing to do, but I think it was a very correct decision if you're thinking about maximizing shareholder wealth. And I don't think it's a bad thing to do for a civilization either, because I think that General Electric is stronger for having Jack Welch there.

And there are also disadvantages of scale. For example, we, by which I mean Berkshire Hathaway, are the largest shareholder in Capital City's ABC. And we had trade publications there that got murdered where our competitors beat us. And the way they beat us was by going to a narrower specialization. We'd have a travel magazine for business travel. So, somebody would create one that was addressed solely at corporate travel departments, like an ecosystem. We're getting a narrower and narrower specialization. Well, they got much more efficient. They could tell more to the guys who ran corporate travel departments. Plus, they didn't have to waste the ink and paper mailing out stuff that corporate travel departments weren't interested in reading. It was a more efficient system, and they beat our brains out as we relied on our broader magazine. That's what happened to the Saturday Evening Post and all those things. They're gone. What we have now is Motocross, which is read by a bunch of nuts who like to participate in tournaments where they turn somersaults on their motorcycles, but they care about it. For them, it's the principal purpose of life. A magazine called Motocross is a total necessity to those people, and its profit margins would make you salivate. Just think of how narrowcast that kind of publishing is. So, occasionally scaling down and intensifying gives you the big advantage. Bigger is not always better.

The great defect of scale, of course, which makes the game interesting, so that the big people don't always win, is that as you get big, you get the bureaucracy. And with the bureaucracy comes the territoriality, which is again grounded in human nature. And the incentives are perverse. For example, if you worked for AT&T in my day, it was a great bureaucracy. Who in the hell was really thinking about the shareholder or anything else? And in a bureaucracy, you think the work is done when it goes out of your in-basket into somebody else's in-basket. But of course, it isn't. It's not done until AT&T delivers what it's supposed to deliver. So, you get big, fat, dumb, unmotivated bureaucracies. They also tend to become somewhat corrupt. In other words, if I've got a department and you've got a department, and we kind of share power running this thing, there's sort of an unwritten rule. If you won't bother me, I won't bother you, and we're both happy. So, you get layers of management and associated costs that nobody needs. Then, while people are justifying all these layers, it takes forever to get anything done. They're too slow to make decisions, and nimbler people run circles around them. The constant curse of scale is that it leads to big, dumb bureaucracy, which, of course, reaches its highest and worst form in government, where the incentives are really awful. That doesn't mean we don't need governments because we do. But it's a terrible problem to get big bureaucracies to behave. So, people go to strategies. They create little decentralized units and fancy motivation and training programs. For example, for a big company, General Electric has fought bureaucracy with amazing skill. But that's because they have a combination of a genius and a fanatic running it. And they put him in young enough so he gets a long run. Of course, that's Jack Welch. But bureaucracy is terrible. And as things get very powerful and very big, you can get some really dysfunctional behavior. Look at Westinghouse. They blew billions of dollars on a bunch of dumb loans to real estate developers. They put in some guy who'd come up by some career path. I don't know exactly what it was, but it could have been refrigerators or something. And all of a sudden, he's loaning money to real estate developers building hotels. It's a very unequal contest, and in due time, they lost all those billions of dollars.

CBS provides an interesting example of another rule of psychology, namely Pavlovian association. If people tell you what you really don't want to hear, what's unpleasant, there's an almost automatic reaction of antipathy. You have to train yourself out of it. It isn't for destined that you have to be this way, but you will tend to be this way if you don't think about it. Television was dominated by one network, CBS, in its early days, and William S. Paley was a god, but he didn't like to hear what he didn't like to hear, and people soon learned that. So, they told Paley only what he liked to hear. Therefore, he was soon living in a little cocoon of unreality, and everything else was corrupt, although it was a great business. So, the idiocy that crept into the system was carried along by this huge tide. It was a mad hatter's tea party the last 10 years under Bill Paley. And that is not the only example by any means. You can get severe dysfunction in the high ranks of business. And of course, if you're investing, it can make a hell of a lot of difference. If you take all the acquisitions that CBS made under Paley, after the acquisition of the network itself, with all his dumb advisors, his investment bankers, management consultants, and so forth, who were getting paid very handsomely, it was absolutely terrible. So, life is an everlasting battle between those two forces: to get these advantages of scale on one side, and a tendency to get a lot like the U.S. Department of Agriculture on the other side, where they just sit around and so forth. I don't know exactly what they do. However, I do know they do very little useful work.

On the subject of the advantages of economies of scale, I find chain stores quite interesting. Just think about it. The concept of a chain store was a fascinating invention. You get this huge purchasing power, which means that you have lower merchandise costs. You get a whole bunch of little laboratories out there in which you can conduct experiments, and you get specialization. If one little guy is trying to buy across 27 different merchandise categories influenced by traveling salesmen, he's going to make a lot of dumb decisions. But if your buying is done in headquarters for a huge bunch of stores, you can get very bright people who know a lot about refrigerators and so forth to do the buying. The reverse is demonstrated by the little store where one guy is doing all the buying. It's like the old story about the little store with salt all over its walls. A stranger comes in and says to the store owner, "You must sell a lot of salt." And he replies, "No, I don't, but you should see the guy who sells me salt." So, there are huge purchasing advantages, and then there are the slick systems of forcing everyone to do what works. So, a chain store can be a fantastic enterprise. It's quite interesting to think about Walmart starting from a single store in Arkansas against Sears, Roebuck, with its name, reputation, and all its billions. How does a guy in Bentonville, Arkansas, with no money, blow right by Sears, Roebuck? And he does it in his own lifetime. In fact, during his own late lifetime, because he was already pretty old by the time he started out with one little store. He played the chain store game harder and better than anyone else. Sam Walton invented practically nothing, but he copied everything anybody else ever did that was smart, and he did it with more fanaticism and better employee manipulation. So, he just blew right by them all. He also had a very interesting competitive strategy in the early days. He was like a prize fighter who wanted a great record so he could be in the finals and make a big TV hit. So, what did he do? He went out and fought 42 Pucas, right? And the result was knockout, knockout, knockout, 42 times. Walton, being as shrewd as he was, basically broke other small-town merchants in the early days. With his more efficient system, he might not have been able to tackle some titan head-on at the time, but with his better system, he could sure as hell destroy those small-town merchants, and he went around doing it time after time after time. Then, as he got bigger, he started destroying the big boys. Well, that was a very, very shrewd strategy. You can say, "Is this a nice way to behave?" Well, capitalism is a pretty brutal place. But I personally think that the world is better for having Walmart. I mean, you can idealize small-town life, but I've spent a fair amount of time in small towns. And let me tell you, you shouldn't get too idealistic about all those businesses he destroyed. Plus, a lot of people who work at Walmart are very high-grade, bouncy people who are raising nice children. I have no feeling that an inferior culture destroyed a superior culture. I think that is nothing more than nostalgia and delusion. But at any rate, it's an interesting model of how the scale of things and fanaticism combined to be very powerful. And it's also an interesting model on the other side: how, with all its great advantages, the disadvantages of bureaucracy did such terrible damage to Sears, Roebuck. Sears had layers and layers of people it didn't need. It was very bureaucratic. It was slow to think. And there was an established way of thinking. If you poked your head up with a new thought, the system kind of turned against you. It was everything in the way of a dysfunctional big bureaucracy that you would expect. In all fairness, there was also much that was good about it, but it just wasn't as lean and mean and shrewd and effective as Sam Walton. And in due time, all Sears's advantages of scale were not enough to prevent it from losing heavily to Walmart and other similar retailers.

Here's a model that we've had trouble with. Maybe you'll be able to figure it out better. Many markets get down to two or three big competitors or five or six. And in some of those markets, nobody makes any money to speak of, but in others, everybody does very well. Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investors' point of view so that the shareholders do well, while in other markets there's destructive competition that destroys shareholder wealth. If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world: safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk is now a negative figure. A substantial negative figure. Competition was so intense that once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business. Yet, in other fields like cereals, for example, almost all the big boys make out. If you're some kind of a medium-grade cereal maker, you might get 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable despite the fact that it looks to me like they're competing like crazy with promotions, coupons, and everything else? I don't fully understand it. Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it. And maybe the cereal makers, by and large, have learned to be less crazy about fighting for market share. Because if you get even one person who's hell-bent on gaining market share, for example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process, but I think I could do it. In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen. For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money, and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening.

In microeconomics, of course, you've got the concept of patents, trademarks, exclusive franchises, and so forth. Patents are quite interesting. When I was young, I think more money went into patents than came out. Judges tended to throw them out based on arguments about what was really invented and what relied on prior art. That isn't altogether clear, but they changed that. They didn't change the laws. They just changed the administration so that it all goes to one patent court, and that court is now very much more pro-patent. So, I think people are now starting to make a lot of money out of owning patents. Trademarks, of course, have always made people a lot of money. A trademark system is a wonderful thing for a big operation if it's well-known. The exclusive franchise can also be wonderful. If there were only three television channels awarded in a big city, and you owned one of them, there were only so many hours a day that you could be on. So, you had a natural position in an oligopoly in the pre-cable days. And if you get the franchise for the only food stand in an airport, you have a captive clientele and you have a small monopoly of a sort.

The great lesson in microeconomics is to discriminate between when technology is going to help you and when it's going to kill you. And most people do not get this straight in their heads. But a fellow like Buffett does. For example, when we were in the textile business, which is a terrible commodity business, we were making low-end textiles, which are a real commodity product. And one day the people came to Warren and said, "They've invented a new loom that we think will do twice as much work as our old ones." And Warren said, "Gee, I hope this doesn't work because if it does, I'm going to close the mill." And he meant it. What was he thinking? He was thinking, "It's a lousy business. We're earning substandard returns and keeping it open just to be nice to the elderly workers, but we're not going to put huge amounts of new capital into a lousy business." And he knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners. That's such an obvious concept that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy. The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers. Conversely, if you own the only newspaper in Oshkosh, and they were to invent more efficient ways of composing the whole newspaper, then when you got rid of the old technology and got new fancy computers and so forth, all of the savings would come right through to the bottom line. In all cases, the people who sell the machinery, and by and large, even the internal bureaucrats urging you to buy the equipment, show you projections with the amount you'll save at current prices with the new technology. However, they don't do the second step of the analysis, which is to determine how much is going to stay home and how much is just going to flow through to the customer. I've never seen a single projection incorporating that second step in my life, and I see them all the time. Rather, they always read this capital outlay will save you so much money that it will pay for itself in three years, so you keep buying things that will pay for themselves in three years, and after 20 years of doing it, somehow you've earned a return of only about 4% per annum. That's the textile business, and it isn't that the machines weren't better; it's just that the savings didn't go to you. The cost reductions came through. All right. But the benefit of the cost reductions didn't go to the guy who bought the equipment. It's such a simple idea. It's so basic, and yet it's so often forgotten.

Then there's another model from microeconomics that I find very interesting. When technology moves as fast as it does in a civilization like ours, you get a phenomenon that I call competitive destruction. You know, you have the finest buggy whip factory, and all of a sudden, in comes this little horseless carriage, and before too many years go by, your buggy whip business is dead. You either get into a different business or you're dead. You're destroyed. It happens again and again and again. And when these new businesses come in, there are huge advantages for the early birds. When you're an early bird, there's a model that I call surfing. When a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in shallows. But people get long runs when they're right on the edge of the wave. Whether it's Microsoft or Intel or all kinds of people, including National Cash Register in the early days. The cash register was one of the great contributions to civilization. It's a wonderful story. John Henry Patterson was a small retail merchant who didn't make any money. One day, somebody sold him a crude cash register, which he put into his retail operation, and it instantly changed from losing money to earning a profit because it made it so much harder for the employees to steal. But Patterson, having the kind of mind that he did, didn't think, "Oh, good for my retail business." He thought, "I'm going into the cash register business." And of course, he created National Cash Register. And he surfed. He got the best distribution system, the biggest collection of patents, and the best of everything. He was a fanatic about everything important as the technology developed. I have in my files an early National Cash Register Company report in which Patterson described his methods and objectives. And a well-educated orangutan could see that buying into a partnership with Patterson in those early days, given his notions about the cash register business, was a total 100% cinch. And of course, that's exactly what an investor should be looking for. In a long life, you can expect to profit heavily from at least a few of those opportunities if you develop the wisdom and will to seize them. At any rate, surfing is a very powerful model.

However, Berkshire Hathaway, by and large, does not invest in these people who are surfing on complicated technology. After all, we're cranky and idiosyncratic, as you may have noticed. And Warren and I don't feel like we have any great advantage in the high-tech sector. In fact, we feel like we're at a big disadvantage in trying to understand the nature of technical developments in software, computer chips, or what have you. So, we tend to avoid that stuff based on our personal inadequacies. Again, that is a very, very powerful idea. Every person is going to have a circle of competence, and it's going to be very hard to enlarge that circle. If I had to make my living as a musician, I can't even think of a level low enough to describe where I would be sorted out to if music were the measuring standard of the civilization. So, you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don't, you're going to lose. And that's as close to certain as any prediction you can make. You have to figure out where you've got an edge. And you've got to play within your own circle of competence. If you want to be the best tennis player in the world, you may start out trying and soon find out that it's hopeless, that other people blow right by you. However, if you want to become the best plumbing contractor in Boise, that is probably doable by two-thirds of you. It takes a will. It takes the intelligence. But after a while, you'd gradually know all about the plumbing business in Boise and master the art. That is an attainable objective, given enough discipline. And people who could never win a chess tournament or stand in center court in a respectable tennis tournament can rise quite high in life by slowly developing a circle of competence which results partly from what they were born with and partly from what they slowly developed through work. So, some edges can be acquired, and the game of life, to some extent for most of us, is trying to be something like a good plumbing contractor in Boise. Very few of us are chosen to win the world's chess tournaments. Some of you may find opportunities surfing along in the new high-tech fields, the Intels, the Microsofts, and so on. The fact that we don't think we're very good at it and have pretty well stayed out of it doesn't mean that it's irrational for you to do it.

Well, so much for the basic microeconomic models, a little bit of psychology, a little bit of mathematics, helping create what I call the general substructure of worldly wisdom. Now, if you want to go on from carrots to dessert, I'll turn to stock-picking, trying to draw on this general worldly wisdom as we go. I don't want to get into emerging markets, bond arbitrage, and so forth. I'm talking about nothing but plain vanilla stock-picking. That, believe me, is complicated enough. And I'm talking about common stock-picking.

The first question is, what is the nature of the stock market? And that gets you directly to this efficient market theory that got to be the rage, a total rage, long after I graduated from law school. And it's rather interesting because one of the greatest economists of the world is a substantial shareholder in Berkshire Hathaway and has been from the very early days after Buffett was in control. His textbook always taught that the stock market was perfectly efficient and that nobody could beat it. But his own money went into Berkshire and made him wealthy. So, like Pascal in his famous wager, he hedged his bet. Is the stock market so efficient that people can't beat it? Well, the efficient market theory is obviously roughly right, meaning that markets are quite efficient, and it's quite hard for anybody to beat the market by significant margins as a stock-picker by just being intelligent and working in a disciplined way. Indeed, the average result has to be the average result. By definition, everybody can't beat the market. As I always say, the iron rule of life is that only 20% of the people can be in the top fifth. That's just the way it is. So, the answer is that it's partly efficient and partly inefficient. And by the way, I have a name for people who went to the extreme efficient market theory, which is "bonkers." It was an intellectually consistent theory that enabled them to do pretty mathematics. So, I understand its seductiveness to people with large mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie properly to reality. Again, to the man with a hammer, every problem looks like a nail. If you're good at manipulating higher mathematics in a consistent way, why not make an assumption that enables you to use your tool?

The model I like to sort of simplify the notion of what goes on in a market for common stocks is the parimutuel system at the racetrack. If you stop to think about it, a parimutuel system is a market. Everybody goes there and bets, and the odds change based on what's bet. That's what happens in the stock market. Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position, etc., etc., is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the damn odds, the bad horse pays 100 to one, whereas the good horse pays 3 to 2. Then it's not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it's very hard to beat the system. And then the track is taking 17% off the top. So, not only do you have to outwit all the other bettors, but you've got to outwit them by such a big margin that on average you can afford to take 17% of your gross bets off the top and give it to the house before the rest of your money can be put to work. Given those mathematics, is it possible to beat the horses using only one's intelligence? Intelligence should give some edge because lots of people who don't know anything go out and bet lucky numbers and so forth. Therefore, somebody who really thinks about nothing but horse performance and is shrewd and mathematical could have a very considerable edge in the absence of the frictional cost caused by the house take. Unfortunately, what a shrewd horse player's edge does in most cases is to reduce his average loss over a season of betting from the 17% that he would lose if he got the average result to maybe 10%.

However, there are actually a few people who can beat the game after paying the full 17%. I used to play poker when I was young with a guy who made a substantial living doing nothing but betting on harness races.

Now, harness racing is a relatively inefficient market. You don't have the depth of intelligence betting on harness races that you do on regular races. What my poker pal would do was to think about harness races as his main profession. And he would bet only occasionally when he saw some mispriced bet available. And by doing that, after paying the full handle to the house, which I presume was around 17%, he made a substantial living. You have to say that's rare.

However, the market was not perfectly efficient. And if it weren't for that big 17% handle, lots of people would regularly be beating lots of other people at the horse races. It's efficient, yes, but it's not perfectly efficient. And with enough shrewdness and fanaticism, some people will get better results than others.

The stock market is the same way, except that the house handle is so much lower. If you take transaction costs, the spread between the bid and the ask plus the commissions, and if you don't trade too actively, you're talking about fairly low transaction costs. So with enough fanaticism and enough discipline, some of the shrewd people are going to get way better results than average in the nature of things. It is not a bit easy, and of course, 50% will end up in the bottom half and 70% will end up in the bottom 70%. But some people will have an advantage, and in a fairly low transaction cost operation, they will get better than average results in stock picking.

How do you get to be one of those who is a winner in a relative sense instead of a loser? Here again, look at the paramutual system. I had dinner last night by absolute accident with the president of Santa Anita. He says that there are two or three bettors who have a credit arrangement with the track now that they have offtrack betting who are actually beating the house. The track is sending money out, net, after the full handle. A lot of it to Las Vegas, by the way, to people who are actually winning slightly, net, after paying the full handle. They're that shrewd about something with as much unpredictability as horse racing.

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 bet 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. That is a very simple concept, and to me, it's obviously right, based on experience, not only from the paramutual system but everywhere else. And yet, in investment management, practically nobody operates that way. We operate that way. I'm talking about Buffett and Munger. And we're not alone in the world, but a huge majority of people have some other crazy construct in their heads. And instead of waiting for a near cinch and loading up, they apparently ascribe to the theory that if they work a little harder or hire more business school students, they'll come to know everything about everything all the time. To me, that's totally insane.

How many insights do you need? Well, I'd argue that you don't need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top 10 insights account for most of it. And that's with a very brilliant man. Warren's a lot more able than I am, and very disciplined, devoting his lifetime to it. I don't mean to say that he's only had 10 insights. I'm just saying that most of the money came from 10 insights. So you can get very remarkable investment results if you think more like a winning paramutual player. Just think of it as a heavy odds-against game, full of craziness, with an occasional mispriced something or other. And you're probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It's just that simple.

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. Again, this is a concept that seems perfectly obvious to me, and to Warren it seems perfectly obvious, but this is one of the very few business classes in the United States where anybody will be saying so. It just isn't the conventional wisdom.

To me, it's obvious that the winner has to bet very selectively. It's been obvious to me since very early in life. I don't know why it's not obvious to very many other people. I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell 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."

Investment managers are in the position of that fishing tackle salesman. They're like the guy who was selling salt to the guy who already had too much salt. And as long as the guy will buy salt, why, they'll sell salt. But that isn't what ordinarily works for the buyer of investment advice. If you invested Berkshire Hathaway style, it would be hard to get paid as an investment manager as well as they're currently paid, because you'd be holding a block of Walmart and a block of Coca-Cola and a block of something else. You'd be sitting on your ass, and the client would be getting rich, and after a while, the client would think, "Why am I paying this guy half a percent a year on my wonderful passive holdings?"

So what makes sense for the investor is different from what makes sense for the manager. And as usual in human affairs, what determines the behavior are incentives for the decision maker. And getting the incentives right is a very, very important lesson from all businesses. My favorite case on incentives is Federal Express. The heart and soul of its system, which creates the integrity of the product, is having all its airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can't deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on time. They tried everything: moral persuasion, threats, you name it. And nothing worked. Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift. And when it's all done, they can all go home. Well, their problems cleared up overnight. So, getting the incentives right is a very, very important lesson. It was not obvious to Federal Express what the solution was, but maybe now it will hereafter more often be obvious to you.

All right, we've now recognized that the market is efficient, as a paramutual system is efficient, with the favorite more likely than the long shot to do well in racing, but not necessarily give any betting advantage to those who bet on the favorite. In the stock market, some railroad that's beset by better competitors and tough unions may be available at one-third of its book value. In contrast, IBM in its heyday might be selling at six times book value. So, it's just like the paramutual system. Any damn fool could plainly see that IBM had better business prospects than the railroad. But once you put the price into the formula, it wasn't so clear anymore what was going to work best for a buyer choosing between the stocks. So it's a lot like a paramutual system, and therefore, it gets very hard to beat.

What style should the investor use as a picker of common stocks in order to try to beat the market? In other words, to get an above-average long-term result. A standard technique that appeals to a lot of people is called sector rotation. You simply figure out when oils are going to outperform retailers, etc., etc., etc. You just kind of flit around, being in the hot sector of the market, making better choices than other people. And presumably, over a long period of time, you get ahead. However, I know of no really rich sector rotator. Maybe some people can do it. I'm not saying they can't. All I know is that all the people I know who got rich, and I know a lot of them, did not do it that way.

The second basic approach is the one that Ben Graham used, much admired by Warren and me. As one factor, Graham had this concept of value to a private owner. What the whole enterprise would sell for if it were available, and that was calculable in many cases. Then, if you could take the stock price and multiply it by the number of shares and get something that was one-third or less of sellout value, he would say that you've got a lot of edge going for you. Even with an elderly alcoholic running a stodgy business, this significant excess of real value per share working for you means that all kinds of good things can happen to you. You had a huge margin of safety, as he put it, by having this big excess value going for you.

But he was by and large operating when the world was in shell shock from the 1930s, which was the worst contraction in the English-speaking world in about 600 years. Wheat in Liverpool, I believe, got down to something like a 600-year low, adjusted for inflation. People were so shell-shocked for a long time thereafter that Ben Graham could run his Geiger counter over this detritus from the collapse of the 1930s and find things selling below their working capital per share and so on. And in those days, working capital actually belonged to the shareholders. If the employees were no longer useful, you just sacked them all, took the working capital, and stuck it in the owner's pockets. That was the way capitalism then worked.

Nowadays, of course, the accounting is not realistic because the minute the business starts contracting, significant assets are not there. Under social norms and the new legal rules of the civilization, so much is owed to the employees that the minute the enterprise goes into reverse, some of the assets on the balance sheet aren't there anymore. Now, that might not be true if you run a little auto dealership yourself. You may be able to run it in a way that there's no health plan and this and that, so that if the business gets lousy, you can take your working capital and go home. But IBM can't, or at least didn't. Just look at what disappeared from its balance sheet when it decided that it had to change size, both because the world had changed technologically and because its market position had deteriorated. And in terms of blowing it, IBM is some example. Those were brilliant, disciplined people, but there was enough turmoil in technological change that IBM got bounced off the wave after surfing successfully for 60 years. And that was some collapse, an object lesson in the difficulties of technology. And one of the reasons why Buffett and Munger don't like technology very much. We don't think we're any good at it. And strange things can happen.

At any rate, the trouble with what I call the classic Ben Graham concept is that gradually the world wised up, and those real obvious bargains disappeared. You could run your Geiger counter over the rubble, and it wouldn't click. But such is the nature of people who have a hammer, to whom, as I mentioned, every problem looks like a nail, that the Ben Graham followers responded by changing the calibration on their Geiger counters. In effect, they started defining a bargain in a different way, and they kept changing the definition so that they could keep doing what they'd always done, and it still worked pretty well. So, the Ben Graham intellectual system was a very good one.

Of course, the best part of it all was his concept of Mr. Market. Instead of thinking the market was efficient, Graham treated it as a manic-depressive who comes by every day. And some days Mr. Market says, "I'll sell you some of my interest for way less than you think it's worth." And other days he comes by and says, "I'll buy your interest at a price that's way higher than you think it's worth." And you get the option of deciding whether you want to buy more, sell part of what you already have, or do nothing at all. To Graham, it was a blessing to be in business with a manic-depressive who gave you this series of options all the time. That was a very significant mental construct. And it's been very useful to Buffett, for instance, over his whole adult lifetime.

However, if we'd stayed with classic Graham the way Ben Graham did it, we would never have had the record we have. And that's because Graham wasn't trying to do what we did. For example, Graham didn't want to ever talk to management. And his reason was that like the best sort of professor aiming his teaching at a mass audience, he was trying to invent a system that anybody could use, and he didn't feel that the man in the street could run around and talk to management and learn things. He also had a concept that management would often couch the information very shrewdly to mislead. Therefore, it was very difficult, and that is still true, of course, human nature being what it is.

And so, having started out as grammites, which, by the way, worked fine, we gradually got what I would call better insights. And we realized that some company that was selling at two or three times book value could still be a hell of a bargain because of momentum implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other or some system or other. And once we'd gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses. And by the way, the bulk of the billions in Berkshire Hathaway have come from the better businesses. Much of the first $200 or $300 million came from scrambling around with our Geiger counter. But the great bulk of the money has come from the great businesses. And even some of the early money was made by being temporarily present in great businesses. Buffett Partnership, for example, owned American Express and Disney when they got pounded down.

Most investment managers are in a game where the clients expect them to know a lot about a lot of things. We don't have any clients who could fire us at Berkshire Hathaway. So we don't have to be governed by any such construct. And we came to this notion of finding a mispriced bet and loading up when we were very confident that we were right. So we're way less diversified. And I think our system is miles better. However, in all fairness, I don't think a lot of money managers could successfully sell their services if they used our system. But if you're investing for 40 years in some pension fund, what difference does it make if the path from start to finish is a little more bumpy or a little different than everybody else's? So long as it's all going to work out well in the end. So what if there's a little extra volatility?

In investment management today, everybody wants not only to win, but to have the path never diverge very much from a standard path, except on the upside. Well, that is a very artificial, crazy construct. That is really hobbling yourself. Now, investment managers would say, "We have to be that way. That's how we're measured." And they may be right in terms of the way the business is now constructed. But from the viewpoint of a rational consumer, the whole system's bonkers and draws a lot of talented people into socially useless activity. And the Berkshire system is not bonkers. It's so damned elementary that even bright people are going to have limited really valuable insights in a very competitive world when they're fighting against other very bright, hardworking people. And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. You're much more likely to do well if you start out to do something feasible instead of something that isn't feasible. Isn't that perfectly obvious?

How many of you have 56 brilliant insights in which you have equal confidence? Raise your hands, please. How many of you have two or three insights that you have some confidence in? I rest my case. We've really made the money out of high-quality businesses. In some cases, we bought the whole business, and in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high-quality businesses, and most of the other people who've made a lot of money have done so in high-quality businesses. I'd say that Berkshire Hathaway's system is adapting to the nature of the investment problem as it really is.

Over the long term, it's hard for a stock to earn a much better return than the business that 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 one hell of a result. So the trick is getting into better businesses, and that involves all of these advantages of scale that you could consider momentum effects.

How do you get into these great companies? One method is what I'd call the method of finding them small, get them when they're little, for example, buy Walmart when Sam Walton first goes public, and so forth. A lot of people try to do just that, and it's a very beguiling idea. If I were a young man, I might actually go into it, but it doesn't work for Berkshire Hathaway anymore because we've got too much money. We can't find anything that fits our size parameter that way. Besides, we're set in our ways, but I regard finding them small as a perfectly intelligent approach for somebody to try with discipline. It's just not something that I've done. Finding them big, obviously, is very hard because of the competition. So far, Berkshire's managed to do it, but can we continue to do it? What's the next Coca-Cola investment for us? Well, the answer to that is I don't know. I think it gets harder for us all the time. And ideally, and we've done this a lot, you get into a great business that also has a great manager, because management matters. For example, it's made a hell of a difference to General Electric that Jack Welch came in instead of the guy who took over Westinghouse. One hell of a difference. So, management matters, too. And some of it is predictable. I do not think it takes a genius to understand that Jack Welch was a more insightful person and a better manager than his peers in other companies. Nor do I think it took tremendous genius to understand that Disney had basic momentum in place that are very powerful, and that Michael Eisner and Frank Wells were very unusual managers. So, you do get an occasional opportunity to get into a wonderful business that's being run by a wonderful manager. And of course, that's hog heaven day. If you don't load up when you get those opportunities, it's a big mistake.

Occasionally, you'll find a human being who's so talented that he can do things that ordinary skilled mortals can't. I would argue that Simon Marx, who was second generation in Marx and Spencer of England, was such a man. Patterson was such a man at National Cash Register, and Sam Walton was such a man. These people do come along, and in many cases, they're not all that hard to identify. If they've got a reasonable hand with the fanaticism and intelligence and so on that these people generally bring to the party, then management can matter very much. However, averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But very rarely you find a manager who's so good that you're wise to follow him into what looks like a mediocre business.

Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you're going to buy something that compounds for 30 years at 15% per annum and you pay 135% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15%, or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening. If you sit on your ass for long, long stretches in great companies, you can get a huge edge from nothing but the way income taxes work. Even with a 10% per annum investment, paying a 35% tax at the end gives you 8.3% after taxes as an annual compounded result after 30 years. In contrast, if you pay the 35% each year instead of at the end, your annual result goes down to 6.5%. So you add nearly 2% of after-tax return per annum if you only achieve an average return by historical standards from common stock investments in companies with low dividend payout ratios.

But in terms of business mistakes that I've seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. I see terrible mistakes from people being overly motivated by tax considerations. Warren and I personally don't drill oil wells. We pay our taxes, and we've done pretty well so far. Anytime somebody offers you a tax shelter from here on in life, my advice would be don't buy it. In fact, anytime anybody offers you anything with a big commission and a 200-page prospectus, don't buy it. Occasionally, you'll be wrong if you adopt Munger's rule. However, over a lifetime, you'll be a long way ahead, and you will miss a lot of unhappy experiences that might otherwise reduce your love for your fellow man.

There are huge advantages for an individual to get into a position where you make a few great investments and just sit on your ass. You're paying less to brokers. You're listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2, or 3 percentage points per annum compounded. And you think that most of you are going to get that much advantage by hiring investment counselors and paying them 1% to run around incurring a lot of taxes on your behalf? Lots of luck.

Are there any dangers in this philosophy? Yes, everything in life has dangers. Since it's so obvious that investing in great companies works, it gets horribly overdone from time to time. In the Nifty Fifty days, everybody could tell which companies were the great ones. So, they got up to 50, 60, and 70 times earnings. And just as IBM fell off the wave, other companies did, too. Thus, a large investment disaster resulted from too high prices. And you've got to be aware of that danger. So, there are risks. Nothing is automatic and easy. But if you can find some fairly priced great company and buy it and sit, that tends to work out very, very well indeed, especially for an individual.

Within the growth stock model, there's a subposition. There are actually businesses that you will find a few times in a lifetime where any manager could raise the return enormously just by raising prices, and yet they haven't done it. So, they have huge untapped pricing power that they're not using. That is the ultimate no-brainer. That existed in Disney. It's such a unique experience to take your grandchild to Disneyland. You're not doing it that often. And there are lots of people in the country. And Disney found that it could raise those prices a lot, and the attendance stayed right up. So, a lot of the great record of Eisner and Wells was utter brilliance. But the rest came from just raising prices at Disneyland and Disney World and through video cassette sales of classic animated movies. At Berkshire Hathaway, Warren and I raised the prices of See's candies a little faster than others might have. And of course, we invested in Coca-Cola, which had some untapped pricing power, and it also had brilliant management. So a Roberto Goizueta and Donald Keough could do much more than raise prices. It was perfect.

You will get a few opportunities to profit from finding underpricing. There are actually people out there who don't price everything as high as the market will easily stand. And once you figure that out, it's like finding money in the street if you have the courage of your convictions. If you look at Berkshire's investments where a lot of the money's been made, and you look for the models, you can see that we twice bought into two newspaper towns which have since become one newspaper towns. So we made a bet to some extent. In one of those, the Washington Post, we bought it at about 20% of the value to a private owner. So we bought it on a Ben Graham-style basis at one-fifth of obvious value. And in addition, we faced a situation where you had both the top hand in a game that was clearly going to end up with one winner, and a management with a lot of integrity and intelligence. That one was a real dream. They're very high-class people, the Katherine Graham family. That's why it was a dream. An absolute damn dream. Of course, that came about back in '73-'74, and that was almost like 1932. That was probably a once-in-40-years type duopoly in the markets. That investment's up about 50 times over our cost. If I were you, I wouldn't count on getting any investment in your lifetime quite as good as the Washington Post was in '73 and '74.

Let me mention another model. Of course, Gillette and Coke made fairly low-priced items and have a tremendous marketing advantage all over the world. And in Gillette's case, they keep surfing along new technology, which is fairly simple by the standards of microchips, but it's hard for competitors to do it. So, they've been able to stay constantly near the edge of improvements in shaving. There are whole countries where Gillette has more than 90% of the shaving market.

Geico is a very interesting model. It's another one of the hundred or so models you ought to have in your head. I've had many friends in the sick business fix game over a long lifetime. And they practically all use the following formula. I call it the cancer surgery formula. They look at this mess and they figure out if there's anything sound left that can live on its own if they cut away everything else. And if they find anything sound, they just cut away everything else. Of course, if that doesn't work, they liquidate the business. But it frequently does work. And Geico had a perfectly magnificent business, submerged in a mess, but still working. Misled by success, Geico had done some foolish things. They got to thinking that because they were making a lot of money, they knew everything. And they suffered huge losses. All they had to do was cut out all the folly and go back to the perfectly wonderful business that was lying there. And when you think about it, that's a very simple model. And it's repeated over and over again. And in Geico's case, think about all the money we passively made. It was a wonderful business combined with a bunch of foolishness that could easily be cut out. And people were coming in who were temperamentally and intellectually designed. So they were going to cut it out. That is a model you want to look for. And you may find one or two or three in a long lifetime that are very good, and you may find 20 or 30 that are good enough to be quite useful.

Finally, I'd like to talk once again about investment management. That is a funny business because on a net basis, the whole investment management business together gives no value added to all buyers combined. That's the way it has to work. Of course, that isn't true of plumbing, and it isn't true of medicine. If you're going to make your careers in the investment management business, you face a very peculiar situation, and most investment managers handle it with psychological denial, just like a chiropractor. That is the standard method of handling the limitations of the investment management process. But if you want to live the best sort of life, I would urge each of you not to use the psychological denial mode. I think a select few, a small percentage of the investment managers can deliver value added. But I don't think brilliance alone is enough to do it. I think that you have to have a little of this discipline of calling your shots and loading up if you want to maximize your chances of becoming one who provides above-average real returns for clients over the long pull. But I'm just talking about investment managers engaged in common stock picking. I am agnostic elsewhere. I think there may well be people who are so shrewd about currencies and this and that and the other thing that they can achieve good long-term records operating on a pretty big scale in that way. But that doesn't happen to be my milieu. I'm talking about stock picking in American stocks. I think it's hard to provide a lot of value added to the investment management client, but it's not impossible.

Talk Two Revisited. As I reviewed Talk 2 in 2006, I thought it would be improved by adding one, an attempt to explain the extreme investment success of Harvard and Yale in recent years, plus two, a prediction about the outcomes for the many pools of capital that will now try to duplicate the past success of Harvard and Yale by copying or continuing their methods. Plus three, a brief comment about the implications for the efficient market hypothesis as demonstrated in a 2005 book, Fortune's Formula, by William Poundstone. To me, it seems likely that as Harvard and Yale deemphasized conventional unleveraged holding of diversified U.S. common stocks, their investment success was boosted by factors including the four described below.

One, by investing in LBO, leveraged buyout funds, Harvard and Yale introduced leverage into their results from owning interests in U.S. businesses. And the LBO fund structure gave them a way to make their leveraged business investments in a manner safer than is possible in a normal margin account, prone during panics to forced sales. Decent comparative results often followed in markets with tolerable general outcomes. And this happened even when net after-cost results from investments in the LBO funds were no better than would have occurred through only slightly leveraged investment in an index of U.S. stocks.

Two. In category after category, Harvard and Yale selected or directly employed investment managers who were way above average in ability, providing additional evidence that investment markets are not perfectly efficient, and that some good investment results come from abnormal skill or other abnormal advantage. As one example, Harvard and Yale, by reason of their own prestige, were able to get into some of the most profitable high-tech venture capital funds not available to all other investors. These funds, using momentum provided by their own past success, had an opportunity advantage over less well-established venture capital operations, in that the best entrepreneurs quite logically made early presentations to the best-regarded funds.

Three. Harvard and Yale wisely and opportunistically imitated investment banking firms by going into several activities that were then non-traditional, like investing in distressed U.S. corporate bonds and high-coupon foreign bonds and leveraged fixed income arbitrage during a period when many good opportunities were available to skilled operators in the activities chosen.

Four. Finally, the benefits that came to Harvard and Yale in recent years through leverage and unconventionality were often, of course, given a large tailwind by a happy combination of declining interest rates and rising price-earnings ratios for stocks.

The extreme investment success of Harvard and Yale gives me both pleasure and pain. My pleasure comes from this demonstration that academic skill is often useful in worldly affairs. People like me who were attracted by academia yet have gone into business naturally respond to such worldly achievement much like the many modern scientists who relish the example of Thales of Miletus. This scientist of antiquity made a large profit by leasing most of the olive presses in his area just before the occurrence of a particularly bountiful harvest. My pain comes from one, foreseeing a lot of future adversity for other worthy institutions driven by envy and salesmen into enthusiastic imitation of Harvard and Yale, and two, disapproval of the conduct of many of the salesmen likely to succeed in pushing the imitation. Something similar to what I fear happened near the end of the high-tech bubble at that time. Envy of successful early-stage high-tech venture capital investors like Stanford, plus the dubious sales methods of many venture capitalists, caused about $90 billion to rush into low-quality imitative early-stage ventures that by now may have created as much as $45 billion in net losses for late-coming investors. Moreover, Harvard and Yale may now need new displays of unconventional wisdom that are different from their last displays. It is quite counterintuitive to decrease that part of one's activity that has recently worked best. But this is often a good idea, and so also with reducing one's perception of one's needs instead of increasing risks in an attempt to satisfy perceived needs.

Talk 2 was made in 1994, about 12 years before this addendum was written. And during that 12 years, much useful thought and data collection has supported the idea that neither securities markets nor paramutual betting systems at racetracks prevent some venturers from gaining highly satisfactory, way above-average results through unusual skill. William Poundstone's book, Fortune's Formula, collects much of the modern evidence on this point in a highly entertaining way. Moreover, the book contains an account of the Laal Palooza investment record of Claude Shannon, pioneer scientist in information theory, that makes Shannon's methods look much like those of Charlie Munger.

Worldly Wisdom Updated Q&A with Charlie.

How do you and Warren evaluate an acquisition candidate? We're light on financial yardsticks. We apply lots of subjective criteria. Can we trust management? Can it harm our reputation? What can go wrong? Do we understand the business? Does it require capital infusions to keep it going? What is the expected cash flow? We don't expect linear growth. Cyclicality is fine with us as long as the price is appropriate.

What should a young person look for in a career? I have three basic rules. Meeting all three is nearly impossible, but you should try anyway. Don't sell anything you wouldn't buy yourself. Don't work for anyone you don't respect and admire. Work only with people you enjoy. I have been incredibly fortunate in my life. With Warren, I had all three.

What overall life advice do you have for young people? Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step, you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day, and at the end of the day, if you live long enough, like most people, you will get out of life what you deserve. Life and its various passages can be hard, brutally hard. The three things I have found helpful in coping with its challenges are: have low expectations, have a sense of humor, surround yourself with the love of friends and family. Above all, live with change and adapt to it. If the world didn't change, I'd still have a 12 handicap.

Talk Three, A Lesson on Elementary Worldly Wisdom as it Relates to Investment Management and Business Revisited. April 19th, 1996, Stanford Law School. This talk was given in 1996 to the students of Professor William C. Lazier, who was the Nancy and Charles Munger Professor of Business at Stanford University Law School. Because this talk published in Outstanding Investor Digest on December 29th, 1997 and March 13th, 1998 repeats many of the ideas and much of the language included in other talks, particularly Practical Thought About Practical Thought, your editor has abridged certain passages and added comments to maintain the logic and flow of the speech. Even with the abridgements, this talk includes many unique ideas as well as familiar ones expressed in novel ways.

What I'm going to try to do today is to extend the remarks I made two years ago at the USC business school. You were assigned a transcript of my USC talk. There's nothing I said then that I wouldn't repeat today, but I want to amplify what I said then. It's perfectly clear that if Warren Buffett had never learned anything new after graduating from the Columbia Business School, Berkshire would be a pale shadow of its present self. Warren would have gotten rich because what he learned from Ben Graham at Columbia was enough to make anybody rich. But he wouldn't have the kind of enterprise Berkshire Hathaway is if he hadn't kept learning.

How do you get worldly wisdom? What system do you use to rise into the tiny top percentage of the world in terms of having sort of an elementary practical wisdom? I've long believed that a certain system which almost any intelligent person can learn works way better than the systems that most people use. As I said at the USC business school, what you need is a lattice work of mental models in your head, and you hang your actual experience and your vicarious experience that you get from reading and so forth on this lattice work of powerful models. And with that system, things gradually get to fit together in a way that enhances cognition. Charlie discusses several of the specific mental models elaborated in other talks. Your assigned reading for today included the latest annual letters from Jack Welch and Warren Buffett relating to General Electric and Berkshire Hathaway, respectively. Jack Welch has a PhD in engineering, and Warren plainly could have gotten a PhD in any field he wanted to pursue. And both gentlemen are inveterate teachers. Worldly wisdom is quite academic when you get right down to it.

Look at what General Electric has achieved, and for that matter, what Berkshire Hathaway has achieved. Of course, Warren had a professor and mentor, Ben Graham, for whom he had a great affection. Graham was so academic that when he graduated from Columbia, three different academic departments invited him into their PhD programs and asked him to start teaching immediately as part of the PhD program: Literature, Greek and Latin classics, and Mathematics. Graham had a very academic personality. I knew him. He was a lot like Adam Smith, very preoccupied, very brilliant. He even looked like an academic, and he was a good one. And Graham, without ever really trying to maximize the gaining of wealth, died rich, even though he was always generous and spent 30 years teaching at Columbia and authored or co-authored the best textbooks in his field. So I would argue that academia has a lot to teach about worldly wisdom, and that the best academic values really work.

Of course, when I urge a multi-disciplinary approach, that you've got to have the main models from a broad array of disciplines, and you've got to use them all, I'm really asking you to ignore jurisdictional boundaries. And the world isn't organized that way. It discourages the jumping of jurisdictional boundaries. Big bureaucratic businesses discourage it. And of course, academia itself discourages it. All I can say there is that in that respect, academia is horribly wrong and dysfunctional. Some of the worst dysfunctions in businesses come from the fact that they vulcanize reality into little individual departments with territoriality and turf protection and so forth. So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries. You don't have to know it all. Just take in the best big ideas from all these disciplines. And that's not hard to do.

I might try and demonstrate that point using the card game of contract bridge. Suppose you want to be good at declarer play in contract bridge. Well, you know the contract. You know what you have to achieve. And you can count up the sure winners you have by laying down your high cards and your invincible trumps. But if you're a trick or two short, how are you going to get the other needed tricks? Well, there are only six or so different standard methods. You've got long suit establishment, you've got finesses, you've got throw-in plays, you've got cross-ruffs, you've got squeezes, and you've got various ways of misleading the defense into making errors. So, it's a very limited number of models. But if you only know one or two of those models, then you're going to be a horse's patoot in declarer play. Furthermore, these things interact. Therefore, you have to know how the models interact, otherwise, you can't play the hand right. Similarly, I've told you to think forward and backward. Well, great declarers in bridge think, "How can I take the necessary winners?" but they think it through backward too. "What could possibly go wrong that could cause me to have too many losers?" Both methods of thinking are useful. So in the game of life, get the needed models into your head and think it through forward and backward. What works in bridge will work in life. That contract bridge is so out of vogue in your generation is a tragedy. China is way smarter than we are about bridge. They're teaching bridge in grade school now. And God knows the Chinese do well enough when introduced to capitalist civilization. If we compete with a bunch of people who really know how to play bridge when our people don't, it'll be just one more disadvantage we don't need. Since your academic structure by and large doesn't encourage minds jumping jurisdictional boundaries, you're at a disadvantage because in that one sense, even though academia is very useful to you, you've been mistaught. My solution for you is one that I got at a very early age from the nursery: the story of the little red hen. The punchline, of course, is "Then I'll do it myself," said the little red hen. So, if your professors won't give you an appropriate multidisciplinary approach, if each wants to overuse his own models and underuse the important models in other disciplines, you can correct that folly yourself. Just because he's a horse's patoot, you don't have to be one, too. You can reach out and grasp the model that better solves the overall problem. All you have to do is know it and develop the right mental habits. And it's kind of fun to sit there and outthink people who are way smarter than you because you've trained yourself to be more objective and multidisciplinary. Furthermore, there's a lot of money in it, as I can testify from my own personal experience.

Charlie begins the Coca-Cola business case detailed in Talk 4, Practical Thought About Practical Thought, and discusses the importance of flavor. One of my favorite business stories comes from Hershey. They get their flavor because they make their cocoa butter in old stone grinders that they started with in the 1800s in Pennsylvania. And a little bit of the husk of the cocoa bean winds up in the chocolate. Therefore, they get that odd flavor that people like in Hershey's chocolate. Hershey knew enough when they wanted to expand into Canada to know they shouldn't change their winning flavor. Therefore, they copied their stone grinders. Well, it took them 5 years to duplicate their own flavor. As you can see, flavors can be quite tricky. Even today, there's a company called International Flavors and Fragrances. It's the only company I know that does something on which you can't get a copyright or a patent, but which nevertheless receives a permanent royalty. They managed to do that by helping companies develop flavors and aromas in their trademarked products like shaving cream. The slight aroma of shaving cream is very important to consumption. So, all of this stuff is terribly important.

Continuing the Coca-Cola case study, Charlie explains how our understanding of graphic depictions of mathematical ideas are rooted in biology. My friend Dr. Nat Mervald, who's the chief technology officer at Microsoft, is bothered by this. He's a PhD physicist and knows a lot of math. And it disturbs him that biology could create a neural apparatus that could do automatic differential equations at fast speed. And yet everywhere he looks, people are total klutzes at dealing with ordinary probabilities and ordinary numbers. By the way, I think Mervald's wrong to be amazed by that. The so-called fitness landscape of our ancestors forced them to know how to throw spears, run around, turn corners, and what have you long before they had to think correctly like Mervald. So, I don't think he should be so surprised. However, the difference is so extreme that I can understand how he finds it incongruous. At any rate, mankind invented a system to cope with the fact that we are so intrinsically lousy at manipulating numbers. It's called the graph. Oddly enough, it came

out of the Middle Ages. It's the only intellectual invention of the monks during the Middle Ages I know of that's worth a damn.

The graph puts numbers in a form that looks like motion. So, it's using some of this primitive neural stuff in your system in a way that helps you understand it. So the value line graphs are very useful.

The graph I've distributed is on log paper which is based on the natural table of logarithms and that's based on the elementary mathematics of compound interest which is one of the most important models there is on earth. So there's a reason why that graph is in that form. And if you draw a straight line through data points on a graph on log paper, it will tell you the rate at which compound interest is working for you. So these graphs are marvelously useful.

I don't use value lines predictions because our system works better for us than theirs. In fact, a lot better. But I can't imagine not having their graphs and their data. It's a marvelous, marvelous product.

Charlie discusses the importance of trademarks to Coca-Cola's success and carries it over to a discussion of food products and Carnation. Now, when Carnation tried to make a deal for its trademark, there was this one guy who sold Carnation Fish. So, help me God. That was his trade name. Don't ask me why. And every time they'd say, "We'll pay you $250,000." He'd say, "I want $400,000." And then four years later, they'd say, "We'll give you $1 million." And he'd say, "I want $2 million." And they just kept doing that all the way through. They never did buy the trademark. At least they hadn't bought it the last time I looked.

In the end, Carnation came to him sheepfacedly and said, "We'd like to put our quality control inspectors into your fish plants to make sure that your fish are perfect, and we'll pay all the costs." which he quickly and smirkily allowed. So he got free quality control in his fish plants courtesy of the Carnation Company. This history shows the enormous incentive you create if you give a guy a trademark. And this incentive is very useful to the wider civilization. As you see, carnation got so that it was protecting products that it didn't even own. That sort of outcome is very very desirable. So there are some very fundamental microeconomic reasons why even communist countries should protect trademarks. They don't all do it, but there are very powerful reasons why they should. And by and large, averaged out around the world, trademark protection has been pretty good.

Charlie applies various mental models to Coca-Cola. However, if you don't have the basic models and the basic mental methods for dealing with the models, then all you can do is to sit there twiddling your thumbs as you look at the value line graph. But you don't have to twiddle your thumbs. You've got to learn 100 models and a few mental tricks and keep doing it all of your life. It's not that hard. And the beauty of it is that most people won't do it, partly because they've been miseducated. and I'm here trying to help you avoid some of the perils that might otherwise result from that miseducation.

Okay, we've been through some of the general ideas in the search for worldly wisdom. And now I want to turn to something even more extreme and peculiar than the talk I've already given you. Of all the models that people ought to have in useful form and don't, perhaps the most important lie in the area of psychology.

I recently had an instructive experience. I just returned from Hong Kong. I have a pal there who's a headmaster of one of the leading schools. He gave me this book called The Language Instinct written by Steven Pinker. Well, Pinker is a semanticist professor who rose in the shadow of Nam Chsky, Linguistics Institute professor at MIT, who is probably the greatest semanticist who ever lived. And Pinker says that human language ability is not just learned. It's deeply buried to a considerable extent in the genome. It's not in the genome of the other animals, including the chimpanzee, to any really useful extent. It's a gift that came to humans. And Pinker proves his point pretty well. Of course, Chsky's already proven it. You have to be pretty ignorant not to realize that a good deal of language ability is right there in the human genome. And even though you have to work like hell to improve it through education, you start with a big leg up in your genes.

Pinker can't understand why Chsky, who again is such a genius, takes the position that the jury's still out about why this ability is in the human genome. Pinker in effect says like hell the jury is still out. The language instinct got into humans in exactly the same way that everything else got there through Darwinian natural selection. Well, the junior professor is clearly right and Chsky's hesitation is a little dafted. But if the junior professor and I are right, how has a genius like Chsky made an obvious misjudgment? The answer is quite clear to me. Chsky is passionately ideological. He is an extreme egalitarian leftist who happens to be a genius and he's so smart that he realized that if he conceds this particular Darwinian point the implications threaten his leftist ideology. So he naturally had his conclusion affected by his ideological bias. And that gets into another lesson in worldly wisdom. If ideology can screw up the head of Chsky, imagine what it does to people like you and me. Ideology does some strange things and distorts cognition terribly. If you get a lot of heavy ideology young and then you start expressing it, you are really locking your brain into a very unfortunate pattern and you are going to distort your general cognition.

There's a very interesting history if you take Warren Buffett as an example of worldly wisdom. Warren adored his father who was a wonderful man. But Warren's father was a very heavy ideologue, right-wing it happened to be who hung around with other very heavy ideologues, right-wing naturally. Warren observed this as a kid and he decided that ideology was dangerous and that he was going to stay a long way away from it. and he has throughout his whole life. That has enormously helped the accuracy of his cognition. I learned the same lesson in a different way. My father hated ideology. Therefore, all I had to do is imitate my father and thereby stay on what I regard as the right path. People like Bob Dornan on the right or Ralph Nater on the left have obviously gone a little dafted. They're extreme examples of what ideology will do to you, particularly violently expressed ideology. Since it pounds ideas in better than it convinces out, it's a very dangerous thing to do. Therefore, in a system of multiple models across multiple disciplines, I should add as an extra rule that you should be very wary of heavy ideology. You can have heavy ideology in favor of accuracy, diligence, and objectivity, but a heavy ideology that makes you absolutely sure that the minimum wage should be raised or that it shouldn't, and it's kind of a holy construct where you know you're right, makes you a bit nuts. This is a very complicated system and life is one damn relatedness after another. It's all right to think that on balance you suspect that civilization is better if it lowers the minimum wage or raises it. Either position is okay. But being totally sure on issues like that with a strong violent ideology, in my opinion, turns you into a lousy thinker. So beware of ideology-based mental misfunctions.

Charlie laments how poorly the field of psychology deals with incentivecaused bias. Another reason that I mentioned Pinker, the semanticist who wrote the book that I told you about earlier, is that at the end of his book, he says roughly, I've read the psychology textbooks and they're dafted. He says this whole subject is misorganized and mistaught. Well, I have far less in the way of qualifications than Pinker. In fact, I've never taken a single course in psychology. However, I've come to exactly the same conclusion that the psychology texts, while they are wonderful in part, are also significantly dafted.

In fact, just take a simple psychological denial. About three centuries before the birth of Christ, Damosanes said, "What a man wishes, that also will he believe." Well, Damastines was right. I had a family acquaintance whose much loved son, who was brilliant and a star football player, flew off over the ocean and never came back. Well, his mother thought he was still alive. The mind will sometimes flip so that the wish becomes the belief. It will do so at various levels. Individuals vary in how much psychological denial they get, but miscognition from denial overwhelmingly pervades the reality that you're going to have to deal with. And yet, you won't find an adequate treatment of simple psychological denial in psychology texts. So, you can't learn psychology the way your professors teach it. You've got to learn everything they teach, but you've got to learn a lot more that they don't teach because they don't handle their own subject correctly. Psychology to me as currently organized is like electromagnetism after Michael Faraday, but before Maxwell. A lot has been discovered, but no one mind has put it all together in proper form. And it should be done because it wouldn't be that hard to do and it's enormously important.

Just open a psychology text, turn to the index, and look up envy. Well, envy made it into one or two or three of the ten commandments. Moses knew all about envy. The old Jews, when they were hurting sheep, knew all about envy. It's just that psychology professors don't know about envy. Books that thick are teaching a psychology course without envy and with no simple psychological denial and no incentive caused bias. And psychology texts don't deal adequately with combinations of factors. I told you earlier to be aware of the la palooa effect when two or three or more forces are operating in the same direction.

Well, the single most publicized psychology experiment ever done is the Mgrim experiment, where they asked people to apply what they had every reason to believe was heavy electrical torture on innocent fellow human beings. And they manipulated most of these decent volunteers into doing the torture. Stanley Mgrim performed the experiment right after Hitler had gotten a bunch of believing Lutheran, Catholics, and so forth to perform unholy acts they should have known were wrong. Mgrim was trying to find out how much authority could be used to manipulate high-grade people into doing things that were clearly and grossly wrong. And he got a very dramatic effect. He managed to get high-grade people to do many awful things. But for years, it was in the psychology books as a demonstration of authority. How authority could be used to persuade people to do awful things. Of course, that's mere first conclusion bias. That's not the complete and correct explanation. Authority is part of it. However, there were also quite a few other psychological principles all operating in the same direction that achieved that laalapalooa effect precisely because they acted in combination toward the same end. People have gradually figured that out. And if you read the recent psychology texts at a place like Stanford, you'll see that they've now managed to get it about 2/3 right. However, here's the main experiment in all of psychology, and even at Stanford, they still leave out some of the important causes of Mgrim's results.

How can smart people be so wrong? Well, the answer is that they don't do what I'm telling you to do, which is to take all the main models from psychology and use them as a checklist in reviewing outcomes in complex systems. No pilot takes off without going through his checklist. A B C D. And no bridge player who needs two extra tricks plays a hand without going down his checklist and figuring out how to do it. But these psychology professors think they're so smart that they don't need a checklist. But they aren't that smart. Almost nobody is. Or maybe nobody is. If they use a checklist, they'd realize the Mgrim experiment harnesses six psychological principles at least, not three. All they'd have to do is to go down the checklist to see the ones that they missed. Similarly, without this system of getting the main models and using them together in a multi-odular way, you'll screw up time after time after time, too.

One reason psychology professors so screw up denial is that it's hard to do demonstrative experiments without conduct forbidden by ethics. To demonstrate how misery creates mental dysfunction in people, think of what you'd have to do to your fellow human beings. And you'd have to do it without telling them about the injury to come. So clearly there are ethical reasons why it's practically impossible to do the experiments necessary to best lay out the ways human misery creates human mental misfunction. Most professors solve this problem in effect by assuming if I can't demonstrate it with my experiments then it doesn't exist. However, obviously that's asinine. If something is very important but can't be perfectly and precisely demonstrated because of ethical constraints, you can't just treat it like it doesn't exist. You have to do the best you can with it with such evidence as is available.

Pavlof himself spent the last 10 years of his life torturing dogs and he published. Thus, we have a vast amount of data about miserycaused mental misfunction in dogs and its correction. Yet, it's in no introductory psychology book that you'll ever see. I don't know whether they don't like the fact that Pavof tortured dogs or whether BF Skinner by overclaiming when he lapsed into his literary mode made the drawing of implications from animal behavior into human behavior unpopular. However, for some crazy reason or other, the psychology books are grossly inadequate in dealing with miserycaused mental misfunction.

You may say, "What difference does all this psychological ignorance make?" Well, if I'm right, you need these models that are blanked out by this ignorance. And furthermore, you need them in a form whereby if there are 20 constructs, you have all 20. In other words, you shouldn't be operating with 10 and you need to use them as a checklist. So, you have to go back and put in your own head what I'd call the psychology of misjudgment in a form whereby you have all of the important models and you can use them. And you especially need them when four or five forces from these models come together to operate in the same direction. In such cases, you often get laala palooa effects which can make you rich or they can kill you. So it's essential that you beware of la palooa effects. There's only one right way to do it. You have to get the main doctrines together and use them as a checklist. And to repeat for emphasis, you have to pay special attention to combinatorial effects that create laalooa consequences.

Charlie discusses the lack of multidisciplinary teaching in the professions, especially how the field of psychology is virtually ignored in academia. You can also learn when you're playing the game of persuasion for a reputable reason to combine these forces in a way that makes you more effective. Let me give you an example of that of wise psychology of yore.

In Captain James Cook's day, he took these long voyages. At the time, scurvy was the dread of the long voyage. In scurvy, your living gums putrify in your mouth, after which the disease gets unpleasant and kills you. And being on a primitive sailing ship with a bunch of dying sailors is a very awkward business. So everybody was terribly interested in scurvy, but they didn't know about vitamin C. Well, Captain Cook, being a smart man with a multiple models kind of approach, noticed that Dutch ships had less scurvy than English ships on long voyages. So he said, "What are the Dutch doing that's different?" And he noticed they had all these barrels of sauerkraut. So he thought, "I'm going on these long voyages and it's very dangerous. sauerkraut may help. So he laid in all this sauerkraut, which incidentally happens to contain a trace of vitamin C, but English sailors were a tough, cranky, and dangerous bunch in that day. They hated krauts, and they were used to their standard food and booze. So how do you get such English sailors to eat sauerkraut? Well, Cook didn't want to tell him that he was doing it in the hope it would prevent scurvy because they might mutiny and take over the ship if they thought that he was taking them on a voyage so long that scurvy was likely. So, here's what he did. Officers ate at one place where the men could observe them. And for a long time he served sauerkraut to the officers, but not to the men. And then finally, Captain Cook said, "Well, the men can have it one day a week." In due course, he had the whole crew eating sauerkraut. I regard that as a very constructive use of elementary psychology. It may have saved god knows how many lives and caused god knows how much achievement. However, if you don't know the right techniques, you can't use them.

Charlie discusses psychological effects at play in the marketing of consumer items such as Coca-Cola, Proctor and Gamble products, Tupperware, etc. Worldly wisdom is mostly very very simple and what I'm urging on you is not that hard to do if you have the will to plow through and do it. And the rewards are awesome. Absolutely awesome. But maybe you aren't interested in awesome rewards or avoiding a lot of misery or being more able to serve everything you love in life. And if that's your attitude, then don't pay attention to what I've been trying to tell you because you're already on the right track.

It can't be emphasized too much that issues of morality are deeply entwined with worldly wisdom considerations involving psychology. For example, take the issue of stealing. A very significant fraction of the people in the world will steal if a it's very easy to do and b there's practically no chance of being caught. And once they start stealing, the consistency principle, which is a big part of human psychology, will soon combine with operant conditioning to make stealing habitual. So if you run a business where it's easy to steal because of your methods, you're working a great moral injury on the people who work for you. Again, that's obvious. It's very, very important to create human systems that are hard to cheat. Otherwise, you're ruining your civilization because these big incentives will create incentivecaused bias and people will rationalize that bad behavior is okay. Then if somebody else does it, now you've got at least two psychological principles. Incentivecaused bias plus social proof. Not only that, but you get serpico effects. If enough people are profiting in a general social climate of doing wrong, then they'll turn on you and become dangerous enemies if you try and blow the whistle. It's very dangerous to ignore these principles and let slop creep in. Powerful psychological forces are at work for evil.

How does this relate to the law business? Well, people graduate from places like Stanford Law School and go into the legislatures of our nation and with the best of motives pass laws that are easily used by people to cheat. While there could hardly be a worse thing you could do. Let's say you have a desire to do public service. As a natural part of your planning, you think in reverse and ask, "What can I do to ruin our civilization?" That's easy. If what you want to do is to ruin your civilization, just go to the legislature and pass laws that create systems wherein people can easily cheat. It will work perfectly. Take the workers compensation system in California. Stress is real and its misery can be real. So, you want to compensate people for their stress in the workplace. It seems like a noble thing to do. But the trouble with such a compensation practice is that it's practically impossible to delete huge cheating. And once you reward cheating, you get crooked lawyers, crooked doctors, crooked unions, etc. participating in referral schemes. You get a total miasma of disastrous behavior. And the behavior makes all the people doing it worse as they do it. So you were trying to help your civilization, but what you did was create enormous damage net. So it's much better to let some things go uncompensated, to let life be hard, than to create systems that are easy to cheat.

Let me give you an example. I have a friend who made an industrial product at a plant in Texas, not far from the border. He was in a low margin, tough business. He got massive fraud in the workers compensation system to the point that his premiums reached doubledigit percentages of payroll. And it was not that dangerous to produce his product. It's not like he was a demolition contractor or something. So he pleaded with the union, "You've got to stop this. There's not enough money in making this product to cover all of this fraud." But by then, everyone's used to it. It's extra income. It's extra money. Everybody does it. It can't be that wrong. Eminent lawyers, eminent doctors, eminent chiropractors, if there are any such things, are cheating. And no one could tell them you can't do it anymore. Incidentally, that's Pavlovian mere association, too. When people get bad news, they hate the messenger. Therefore, it was very hard for the union representative to tell all of these people that the easy money was about to stop. That is not the way to advance as a union representative. So, my friend closed his plant and moved the work to Utah among a community of believing Mormons. Well, the Mormons aren't into workers compensation fraud. At least they aren't in my friend's plant. And guess what his workers compensation expense is today? It's 2% of payroll. This sort of tragedy is caused by letting the slop run. You must stop slop early. It's very hard to stop slop and moral failure if you let it run for a while.

Charlie describes his notion of deprival super reaction syndrome as it relates to gambling and the new coke debacle of the mid 1980s. Of course, as I said before, there is one big consideration that needs huge and special attention as part of any use of techniques deliberately harnessing elementary psychological forces. And that is that once you know how to do it, there are real moral limits regarding how much you should do it. Not all of what you know how to do should you use to manipulate people. Also, if you're willing to transcend the moral limits and the person you're trying to manipulate realizes what you're doing because he also understands the psychology, he'll hate you. There is wonderfully persuasive evidence of this effect taken from labor relations, some in Israel. So, not only are there moral objections, but there are also practical objections, big ones in some cases.

Audience question. How do you incorporate psychology in your investment decisions? I think it would be more than just picking products that will appeal to everybody like Coke. After all, there are a lot of smart people out there who obviously think just the way you showed us today. So, are you looking for failure in the thinking of other investors when you go about picking successful companies?

What makes investment hard, as I said at USC, is that it's easy to see that some companies have better businesses than others. But the price of the stock goes up so high that all of a sudden the question of which stock is the best to buy gets quite difficult. We've never eliminated the difficulty of that problem. And 98% of the time, our attitude toward the market is that we're agnostics. We don't know. Is GM valued properly visav Ford? We don't know. We're always looking for something where we think we have an insight that gives us a big statistical advantage. Sometimes it comes from psychology, but often it comes from something else. And we only find a few, maybe one or two a year. We have no system for having automatic good judgment on all investment decisions that can be made. Ours is a totally different system. We just look for nobrainer decisions. As Buffett and I say over and over again, we don't leap 7-foot fences. Instead, we look for one-ft fences with big rewards on the other side. So, we've succeeded by making the world easy for ourselves, not by solving hard problems based on statistical analysis and insight.

Well, certainly when we do make a decision, we think that we have an insight advantage. And it's true that some of the insight is statistical in nature. However, again, we find only a few of those. It doesn't help us merely for favorable odds to exist. They have to be in a place where we can recognize them. So, it takes a mispriced opportunity that we're smart enough to recognize. And that combination doesn't occur often, but it doesn't have to. If you wait for the big opportunity and have the courage and vigor to grasp it firmly when it arrives, how many do you need? For example, take the top 10 business investments Berkshire Hathways ever made. We would be very rich if we'd never done anything else in two lifetimes. So once again, we don't have any system for giving you perfect investment judgment on all subjects at all times. That would be ridiculous. I'm just trying to give you a method you can use to sift reality to obtain an occasional opportunity for rational reaction. If you take that method into something as competitive as common stockpicking, you're competing with many brilliant people. So even with our method, we only get a few opportunities. Fortunately, that happens to be enough.

Have you been successful in creating an atmosphere where people below you can do the same things you're talking about doing yourself? For example, you talked about the tendency toward commitment and consistency, mostly about the terrible mistakes it causes you to make. How have you created an atmosphere comfortable enough for people to abandon that tendency and admit that they've made a mistake? For example, someone here earlier this year from Intel talked about problems that occurred with their Pentium chip. One of the most difficult things for them to do was to realize they'd been going about it the wrong way and turn course. And it's very difficult to do that in a complex structure. How do you foster that?

Intel and its ilk create a coherent culture where teams solve difficult problems on the cutting edge of science. That's radically different from Berkshire Hathaway. Bergkshire is a holding company. We've decentralized all the power except for natural headquarters type capital allocation. By and large, we've chosen people we admire enormously to have the power beneath us. It's easy for us to get along with them on average because we love and admire them and they create the culture for whatever invention and reality recognition is going on in their businesses. And included in that reality recognition is the recognition that previous conclusions were incorrect. But we're a totally different kind of company. It's not at all clear to me that Warren or I would be that good at doing what Andy Grove does. We don't have special competence in that field. We are fairly good at relating to brilliant people we love, but we have defects. For example, some regard me as absent-minded and opinionated. I might be a mess at intel. However, both Warren and I are very good at changing our prior conclusions. We work at developing that facility because without it, disaster often comes.

Would you talk a little bit about your seeming predelection away from investing in high technology stocks on your own part and the part of Berkshire Hathaway? One of the things I found eyeopening and a little surprising is how the difficulties of running a low tech business and those of running a high-tech business aren't all that different. They're all hard, but why should it be easy to get rich in a competitive world? Shouldn't it be impossible for there to be an easy way for everybody to get rich? Of course, they're all hard. The reason we're not in high-tech businesses is that we have a special lack of aptitude in that area. And yes, a low tech business can be plenty hard. Just try to open a restaurant and make it succeed. You seem to be suggesting that there's special aptitude required in high-tech businesses, that they're harder. But aren't they equally difficult? The advantage of low tech stuff for us is that we think we understand it fairly well. The other stuff we don't and we'd rather deal with what we understand. Why should we want to play a competitive game in a field where we have no advantage, maybe a disadvantage, instead of in a field where we have a clear advantage? Each of you will have to figure out where your talents lie, and you'll have to use your advantages. But if you try to succeed in what you're worst at, you're going to have a very lousy career. I can almost guarantee it. To do otherwise, you'd have to buy a winning lottery ticket or get very lucky somewhere else.

Warren Buffett has said that the investment Bergkshire made in an airline was a good example of what not to do. What chain of thinking led to that wrong decision? We were not buying stock in US Air on the theory that the common shareholders were certain to prosper because the history of the airline business in terms of taking care of shareholders has been terrible. It was a preferred stock with a mandatory redemption. In effect, we were loaning money to US Air and we had this equity kicker. We weren't guessing whether it would be a great place for the shareholders. We were guessing whether it would remain prosperous enough to pay off a credit instrument carrying a fixed dividend and a mandatory redemption. And we guessed that the business would not get so bad that we'd have a credit threat for which we were not being adequately compensated by the high rate we were getting. As it happened, US Air went right to the brink of going broke. It was hanging by a thread for several months. It's since come back and we'll probably get all our money back plus the whole coupon, but it was a mistake. Editor's note. Berkshire did indeed come out whole on its US Air investment.

I don't want you to think that we have any way of learning or behaving so you won't make a lot of mistakes. I'm just saying that you can learn to make fewer mistakes than other people and how to fix your mistakes faster when you do make them. But there's no way that you can live an adequate life without making many mistakes. Part of what you must learn is how to handle mistakes and new facts that change the odds. Life in part is like a poker game wherein you have to learn to quit sometimes when holding a muchloved hand. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke. You've made an enormous commitment to something. You've poured effort and money in. And the more you put in, the more the whole consistency principle makes you think now it has to work. If I put in just a little more, then it'll work. And deprival super reaction syndrome also comes in. you're going to lose the whole thing if you don't put in a little more. People go broke that way because they can't stop, rethink, and say, "I can afford to write this one off and live to fight again. I don't have to pursue this thing as an obsession in a way that will break me."

Could you talk about the thoughts that went into your decision to swap your capital city's stock for Disney rather than taking cash? In the media, it was reported that you mentioned thinking about taking the cash. Disney's a perfectly marvelous company, but it's also very highriced. Part of what it does is make ordinary movies, which is not a business that attracts me at all. However, part of what Disney has is better than a great gold mine. I mean, those video cassettes. Disney is an amazing example of autocatalysis. They had all those movies in the can. They owned the copyright. And just as Coke could prosper when refrigeration came, when the video cassette was invented, Disney didn't have to invent anything or do anything except take the thing out of the can and stick it on the cassette. And every parent and grandparent wanted his descendants to sit around and watch that stuff at home on video cassette. So Disney got this enormous tailwind from life and it was billions of dollars worth of tailwind. Obviously that's a marvelous model if you can find it. You don't have to invent anything. All you have to do is sit there while the world carries you forward. Disney's done a lot of new things right. Don't misunderstand me. But a lot of what happened to Disney was like what a friend of mine said about an ignorant fraternity brother of his who succeeded in life. He was a duck sitting on a pond and they raised the level of the pond. Eisner and Wells were brilliant in how they ran Disney, but the huge tailwind from video cassette sales on all of the old stuff that was there when they came in. That was just an automatic break for the new management. To be fair, they have been brilliant about creating new stuff like Pocahontas and the Lion King to catch the same tailwind. But by the time it's done, The Lion King alone is going to do plural billions. And by the way, when I say when it's done, I mean 50 years from now or something. But plural billions from one movie.

Could you talk about why you left the law? I had a huge family. Nancy and I supported eight children. And I didn't realize that the law was going to get as prosperous as it suddenly got. The big money came into law shortly after I left it. By 1962, I was mostly out and I was totally out by 1965. So that was a long time ago. Also, I preferred making the decisions and gambling my own money. I usually thought I knew better than the client anyway, so why should I have to do it his way? So partly it was having an opinionated personality and partly it was a desire to get resources permitting independence. Also the bulk of my clients were terrific, but there were one or two I didn't enjoy. Plus I like the independence of a capitalist and I'd always had sort of a gambling personality. I like figuring things out and making bets. So I simply did what came naturally.

Did you ever gamble Las Vegas style? I wouldn't bet $100 against house odds between now and the grave. I don't do that. Why should I? I will gamble recreationally with my pals, and I'll occasionally play a much better bridge player like Bob Hammond, who might be the best card player in the world, but I know I'm paying for the fun of playing with him. That's recreational. As for gambling with simple mechanical house odds against me, why in the world would I ever want to do that? particularly given how I detest the manipulative culture of legalized gambling. I don't like legalized gambling, and I'm not comfortable in Las Vegas, even though it does now include a higher percentage of wholesome family recreation. I don't like to be with many of the types who hang around card parlors and so forth. On the other hand, I do like the manly art of wagering, so to speak, and I like light social gambling among friends, but I do not like the professional gambling.

Millu, could you say something about how the mutual fund and money management business has changed since you got into it and the growth of capital markets? Actually, I didn't really get into it. I had a little private partnership for 14 years up until a little over 20 years ago. However, I never had enough money from other people to amount to a hill of beans, at least by current investment management standards. So, I've never really been part of the mutual fund business. But the money management business has been one of the great growth businesses in the recent history of the United States. It's created many affluent professionals and multi-millionaires. It's been a perfect gold mine for people who got in it early. The growth of pension funds, the value of American corporations, and the world's wealth have created a fabulous profession for many and carried lots of them up to affluence. And we deal with them in a variety of ways. However, we haven't been part of it for many years. We've basically invested our own money for a long, long time.

Do you expect this bull run to continue? Well, I'd be amazed if the capitalized value of all American business weren't considerably higher 25 years from now. And if people continue to trade with one another and shuffle these pieces of paper around, then money management may continue to be a marvelous business for the managers. But except for what might be called our own money, we're really not in it.

I was interested in the evolution of your investment strategy from when you first began using the Ben Graham model to the Berkshire Hathway model. Would you recommend that model to a beginning investor, i.e. dumping most of it or all of it into one opportunity we think is a great one and leaving it there for decades? Or is that strategy really for a more mature investor? Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable and some losses are inevitable, you might be wise to utilize a very conservative pattern of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don't think there's a one-sizefits-all investment strategy that I can give you. Mine works for me, but in part that's because I'm good at taking losses. I can take them psychologically, and besides, I have very few. The combination works fine.

You and Buffett have said that Berkshire's stock is overvalued and you wouldn't recommend buying it. We didn't say we thought it was overvalued. We just said that we wouldn't buy it or recommend that our friends buy it at the prices then prevailing. But that just related to Berkshire's intrinsic value as it was at that time. If I had the money, I would buy it because you've been saying that your returns will go down for 20 years. Well, I hope that your optimism is justified, but I do not change my opinion. After all, today we're in uncharted territory. I sometimes tell my friends, "I'm doing the best I can, but I've never grown old before. I'm doing it for the first time, and I'm not sure that I'll do it right." Warren and I have never been in this kind of territory with high valuations and a huge amount of capital. We've never done it before, so we're learning.

Everything you and Buffett say seems logical, but it sounds like exactly the same language that Ben Graham was using 30 years ago when he was saying the stock market was overvalued when it was at 900. Oh, I don't think that we share that with him. Graham, great though he was as a man, had a screw loose as he tried to predict outcomes for the stock market as a whole. In contrast, Warren and I are almost always agnostic about the market. On the other hand, we have said that common stocks generally have generated returns of 10 to 11% after inflation for many years and that those returns can't continue for a very long period and they can't. It's simply impossible. The wealth of the world will compound at no such rate. Whatever experience Stanford has had in its portfolio for the last 15 years, its future experience is virtually certain to be worse. It may still be okay, but it's been a hog heaven period for investors over the last 15 years. Bonanza effects of such scale can't last forever.

Berkshire's annual report got a lot of press for being pessimistic and for expressing concern about the shrinking pool of opportunities as the company gets bigger and bigger. Where does that leave you 10 years from now? We've said over and over that our future rate of compounding our shareholders wealth is going to go down compared to our past and that our size will be an anchor dragging on performance and we've said over and over again that it is not an opinion but a promise. However, let's suppose that we were able to compound our present book value at 15% peranom from this point. that would not be so bad and would work out okay for our long-term shareholder. I'm just saying that we could afford to slow down some as we surely will and still do okay for the long-term shareholder. By the way, I'm not promising that we will compound our present book value at 15% peranom.

You talked about how important it was not to have an extreme ideology. What responsibility, if any, do you think the business and legal communities have for helping inner city areas, spreading the wealth, and so on? I'm all for fixing social problems. I'm all for being generous to the less fortunate, and I'm all for doing things where, based on a slight prepoundonderance of the evidence, you guess that it's likely to do more good than harm. What I'm against is being very confident and feeling that you know for sure that your particular intervention will do more good than harm given that you're dealing with highly complex systems wherein everything is interacting with everything else. So just make sure that what you're doing you can't make sure that's my point on the other hand I did recently reverse the conclusions of two sets of engineers. How did I have enough confidence in such a complicated field to do that? Well, you might think, "Oh, this guy is just an egoomaniac who's made some money and thinks he knows everything." Well, I may be an egoomaniac, but I don't think I know everything. But I saw huge reasons in the circumstances for bias in each set of engineers, as each recommended a course of action very advantageous to itself. and what each was saying was so consonant with a natural bias that it made me distrust it. Also, perhaps I knew enough engineering to know that what they were saying didn't make sense. Finally, I found a third engineer who recommended a solution I approved. And thereafter, the second engineer came to me and said, "Charlie, why didn't I think of that?" Which is to his credit, it was a much better solution, both safer and cheaper. 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. But 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. In effect, you've got to know what you know and what you don't know. What could possibly be more useful in life than that?

You discussed Ko's mistake. Do you have any thoughts about where Apple went wrong? Let me give you a very good answer. One I'm copying from Jack Welch, the CEO of General Electric. He has a PhD in engineering. He's a star businessman. He's a marvelous guy. And recently in Warren's presence, someone asked him, "Jack, what did Apple do wrong?" His answer, "I don't have any special competence that would enable me to answer that question." And I'm giving you the very same answer. That's not a field in which I'm capable of giving you any special insight. On the other hand, in copying Jack Welch, I am trying to teach you something. When you don't know and you don't have any special competence, don't be afraid to say so. There's another type of person I compare to an example from biology. When a bee finds nectar, it comes back and does a little dance that tells the rest of the hive as a matter of genetic programming which direction to go and how far. So, about 40 or 50 years ago, some clever scientist stuck the nectar straight up. Well, the nectar is never straight up in the ordinary life of a bee. The nectar's out. So, the bee finds the nectar and returns to the hive. But it doesn't have the genetic programming to do a dance that says straight up. So, what does it do? Well, if it were like Jack Welch, it would just sit there. But what it actually does is to dance this incoherent dance that gums things up. A lot of people are like that bee. They attempt to answer a question like that and that is a huge mistake. Nobody expects you to know everything about everything. I try to get rid of people who always confidently answer questions about which they don't have any real knowledge. To me, they're like the bee dancing its incoherent dance. They're just screwing up the hive.

As someone who's been in legal practice and business, how did you incorporate or did you incorporate these models into your legal practice and how did it work? I suspect many of us have seen law firms that don't appear to adhere to these kinds of models. Well, the models are there, but just as there are perverse incentives in academia, there are perverse incentives in law firms. In fact, in some respects at the law firms, it's much worse. Here's another model from law practice. When I was very young, my father practiced law. One of his best friends, Grant McFeden, Omaha's pioneer Ford dealer, was a client. He was a perfectly marvelous man, a self-made Irishman who'd run away uneducated from a farm as a youth because his father beat him. So, he made his own way in the world. He was a brilliant man of enormous charm and integrity. Just a wonderful, wonderful man. In contrast, my father had another client who was a blowhard, an overreaching, unfair, pompous, difficult man. And I must have been 14 years old or thereabouts when I asked, "Dad, why do you do so much work for Mr. X, this overreaching

blowhard, instead of working more for wonderful men like Grant McFeden?"

My father said Grant McFeden treats his employees right, his customers right, and his problems right. And if he gets involved with a psychotic, he quickly walks over to where the psychotic is and works out an exit as fast as he can. Therefore, Grant McFeden doesn't have enough remunerative law business to keep you in Coca-Cola. But Mr. X is a walking minefield of wonderful legal business.

This case demonstrates one of the troubles with practicing law. To a considerable extent, you're going to be dealing with grossly defective people. They create an enormous amount of the remunerative law business. And even when your own client is a paragon of virtue, you'll often be dealing with gross defectives on the other side or even on the bench. That's partly what drove me out of the profession. The rest was my own greed. But my success in serving greed partly allowed me to make easier the process of being honorable and sensible. Like Ben Franklin observed, "It's hard for an empty sack to stand upright."

I'd argue that my father's model when I asked him about the two clients was totally correct did action. He taught me the right lesson. The lesson. As you go through life, sell your services once in a while to an unreasonable blowhard if that's what you must do to feed your family, but run your own life like Grant McFeden. That was a great lesson, and he taught it in a very clever way because instead of just pounding it in, he told it to me in a way that required a slight mental reach. I had to make the reach myself in order to get the idea that I should behave like Grant McFeden. And because I had to reach for it, he figured I'd hold it better. And indeed, I've held it all the way through until today, through all of these decades. That's a very clever teaching method. There again, we're talking about elementary psychology. It's elementary literature. Good literature makes the reader reach a little for understanding. Then it works better. You hold it better. It's the commitment and consistency tendency. If you've reached for it, the ideas pounded in better.

As a lawyer or executive, you want to teach somebody what my father taught me. Or maybe you'll want to teach them something else. And you can use lessons like this. Isn't that a great way to teach a child? My father used indirection on purpose. And look at how powerfully it worked. Like Captain Cook's wise use of psychology. I've been trying to imitate Grant McFaden ever since for all my life. I may have had a few lapses, but at least I've been trying.

At the end of your article in oid, you mentioned that only a select few investment managers actually add value. Since you're speaking to an audience of future lawyers, what would you encourage us to do in order to be able to add value in our profession?

To the extent you become a person who thinks correctly, you can add great value. To the extent you've learned it so well that you have enough confidence to intervene where it takes a little courage, you can add great value. And to the extent that you can prevent or stop some asinity that would otherwise destroy your firm, your client or something that you care about, you can add great value. There are constructive tricks you can use. For example, one reason why my old classmate Joe Flom of Scatteren Arps has been such a successful lawyer is that he's very good at dreaming up little vivid examples that serve to pound the point home in a way that really works. It's enormously helpful when you're serving clients or otherwise trying to persuade someone in a good cause to come up with a little humorous example. The ability to do that is a knack. So you could argue that the Joe Flams of the world are almost born with a gift, but he's honed the gift. And to one degree or another, all of you were born with the gift, and you can hone it, too.

Occasionally, you get into borderline stuff. For instance, suppose you've got a client who really wants to commit tax fraud. If he doesn't push the tax law way beyond the line, he can't stand it. He can't shave in the morning if he thinks there's been any cheating he could get by with that he hasn't done. And there are people like that. They just feel they aren't living aggressively enough. You can approach that situation in either of two ways. You can say, "I just won't work for him." And duck it. Or you can say, "Well, the circumstances of my life require that I work for him, and what I'm doing for him doesn't involve my cheating. Therefore, I'll do it. And if you see he wants to do something really stupid, it probably won't work to tell him what you're doing is bad. I have better morals than you. That offends him. You're young. He's old. Therefore, instead of being persuaded, he's more likely to react with, "Who in the hell are you to establish the moral code of the whole world?" But instead, you can say to him, "You can't do that without three other people beneath you knowing about it. Therefore, you're making yourself subject to blackmail. You're risking your reputation. You're risking your family, your money, etc. That is likely to work. And you're telling him something that's true.

Do you want to spend a lot of time working for people where you have to use methods like that to get them to behave well? I think the answer is no. But if you're hooked with it, appealing to his interest is likely to work better as a matter of human persuasion than appealing to anything else. That again is a powerful psychological principle with deep biological roots.

I saw that psychological principle totally blown at Solomon. Solomon's general counsel knew that the CEO, John Goodfriend, should have promptly told the federal authorities all about Solomon's trading improprieties in which Good Friend didn't participate and which he hadn't caused. And the general counsel urged Good Friend to do it. He told Good Friend, in effect, "You're probably not legally required to do that, but it's the right thing to do. You really should." But it didn't work. The task was easy to put off because it was unpleasant. So that's what good friend did. He put it off. The general counsel had very little constituency within Solomon except for the CEO. If the CEO went down, the general counsel was going down with him. Therefore, his whole career was on the line. So to save his career, he needed to talk the dilatory CEO into doing the right thing. It would have been child's play to get that job done right. All the general counsel had to do was to tell his boss, "John, this situation could ruin your life. You could lose your wealth. You could lose your reputation." And it would have worked. CEOs don't like the idea of being ruined, disgraced, and fired. The ex-gener council of Solomon is brilliant and generous, and he had the right idea. However, he lost his job because he didn't apply little elementary psychology. He failed to recognize that what works best in most cases is to appeal to a man's interest.

But you don't have to get similarly lousy results when you face similar situations. Just remember what happened to Good Friend and his general counsel. The right lessons are easily learned if you'll work at it. And if you do learn them, you can be especially useful at crucial moments when others fail. And to the extent that you do become wise, diligent, objective, and especially able to persuade in a good cause, then you're adding value.

Would you discuss how the threat of litigation, shareholder lawsuits, and so forth, and legal complexity in general have affected decision-making in big business?

Well, every big business screams about its legal costs, screams about the amount of regulation, screams about the complexity of its life, screams about the plaintiff's bar, particularly the class action plaintiff's bar. So, there's an absolute catechism on that where you could just copy the screams from one corporation to another and you'd hardly have to change a word. But what causes the screams has so far been a godsend for the law firms. The big law firms have had a long updraft. And they now tend to kind of cluck like an undertaker in a plague. An undertaker, of course, would look very unseemly if he were jumping up and down and playing his fiddle during the plague. So law firm partners say, "Oh, isn't it sad? all this complexity, all this litigation, all this unfairness, but really they're somewhat schizophrenic on the subject because it's been very good for them.

Some recent California initiatives created some interesting conduct. Part of the defense bar lobbied quietly against certain propositions and effectively against their clients because they didn't want their clients to catch them in the process. And the reason they did so was because it became harder for plaintiffs to bring cases. If you make a living fighting over reaching and it keeps your children in school and somebody proposes a system that eliminates it, well, that's an adult experience and an adult choice that you have to make. So big corporations adapt. They have more litigation. They have to have a bigger legal department. They scream about what they don't like, but they adapt.

But hasn't that legal complexity consumed a lot more of companies resources over the last few decades?

The answer is yes. There's hardly a corporation in America that isn't spending more on lawsuits and on compliance with various regulations than it was 20 years ago. And yes, some of the new regulation is stupid and foolish and some was damn well necessary. And it will ever be thus, albeit with some eb and flow.

But have you seen or experienced any change in decision-making at corporations in their being less likely to take on riskier investments for fear of failure or liability?

The only place I saw with another friend, not Warren, was when I was part owner of the biggest shareholder in a company that invented a better policeman's helmet. it was made of Kevlar or something of that sort. They brought it to us and wanted us to manufacture it. As a matter of ideology, we're very pro police. I believe civilization needs a police force, although I don't believe in policemen creating too many widows and orphans unnecessarily either. But we like the idea of a better policeman's helmet. However, we took one look at it and said to the people who invented it, "We're a rich corporation. We can't afford to make a better policeman's helmet. That's just how the civilization works. All risks considered, it can't work for us. But we want the civilization to have these. So, we don't maximize what we sell it for. Get somebody else to make it. transfer the technology or whatever to somebody who can do it, but we're not going to. Thus, we didn't try to disadvantage policemen from getting new helmets, but we decided not to manufacture helmets ourselves.

There are businesses, given the way the civilization has developed, where being the only deep pocket around is bad business. In high school football, for example, a paraplegic or a quadriplegic will inevitably be created occasionally. And who with deep pockets can the injured person best sue other than the helmet manufacturer? Then everyone feels sorry the injuries are horrible and the case is dangerous for the manufacturer. I think big rich corporations are seldom wise to make football helmets in the kind of civilization we're in. And maybe it should be harder to successfully sue helmet makers.

I know two different doctors, each of whom had a sound marriage. When the malpractice premiums got high enough, they divorced their wives and transferred most of their property to their wives, and they continued to practice only without malpractice insurance. They were angry at the civilization. They needed to adapt, and they trusted their wives. So that was that and they've not carried any malpractice insurance since. People adapt to a changing litigation climate. They have various ways of doing it. That's how it's always been and how it's always going to be.

What I personally hate most are systems that make fraud easy. Probably way more than half of all the chiropractic income in California comes from pure fraud. For example, I have a friend who had a little fender bender, an auto accident in a tough neighborhood, and he got two chiropractor's cards and one lawyer's card before he'd even left the intersection. They're in the business of manufacturing claims that necks hurt. In California, I believe the Rand statistics showed that we have twice as many personal injuries per accident as in many other states. And we aren't getting twice as much real injury per accident. So, the other half of that is fraud. People just get so that they think everybody does it and it's all right to do. I think it's terrible to let that stuff creep in.

If I were running the civilization, compensation for stress in workers comp would be zero. Not because there's no work- caused stress, but because I think the net social damage of allowing stress to be compensated at all is worse than what would happen if a few people who had real work caused stress injuries went uncompensated. I like the Navy system. If you're a captain in the Navy and you've been up for 24 hours straight and have to go to sleep and you turn the ship over to a competent first mate in tough conditions and he takes the ship a ground clearly through no fault of yours, they don't court marshall you, but your naval career is over. You can say that's too tough. That's not law school. That's not due process. Well, the Navy model is better in its context than would be the law school model. The Navy model really forces people to pay attention when conditions are tough because they know that there's no excuse. Napoleon said he liked luckier generals. He wasn't into supporting losers. Well, the Navy likes luckier captains. It doesn't matter why your ship goes ground, your career is over. Nobody's interested in your fault. It's just a rule that we happen to have for the good of all, all effects considered. I like some rules like that. I think that the civilization works better with some of these no fault rules, but that stuff tends to be anathema around law schools. It's not due process. You're not really searching for justice. Well, I am searching for justice when I argue for the Navy rule, for the justice of fewer ships going ground. Considering the net benefit, I don't care if one captain has some unfairness in his life. After all, it's not like he's being court marshaled. He just has to look for a new line of work and he keeps vested pension rights and so on. So, it's not like it's the end of the world. So, I like things like that. However, I'm in a minority.

I'd like to hear you talk a little bit more about judgment. In your talk, you said we should read the psychology textbooks and take the 15 or 16 principles that are the best of the ones that make sense. the ones that are obviously important and obviously right.

That's correct. And then you stick in the ones that are obviously important and not in the books and you've got a system. Right. My problem seems to be the prior step which is determining which ones are obviously right. And that seems to me to be the more essential question to ask.

No. No. You overestimate the difficulty. Do you have difficulty understanding that people are heavily influenced by what other people think and what other people do and that some of that happens on a subconscious level?

No, I don't. I understand that.

Well, you can go right through the principles and one after another they're like that. It's not that hard. Do you have any difficulty with the idea that operant conditioning works? That people will repeat what worked for them the last time?

It just seems to me like there's a lot of other things out there as well that also make a lot of sense. The system would quickly get too complicated, I imagine, as a result of too much cross talk.

Well, if you're like me, it's kind of fun for it to be a little complicated. If you want it totally easy and totally laid out, maybe you should join some cult that claims to provide all the answers. I don't think that's a good way to go. I think you'll just have to endure the world, as complicated as it is. Einstein has a marvelous statement on that. Everything should be made as simple as possible, but no more simple. I'm afraid that's the way it is. If there are 20 factors and they interact some, you'll just have to learn to handle it because that's the way the world is. But you won't find it that hard if you go at it Darwinlike, step by step with curious persistence. You'll be amazed at how good you can get.

You've given us about three of the models that you use. I wondered where you found the other ones. And second, do you have an easier way for us to find them than going through a psychology textbook? I'm not averse to doing that, but it takes longer.

There are a relatively small number of disciplines and a relatively small number of truly big ideas. And it's a lot of fun to figure it out. Plus, if you figure it out and do the outlining yourself, the ideas will stick better than if you memorize them using somebody else's cram list. Even better, the fun never stops. I was miseducated horribly, and I hadn't bothered to pick up what's called modern Darwinism. I do a lot of miscellaneous reading, too, but I just missed it. And in the last year, I suddenly realized I was a total damned fool and hadn't picked it up properly. So I went back and with the aid of Richard Dawkins, Oxford's great biologist and others, I picked it up. Well, it was an absolute circus for me in my 70s to get the modern Darwinian synthesis in my head. It's so awesomely beautiful and so awesomely right. And it's so simple once you get it. So one beauty of my approach is that the fun never stops. I suppose that it does stop eventually when you're drooling in the convolescent home at the end, but at least it lasts a long time.

If I were Zar of a law school, although of course no law school will permit a zar, they don't even want the dean to have much power, I'd create a course that I'd call remedial worldly wisdom that would, among other useful things, include a fair amount of properly taught psychology. and it might last 3 weeks or a month. I think you could create a course that was so interesting with pathy examples and powerful examples and powerful principles that it will be a total circus. And I think that it would make the whole law school experience work better. People raise their eyebrows at that idea. People don't do that kind of thing. They may not like the derision that's implicit in the title remedial worldly wisdom, but the title would be my way of announcing everybody ought to know this. And if you call it remedial, isn't that what you're saying? This is really basic and everybody has to know it. Such a course would be a perfect circus. The examples are so legion. I don't see why people don't do it. They may not do it mostly because they don't want to, but also maybe they don't know how and maybe they don't know what it is. But the whole law school experience would be much more fun if the really basic ideas were integrated and pounded in with good examples for a month or so before you got into conventional law school material. I think the whole system of education would work better, but nobody has any interest in doing it.

When law schools do reach out beyond traditional material, they often do it in what looks to me like a pretty dumb way. If you think psychology is badly taught in America, you should look at corporate finance. Modern portfolio theory, it's demented. It's truly amazing. I don't know how these things happen. Hard science and engineering tend to be pretty reliably done. But the minute you get outside of those areas, a certain amount of inanity seems to creep into academia. Even academia involving people with very high IQs. But boy, what a school would be like that pounded a lot of the silliness out. But the right way to pound it out is not to have some 70 plus year old capitalist come in and tell seniors, "Here's a little remedial worldly wisdom." This is not the way to do it. On the other hand, a month at the start of law school are really pounded in the basic doctrines. Many of the legal doctrines are tied to other doctrines. They're joined at the hip. And yet they teach you those legal doctrines without pointing out how they're tied to the other important doctrines. That's insanity. Absolute insanity. Why do we have a rule that judges shouldn't talk about legal issues that aren't before them? In my day, they taught us the rule, but not in a way giving reasons tied to the guts of undergraduate courses. It's crazy that people don't have those reasons. The human mind is not constructed so that it works well without having reasons. You've got to hang reality on a theoretical structure with reasons. That's the way it hangs together in usable form so that you're an effective thinker. and to teach doctrines either with no reasons or with poorly explained reasons. That's wrong.

Another reason why I like the idea of having a course on remedial worldly wisdom is that it would force more sense on the professors. It would be awkward for them to teach something that was contravened by lessons that were obviously correct and emphasized in a course named remedial worldly wisdom. professors doing so would really have to justify themselves. Is that a totally crazy idea? It may be crazy to expect it to be done. However, if somebody had done it, would you have found it useful? I think it would be a wonderful thing to have. Unfortunately, when it's created, we won't be here anymore.

You're proposing that this would be good to teach people in a course form so it would be accessible to them. Is there any way that it could be more accessible to us other than having to I get requests for pointers to easy learning all the time? I'm trying to provide a little easy learning today, but one talk like this is not the right way to do it. The right way to do it would be in a book. I hope what I'm saying will help you be more effective and better human beings. And if you don't get rich, that won't bother me. But I'm always asked this question. spoon feed me what you know. And of course, what they're often saying is, "Teach me how to get rich with soft white hands faster." And not only let me get rich faster, but teach me faster, too. I don't have much interest in writing a book myself. Plus, it would be a lot of work for somebody like me to try and do it in my 70s, and I have plenty else to do in life, so I'm not going to do it. But it's a screaming opportunity for somebody. I'd provide funds to support the writing of an appropriate book if I found someone with the wisdom and the will to do the job right.

Let me turn to some of the probable reasons for present bad education. Part of the trouble is caused by the bulcanization of academia. For instance, psychology is most powerful when combined with doctrines from other academic departments. But if your psychology professor doesn't know the other doctrines, then he isn't capable of doing the necessary integration. And how would anyone get to be a psychology professor in the first place if he were good with non-sychology doctrines and constantly worked non-sychology doctrines into his material? Such a would-be professor would usually offend his peers and superiors. There have been some fabulous psychology professors in the history of the world. Robert Chaldini of Arizona State was very useful to me as was BF Skinner for his experimental results if divorced from his monoomania and utopianism. But averaged out, I don't believe that psychology professors in America are people whose alternative career paths were in the toughest part of physics. And that may be one of the reasons why they don't get it quite right. The schools of education, even at eminent universities, are pervaded by psychology and they're almost an intellectual disgrace. It's not unheard of for academic departments, even at great institutions, to be quite deficient in important ways. And including a lot of material labeled as psychological, is no cure all. And given academic inertia, all academic deficiencies are very hard to fix.

Do you know how they tried to fix psychology at the University of Chicago? Having tenured professors who were terrible, the president there actually abolished the entire psychology department. And Chicago in due course will probably bring back a new and different psychology department. Indeed, by now it probably has. Perhaps conditions are now better. And I must admit that I admire a college president who will do something like that. I do not wish to imply in my criticism that the imperfections of academic psychology teaching are all attributable to some kind of human fault common only to such departments. Instead, the causes of many of the imperfections lie deep in the nature of things in irritating peculiarities that can't be removed from psychology. Let me demonstrate by a thought experiment involving a couple of questions. Are there not many fields that need a synthesizing supermind like that of James Clark Maxwell, but are destined never to attract one? And is academic psychology by its nature one of the most unfortunate of all the would-be attractors of superminds? I think the answers are yes and yes. One can see this by considering the case of any of the few members of each generation who can as fast as fingers can move accurately work through the problem sets in thermodynamics, electromagnetism and physical chemistry. Such a person will be begged by some of the most eminent people alive to enter the upper reaches of hard science. Will such a supergifted person instead choose academic psychology wherein lie very awkward realities, A that the tendencies demonstrated by social psychology paradoxically grow weaker as more people learn them? and B that clinical patient treating psychology has to deal with the awkward reality that happiness physiologically measured is often improved by believing things that are not true. The answer I think is plainly no. The supermind will be repelled by academic psychology much as Nobel laurate physicist Mox Plank was repelled by economics wherein he saw problems that wouldn't yield to his methods.

We talk a lot about tradeoffs between the quality of our life and our professional commitments. Is there time for a professional life, learning about these models and doing whatever else interests you? Do you find time to do fun things besides learning?

I've always taken a fair amount of time to do what I really wanted to do, some of which was merely to fish or play bridge or play golf. Each of us must figure out his or her own lifestyle. You may want to work 70 hours a week for 10 years to make partner at Kravath and thereby obtain the obligation to do more of the same. Or you may say, "I'm not willing to pay that price." Either way, it's a totally personal decision that you have to make by your own lights. But whatever you decide, I think it's a huge mistake not to absorb elementary worldly wisdom if you're capable of doing it because it makes you better able to serve others. It makes you better able to serve yourself and it makes life more fun. So if you have an aptitude for doing it, I think you'd be crazy not to. Your life will be enriched not only financially but in a host of other ways if you do.

Now, this has been a very peculiar talk for some businessman to come in and give it a law school. Some guy who's never taken a course in psychology telling you that all of the psychology textbooks are wrong. This is very eccentric, but all I can tell you is that I'm sincere. There's a lot of simple stuff that many of you are quite capable of learning, and your lives will work way better, too, if you do. Plus, learning it is a lot of fun. So I urge you to learn it.

Are you in effect fulfilling your responsibility to share the wisdom that you've acquired over the years?

Sure. Look at Berkshire Hathaway. I call it the ultimate didactic enterprise. Warren's never going to spend any money. He's going to give it all back to society. He's just building a platform so people will listen to his notions. Needless to say, they're very good notions, and the platform's not so bad either. But you could argue that Warren and I are academics in our own way.

Most of what you've said is very compelling, and your quest for knowledge and therefore command of the human condition and money are all laudable goals. I'm not sure the quest for money is so laudable.

Well, then understandable. That I'll take. I don't sneer. incidentally at making sales calls or proofreading bond indentures. If you need the money, it's fun earning it. And if you have to try a bunch of cases in the course of your career, you'll learn something doing that. You ought to do something to earn money. Many activities are dignified by the fact that you earn money.

I understand your skepticism about overly ideological people, but is there an ideological component to what you do? Is there something that you're irrationally passionate about?

Yeah, I'm passionate about wisdom. I'm passionate about accuracy and some kinds of curiosity. Perhaps I have some streak of generosity in my nature and a desire to serve values that transcend my brief life. But maybe I'm just here to show off. Who knows? I believe in the discipline of mastering the best that other people have ever figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart.

Talk three revisited. When I gave talk 3 in 1996, I argued that intense political animosity should be avoided because it causes much mental malfunction even in brilliant brains. Since then, political animosity has increased greatly both on the left and the right with sad effects on the ability of people to recognize reality exactly as I would have expected. Naturally, I don't like this result. The grain of my emotional nature is to respond as Archimedes might respond if he complained, "Now to God, how could you put in those dark ages after I published my formulas?" Or as Mark Twain once complained, these are sad days in literature. Homer is dead. Shakespeare is dead. And I myself am not feeling at all well. Fortunately, I am still able to refrain from complaint in the mode of Mark Twain. After all, I never had more than a shred of an illusion that any views of mine would much change the world. Instead, I always knew that aiming low was the best path for me, so I merely sought it. One, to learn from my betters a few practical mental tricks that would help me avoid some of the worst miscognitions common in my age cohort, and two, to pass on my mental tricks only to a few people who could easily learn from me because they already almost knew what I was telling them. Having pretty well accomplished these very limited objectives, I see little reason to complain now about the unwisdom of the world. Instead, what works best for me in coping with all disappointment is what I call the Jewish method, humor. As I revisit talk 3 in March 2006, I still like its emphasis on the desiraability of making human systems as cheating proof as is practicable. Even if this leaves some human misery unfixed. After all, the people who rewarded cheating on a massive scale leave a trail of super ruin in their wake since the bad conduct spreads by example and is so very hard to reverse. And I fondly recall talk 3's emphasis on both the life handling lessons I learned from my father's friend Grant McFeden and one teaching method I learned from my father. I owe a lot to these long deadad predecessors. And if you like poor Charlie's almanac, so do you.

>> That brings us to the end of the chapters covered in this video. To continue listening, simply head to the next video in the series. If you enjoyed this video, give me a like. Thanks for watching. See you in the next.