Charlie Munger at University of Michigan Ross - Life Lessons, Great Depression, Berkshire & Rationality

Charlie one of very few alive who deeply remembers Great Depression. Nobody had money, people begged for meals, hobo jungle near grandfather's house. Safer in that hobo jungle in depths of 30s when people starving than walking his LA neighborhood now - crime was low despite poverty. One of greatest recessions in 600 years. Fixed by accidental Keynesianism of WWII. Hitler fixed German Depression deliberately with armaments spending - by 1939 Germany strongest economic power in Europe.

Grandfather Munger was federal judge in Lincoln Nebraska for decades - brilliant man who rose from poverty (child of two impoverished schoolteachers, bought parts of animal nobody else would eat). Self-educated like Abe Lincoln. Had extreme attitude: you have moral duty to make yourself as un-ignorant and un-stupid as possible - your highest moral duty maybe after family. Rationality was moral duty, worked at it, scorned people who didn't. As got older willing to call man 'good man' on easier terms - Charlie thought correct development.

Charlie was prodigy at having adult interests - understanding what worked and didn't and why. Could see eminent people he loved were nuts in some ways. Very judgmental but kept changing judgments as learned more. Whole trick in life: get so your own brain doesn't mislead you. Lifelong fun game. Sometimes very vivid extreme evidence misleads you to deeper reality - got to guard against that all your life.

Charlie watched family cope with Great Depression difficulties. Uncle with Harvard architecture degree went from prosperous 20s to $108/month after deductions (classified as laundry worker). Could rent house $25, feed self on $108/month. Eventually first in FHA exam, became chief architect. Sounds awful but they weren't all that unhappy - you can cope pretty well because get used to it. Nice thing about human condition. At Charlie's age: good day when wake up and nothing new hurts.

Charlie took math because could get A without doing any work. Was perfect whiz at calculus when taught but never touched it after age 19 - lost it completely, symbols would mystify him now. Neither Warren nor Charlie nor Ben Graham ever used fancy math in business. Everything they've done could be done with simplest algebra, geometry, addition. If really know basic stuff it's enormously useful. Only very few people gonna need calculus.

Charlie chose law because knew didn't want everything else. Didn't want doctor (blood/misery), didn't want bottom of big org crawling up. Natural contrarian - not going to work. Found could tell people when thought they were idiots - not way to rise in big organization. Left with law - grandfather and father had good lives. People still go to law/business school for that reason: least bad of options considering their interests and abilities.

Charlie painted himself in corner - army of children, no capital. Got paid $350K total in first 13 years law practice. When chose alternative career had over $300K liquid (10 years living expenses). Not courageous - cautious little squirrel saving more nuts than needed, not going deep into pile. Kept one foot in law while tried capitalism. Wanted independence - hated sending invoices, needing money from richer people. Wanted own money for independence not prestige.

Wheeler Munger grew to $3-4M. In 1974-75 crunch (worst since 30s) Charlie didn't suffer - knew would work out. But quoted prices went to ridiculous levels, some investors suffering. Had enough fiduciary gene that pained him greatly. Like grandfather said about aunt's divorce: 'Same way I felt when they lanced my carbuncle.' Lanced the carbuncle - closed firm, lived on own money with no fees/overrides/salary. Seemed more manly when knew it would work.

Warren taught by Ben Graham to buy cheap no matter how lousy business. Berkshire was New England textile mill - can't imagine worse business. Textiles = congealed electricity, New England rates 60% higher than TVA. Absolute certain liquidation. Warren should have known better than buy totally doomed enterprise. So cheap - bought at discount from liquidating value. Bought big giant turd but gonna die. Only way forward: wring money out to buy something else. Very indirect - would not recommend. Eventually learned not to buy cigar butts - buy better businesses instead. Main secret of Berkshire.

Reason Berkshire more successful than any big conglomerate: try to buy things that won't require much managerial talent at headquarters. Everybody else thinks they've got lot of HQ talent - that's hubris. If business lousy enough and gets wonderful manager, business wins. It's reputation of business that remains intact, not manager. Can't fix really lousy businesses - can wring money out in liquidation and do something else, but most lousy businesses can't be fixed.

Charlie and Warren came to business as people who owned portfolios, thought like capitalists in shareholder mindset. Lot of people think like careerists. Got to think like careerist to some extent, but also helps to see strategy problems as owner. GM had bunch of careerists. Owner would have seen immediately situation was hopeless. They romped through with denial, stupidity, pompous. Mightiest company in world went bankrupt. None of those hotshot executives thought like owner.

Private equity often buys where founder leaving - tough way to make buck. Berkshire generally buys with talent in place. Very seldom put somebody in after purchase - can't think of any case. Warren says can't teach new dogs old tricks. By definition old dog survived big culling process - unique with proven record. Everybody overestimates how much can tell in interview. Paper record has about 3x predictive value of interview impression. Berkshire buying great paper records. Amazing how much record comes from old dogs in business when bought.

Charlie almost despises executive search - want to sell best available even if no good. But best expense Berkshire ever had: paid recruiter to find Ajit Jain. Honors grad from Indian technical institute, no insurance experience. Created whole reinsurance business from scratch - only big Berkshire business created that way. Talked with Warren every night like father and son. Very Confucian company. Now by far biggest reinsurance in world. At least $60B in Berkshire net worth Ajit created. Value way more than $60B.

Charlie thinks Bitcoin perfectly asinine, doesn't even pause to think about it. Gold has rarity advantage - man can't easily make more. But man capable of creating more Bitcoin. They say won't do it - means they want to. When enough incentive, bad things happen. Bad people, crazy bubble, bad idea. Luring people into easy wealth without work - last thing should think about. If worked would be bad - you'd try again. Totally insane. Worst thing if you won because then you'd do it again.

Charlie's life lesson: give whole lot of things wide berth - they don't exist for you. Crooks, crazies, egomaniacs, people full of resentment, self-pity, feel like victims. Whole lot of things not gonna work. Figure out what they are, avoid like plague. One is Bitcoin. So easy to simplify life - all these things beneath you. Don't even know people crowding Bitcoin, don't want to know.

Charlie thinks tax bill will pass. Not crazy to help people making $70K or reduce corporate tax - Singapore and world places that worked best have similar policy. May actually work - nobody knows. Democrats go berserk but may help them. When see Congress on TV - degree of hatred, utter contempt way more than usual. Evil to hate that much. Anger comes in, reason leaves. Want to be angry all time? Welcome to house of misery. Politicians have careerist mindset + groupthink, go crazy like Moonies. Turn brain into cabbage. Got one brain, why turn it into cabbage?

Adam Smith totally right about markets, trade, division of labor. But missed how much steady advance of technology would advance wealth and living standards. In 1700s living not much differently than Roman Empire. Just missed it - wasn't technically minded. There had been huge tech improvements but he missed that. Really stupid mistake.

Ricardo got first-order trade consequences right but didn't think second-order. If advanced nation and other nation numerous with better people on average (China) in poverty, go into free trade - both sides live better (Ricardo right). But here goes up 2%/year, they go up 12%. Pretty soon they're dominant. Are you better off? No. Can't understand US-China trade without tragedy of commons. If only nation wouldn't trade could leave them poor, but whole world will trade anyway. No power to hold back. Had to do it. They'll be greater power. Have to be friendly - compulsory friendship. Out of mind to do otherwise. When happens get misery at people competing with Chinese. Inevitable - not fault of evil Republicans. Just happened.

Most important business career decision: who you marry - will do more for you good or bad than anything. Ben Franklin's best advice on marriage: keep eyes wide open before, half shut after. Amazing how if get up every morning, keep plugging, have discipline, keep learning - works out. Not wise to aim for billionaire - odds against you. Better aim low. Charlie wanted independence not riches - just overshot. Some accidental - big factor of luck. Extraordinary outcomes: discipline + intelligence + virtue PLUS hell of a lot of luck. Why wouldn't world work like that? 'Old George was duck on pond, they raised level of pond.' Makes it interesting.