Charlie Munger at Caltech - DuBridge Lecture: Psychology, Investing & Academic Failures

Munger describes himself as having a 'dangerous attitude' for social discourse but excellent for investing: he thinks he knows more about most specialists' fields than they do about his. He idolizes Ben Franklin - both self-educated men who wandered across vast territories with psychological insight. Munger acknowledges Franklin was 'so much more talented' but identifies with the broad, interdisciplinary approach.

Munger's damning critique: 'Social science in America is very poorly taught.' The solution: get social scientists comfortable across disciplinary boundaries. His test: When do you RAISE prices to sell MORE units? Only 1 in 50 MBA graduates say 'luxury goods' where high price signals quality. Bill Ballhaus (Caltech-educated CEO of Beckman Instruments) inherited a superior product priced low - it wasn't selling because low price signaled poor quality in failure-critical equipment. He massively raised the price and 'sold way more units.'

Munger savages derivatives accounting: Company makes $100M bet, then opposite $105M bet 8 years out, computer shows $5M profit. 'Just because you can punch a button and show a $5 million profit doesn't mean you have one' - you have disastrous closing risk. Fannie Mae/Freddie Mac had 200 regulators watching just TWO companies and ended with $30 billion in miscalculated earnings. The accountants who blessed this are 'despicable.' PhD economist headed Freddie Mac; Berkshire subsidiary had PhD psychologist who 'only improved the wine cellar' and tried taking money from depreciation reserves.

Munger's mortgage fraud example: Lender with great track record on 75% mortgages to 'hardworking plumbers' suddenly recruits 'bums from skid row and charlatans just out of the penitentiary' for 100% high-interest loans. Accountants accrue all this interest as income using OLD bad debt experience. 'Nobody in his right mind would have an accounting that accrues the interest on the new loans' - but American accountants blessed it because making them do more would 'make my life too difficult.'

Munger on Caltech: 'If I had no friends or family left and were thinking what to do with my worldly goods, I wouldn't have a better candidate than Caltech. I'd have way more confidence in it than an elite Ivy League school.' He believes Caltech would be 'more reliably sensible and more reliably ethical.' But warns: 'You shouldn't judge the world by Caltech. This is way better than normal.'

Munger was drafted to Caltech during WWII to become a weatherman. Comparing his 'graduate degree' education to modern Meteorology 101: 'You can't believe how much they figured out in those 60 years.' Better measurements, moving diagrams, improved physics. Even water phase changes - 'how can they not know the phase changes of water?' but 'it's weird the way water behaves in every little change of phase, it interacts differently with radiation.'

Tombrello heard the glass harmonica (invented by Benjamin Franklin) in Metropolitan Opera's 'Lucia de Lammermoor.' Franklin 'really understood all sorts of things from bifocals to very interesting musical instruments... played four different musical instruments... sang pretty well too.' Munger: 'If anybody saved this country by getting the French to come in and help us with the British at Yorktown, it was Franklin.'

Munger's most controversial take: 'Part of the problem with the United States is that we are now competing with some people who have some considerable genetic advantages over us. They're called Chinese.' He observes adopted Chinese girls 'utterly discarded from the remote hinterland' working out 'way better than people's own children.' His theory: being 'mired in a Malthusian trap' under an 'idiotic system of government' somehow created selective breeding that produces exceptional capitalist performance. His conclusion: 'If the Chinese displace the Mungers... my attitude is bon voyage.'

Tombrello counters Munger's Chinese genetics argument with immigration history: his grandfather came at 13 years old with 9-year-old brother, illiterate and impoverished from Sicily. Americans despaired Sicilians would be 'the downfall' but 'they did survive.' He calls it 'the vampire economy' - the US lives on 'fresh blood of immigrants' with each group replaced by the next. But Munger retorts: 'We could safely take in a whole lot of Sicilians and get about the standard number of Tombrellos, but if we try that with Chinese we'll get way above standard.'

Classic story: William Shockley (on his 'craziest') tried recruiting Nobel laureates to donate sperm for selective breeding. He approached Mueller, a famous laureate, who replied: 'You're barking up the wrong tree. What my sperm has given America is two guitar players. If you want to have Nobel laureates you better look among the immigrant illiterate tailors.' Perfect counterpoint to genetic determinism.

Munger on derivatives: 'I knew we never needed them. Warren went and testified before Congress that we didn't need this stuff. He was a solitary voice.' One man asking 'what do we need option exchanges for?' It didn't work then, won't work now. 'We've created such a vested interest now in all the people that profit from this stuff that I don't think we're going back to margin requirements.' Garrett Hardin (Caltech-trained): 'If Aristotle were alive he would be a very grumpy old man because he would have seen the same damn mistakes made over and over and over again.'

Brett Hinov asks what academic experience creates great investors. Munger's answer: 'It helps to have a generalized competency in dealing with words and numbers and quantities and concepts, and of course it helps to practice with that competency. And then if you collect follies the way I do and stay away from the follies, when you're as old as I am you'll be a rich old man.'