The “Twaddle” in Finance | Los Angeles Review of Books #CashNews.co

CHARLIE MUNGER, who died in November 2023, about a month before his 100th birthday, was the mostly silent partner of the more voluble and far-better-known Warren Buffett, and co-head with Buffett of Berkshire Hathaway, generally considered the most successful investment vehicle in modern history. Berkshire is technically a holding company, betting on shares of other companies rather than making or selling products of its own, and Buffett and Munger’s stock-picking prowess is such that Berkshire’s own shares have trounced stock-market indexes like the Dow and the S&P 500 for decades, a near-impossible feat.

Like Buffett, Munger hails from Omaha, Nebraska, a remarkable historical fluke akin to both John Lennon and Paul McCartney growing up in the English backwater of Liverpool. The pair shared stereotypically hardworking, homily-infused upbringings, a straitlaced Midwestern ethic, and acute bullshit detectors, though the folksy saintliness sometimes ascribed to them is of course belied by their multibillionaire status. Poor Charlie’s Almanack: The Essential Wit & Wisdom of Charles T. Munger (reissued by Stripe Press the same week the businessman died), which consists primarily of lectures delivered by Munger starting in the late 1980s, encapsulates a lifetime of the sometimes crotchety investor’s thoughts and philosophies in casual format. As instructive as Munger’s advice—which affords peeks into how he and Buffett made their implausibly profitable investment decisions—is his unapologetic skewering of the sacred principles of contemporary investing and business education, and of the behavior of the business community generally.

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Many CEOs and tycoons see themselves as renegades, but Munger really was one—up to a point. Politically, he was to the right of Buffett, who decried how disgracefully little he paid in taxes. But Munger attacked the received wisdom in his own field. “[M]uch of what is taught at modern corporate finance courses is twaddle,” he once said. “You cannot believe this stuff.” True, everyone with something to hawk makes that kind of claim: “Don’t believe all those useless diet books,” the YouTube ads blast, “I’ll teach you how to really lose weight!” But Munger wasn’t hawking anything, and he had Berkshire’s legendary success as proof of his business acumen. Like Buffett (it’s easy to get the two mixed up because they mostly spoke in one voice), he really did seem interested in helping mainstream investors—or, in the case of one of the talks published here, managers of endowments for charitable organizations, an arguably more simpatico group. A large part of his efforts was directed at pointing out the folly, corruption, and groupthink endemic to the world of business and finance.

Munger’s painfully honest and occasionally indecorous views on the mainstream investing world make for entertaining reading. Hedge fund managers? They’re in it for the usurious fees they charge their wealthy clients, and probably aren’t any good at their jobs anyway. Corporate mergers and acquisitions? Most are done based on the flimsiest reasoning, or for the glory, and more often than not fail spectacularly. Boards of directors? An indolent group who regularly rubber-stamp obscene pay packages and reckless behavior at the companies they ostensibly oversee: “They fail to object to anything much short of an axe murder until some public embarrassment of the board finally causes their intervention.” The widely popular efficient-market theory (EMT), which posits that all stocks are accurately priced at all times, is, in Munger’s description, “bonkers.” In fact, Munger claims that his fortune was made largely thanks to identifying stocks that were mispriced. The EMT “was an intellectually consistent theory that enabled its adherents to do pretty mathematics,” he writes, “so I understand its seductiveness to people with large mathematical gifts.” As for modern portfolio theory (MPT), the prevailing model for portfolio management, which won the economist Harry Markowitz a Nobel Prize, “it’s elaborate and there’s lots of little Greek letters and all kinds of things to make you feel that you’re in the big leagues.” (That was Buffett, but Munger, too, scorned MPT.) History has generally borne these views out, though it’s not surprising that we don’t hear them more often, considering how much money is riding on the other side.

Whatever your feelings on capitalism, there’s an undeniable Schadenfreude in reading how the Omaha-raised, Ben Franklin–quoting duo, with their yellow legal pads and prosaic financial analysis, have repeatedly bested the abstruse technology and armies of physics PhDs employed by modern Wall Street firms. In 2008, Buffett famously made a 10-year, million-dollar bet pitting the performance of a group of hedge funds against the S&P 500—not Berkshire Hathaway, but a generic stock index that anyone can invest in—and the hedge funds lost by a mile. (The winnings went to charity.) Buffett later remarked that the fund managers are “showered with compensation,” which is putting it mildly, despite offering only “esoteric gibberish” in return.

Munger is—of course—confident, but he can be genuinely self-effacing too, a trait you won’t often find in his peers. He expresses regret at how he was miseducated (he attended some of the country’s most elite schools) and had to learn most of what he knows about the world through his own reading. He owns up to his and Buffett’s bad judgment calls. And he freely acknowledges his limitations. His and Buffett’s approach to investing has always been to concentrate cautiously just on their area of expertise, however narrow that may be, but at the same time to pursue fearlessly an opportunity when they feel confident. “It’s not given to human beings to have such talent that they can just know everything about everything all the time,” Munger says. “But […] 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.” He claims that most of the fortune he and Buffett made came from 10 insights, a remarkably small number considering how long they’d been at it: “I don’t mean to say that [Buffett has] only had 10 insights. I’m just saying that most of the money came from 10 insights.” While contemporary hedge funds and automated trading outfits seem to relish complexity for its own sake, Munger and Buffett don’t: “[W]e don’t leap 7-foot fences,” Munger says. “Instead, we look for 1-foot fences with big rewards on the other side. So we’ve succeeded by making the world easy for ourselves, not by solving hard problems.”

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Why should readers uninterested in business or investing care about any of this? A few reasons come to mind. First, “everyone is an investor now,” as they like to say on Wall Street, through 401(k) accounts, an evil-genius-level capitalist innovation that makes even workers with the most modest savings participants in the market to some degree. It follows that for anyone with money in a retirement account, knowing how these accounts work, and how they are managed, constitutes a basic life skill. For those with an interest in finance-crit (which everyone should cultivate, within reason), it’s worth knowing about the chicanery of the country’s business execs and investment managers. But equally useful are Munger’s frequent tangents on psychology, a subject he claims is neglected in business and law schools (the only kinds of schools with which Munger seems concerned, incidentally), and mistaught in psychology courses. By “psychology” he means something like behavioral psychology, the tricks that unethical persuaders, con men, and thieves employ, along with the judgment errors that make most of us their victims (in part because they are so fundamentally embedded in human nature).

In the last talk included here, “The Psychology of Human Misjudgment,” Munger puts forth a more formal list of those errors: reward- and punishment-superresponse tendency, envy/jealousy tendency, authority-misinfluence tendency, excessive self-regard tendency, stress-influence tendency, and about 20 others. His real-world examples include the misplaced financial incentives that lead salespeople to push crappy products, the tendency of most of us to be swayed by unqualified people who happen to possess charisma (he cites one big-name CEO, Carly Fiorina at Hewlett-Packard, who was unfit for the job and badly damaged her company as a result), the magician-worthy manipulation of prices to trick people into overpaying for products, the nonsensical “logic” behind picking lottery numbers, etc. But while Munger insists that “ideology” is to be avoided at all costs—interestingly, he points out that Buffett’s father was something of a right-wing zealot who would not be moved by any amount of evidence—it seems unlikely that a mountain of books demonstrating the damage that capitalism has wrought over the years would make much of a dent in that pillar of his own ideology. On the other hand, he does have the temerity to say that “ever more of the nation’s ethical young brainpower is attracted into lucrative money management and its attendant modern frictions, as distinguished from work providing much more value to others.” So there you go.

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The inventory in “Psychology of Human Misjudgment” may be of more practical use to the average reader than anything else in this collection, but much of it is secondhand, based on or inspired by the business-psychology writer Robert Cialdini’s 1984 book Influence: The Psychology of Persuasiona veritable sacred text in Munger’s eyes. The inventory does not reflect Munger’s original thoughts in the same way as his views on business do, which are, after all, what he and Buffett are known for—and are as welcome on Wall Street as a tempeh burger at a Ruth’s Chris Steak House. That distaste alone makes them worth reading. For the pair, commerce is humankind’s most consequential endeavor (and they most likely viewed socialism as the product of a brain disorder). It would be hard, therefore, to overstate the importance of their heretical views to understanding what’s wrong or corrupt in the business world they know so intimately. That said, canonizing the two is a fool’s errand: they may have been far more upstanding than most corporate CEOs, but ultimately the difference between them and the recent crop of near-sociopathic tech billionaires may be more a matter of degree than of kind. As always, caveat emptor.