Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway's Vice Chairman on Life, Business, and the Pursuit of Wealth With Commentary by David Clark

by David Clark

“The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.”

They have both owned a few bad businesses in their day: a department store, a windmill manufacturer, a textile factory, and an airline. Why are those businesses bad? Because they are involved in intensely competitive industries that beat each other up over price, which brings their profit margins down, kills their cash flow, and diminishes their chances of long-term survivability. But Charlie and Warren’s education in misery has been our gain. Now we know that the secret is always to go with the better business that has a durable competitive advantage and can raise prices at will. This allows it to keep its margins high, which creates lots of free cash flow to spend on new business opportunities.

“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”

“As you can tell in Berkshire’s operations, we are much more conservative. We borrow less, on more favorable terms. We’re happier with less leverage. You could argue that we’ve been wrong, and that it’s cost us a fortune, but that doesn’t bother us. Missing out on some opportunity never bothers us. What’s wrong with someone getting a little richer than you? It’s crazy to worry about this.”

“At Berkshire there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.”

The business world is a dynamic place. Much like a battlefield, it changes rapidly, and no one has thought more about “master plans” being applied to a dynamic setting than the nineteenth-century Prussian military thinker Carl von Clausewitz, who wrote that battle “is a continuous interaction of opposites” in which “my opponent . . . dictates to me as much as I dictate to him.” He also wrote that “No war plan outlasts the first encounter with the enemy.” But my all-time favorite quote on this subject is by none other than Prussian field marshal Count Helmuth von Moltke, who wrote, “The material and moral consequences of every major battle are so far-reaching that they usually bring about a completely altered situation, a new basis for the adoption of new measures. One cannot be at all sure that any operational plan will survive the first encounter with the main body of the enemy. Only a layman could suppose that the development of a campaign represents the strict application of a prior concept that has been worked out in every detail and followed through to the very end.”

“Berkshire is in GM because one of our young men likes it. Warren, when he was a young man, got to do whatever he wanted to do, and that’s the way it is. It is true GM may be protected by the federal government in the end, and it may be a good investment in the end, but the industry is as competitive as I’ve ever seen. Everyone can make good cars, they have the same suppliers, and cars last forever. It just has all these commoditized features. So I don’t think the auto industry is the place to be.”

“Even the best banks drift with the times and do stupid things, but I suspect Wells Fargo will face up to it better.”

“In a democracy, everyone takes turns. But if you really want a lot of wisdom, it’s better to concentrate decisions and process in one person. It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in an enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.”

Lee’s book From Third World to First: The Singapore Story is well worth a read.

“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day—if you live long enough—most people get what they deserve.”

“I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.”

Charlie believes that we can learn from our failures only if we accept responsibility for them and examine exactly why we failed.

Those were huge mistakes in business judgment, often costing millions of dollars. But they set the stage for a greatly improved investment strategy that later paid off in billions.

“Extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world.”

If all we do is what everyone else does, we will spend our lives competing head on with everyone else. But if we specialize in something and excel at it, the specialization will set us apart from the rest of the crowd. Do we take our Porsche to the local car mechanic who works on everyone’s car? Of course not. We take it to the shop that specializes in Porsches. It charges us twice the normal hourly rate and gets away with it because it is a “Porsche specialist.” The same phenomenon holds true for medicine, law, and even the trades, such as plumbing and carpentry. It’s specialists who make the big bucks—everyone else, the little bucks.

“It’s been my experience in life, if you just keep thinking and reading, you don’t have to work.”

One of the keys to Charlie’s accumulation of wealth is that in his youth he was fanatical about not spending money. He didn’t buy his first new car until he was almost sixty, and he lived in an upper-middle-class house long after he became a multimillionaire.

“Being rational is a moral imperative. You should never be stupider than you need to be.” – This is Charlie’s twist on Immanuel Kant, the eighteenth-century German philosopher, who argued that reason is the source of all morality. Being rational, to Kant and Charlie, means ignoring our emotions, and following logic and reason in making our decisions (sounds a lot like Charlie talking about making a stock purchase). A “moral imperative” is a strongly felt principle originating inside a person’s mind that compels that person to act or not act; and according to Kant and Charlie, to do otherwise would be self-defeating and thus contrary to reason. In Charlie’s world, not being rational is the same as being stupid.

“I have never succeeded very much in anything in which I was not very interested. If you can’t somehow find yourself very interested in something, I don’t think you’ll succeed very much, even if you’re fairly smart.”

In the business world, not being able to trust your employees or a counterparty in a transaction may result in a tremendous amount of anxiety and inefficiency because trust is the grease that keeps every business running smoothly. If you own a trucking company or operate a hospital, your managers must trust their employees to execute their jobs effectively and trust that the products and materials they order will be delivered on time. If this is not possible, the company is in deep trouble.

“Look at this generation, with all of its electronic devices and multitasking. I will confidently predict less success than Warren, who just focused on reading. If you want wisdom, you’ll get it sitting on your ass. That’s the way it comes.”

Reading personal biographies allows one to experience multiple lives and successes and failures; reading business biographies allows one to experience the vicissitudes of a business and learn how problems were solved.

He figures that since most men eventually have prostate problems, why worry? Nor does he worry about California earthquakes. All the things that are inevitable he refuses to worry about. That’s made for an almost stress-free life and may be the reason he is now pushing ninety-three.

The secret to getting people to excel is to reinforce their positive qualities.

“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.”

This reminds me of something Warren once said to a group of college students: “We should treat our body like it is the only car we will ever own.” Charlie took Warren’s car analogy to heart and figured out that the less he “drove his body,” the less it would wear out and the longer it would last. Which is why he is famous for avoiding any and all forms of physical exercise, other than playing bridge at the club and turning the pages of a book. What I think he is really saying is that a life spent in honorable pursuits, with an inquisitive mind, acting as part of a community, carries over into old age and leads to a very interesting and satisfying life in our later years.

“In marriage, you shouldn’t look for someone with good looks and character. You look for someone with low expectations.”

‘It’s not greed that drives the world, but envy.’” – No stranger to the seven deadly sins, I can attest that envy and jealousy are the least enjoyable. Wrath, greed, sloth, gluttony, and lust—particularly lust—can all be great fun as one travels the self-indulgent road to disaster; however, envy and jealousy, even in small doses, will make one utterly miserable. But if Charlie and Warren are right and envy really does drive the world, it is no wonder there are so many unhappy people in it.

“In my whole life, I have known no wise people who didn’t read all the time—none, zero. You’d be amazed at how much Warren reads—and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

It is very important to be constantly learning, constantly improving ourselves. Think of it as compounding our intellect; the longer we work at it, the richer we become. It is also one of the oddities of the investment game that the older we get and the more we learn, the better investor we become. The investment field is unique. If Charlie were a surgeon, there would come a time when he just wouldn’t have the physical stamina to stand fifteen hours at an operating table. The same if he were in a trade such as bricklaying. As an investor the only physical attributes he needs are his eyesight, a clear mind, and the digital dexterity to turn the pages of a book. Which is why, at ninety-two, he can still knock the ball out of the park and run circles around the new young Turks.

“You should never, when faced with one unbelievable tragedy, let one tragedy increase into two or three because of a failure of will.”

“I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well, every missed chance in life was an opportunity to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion. That is a very good idea.”

“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.” – This mental exercise comes from Charlie’s early training in law, where it is an advantage to be able to argue both sides of a case. Knowing the other side’s arguments, its possible points of attack, allows one to prepare counterattacks long before a case gets into the courtroom.