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Tao of Charlie Munger

A Compilation of Quotes from Berkshire Hathaway’s Vice Chairman on Life, Business, and the Pursuit of Wealth.

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Charlie Munger was born in Omaha, Nebraska, on JAN 1, 1924.

Part I - Charlie’s thoughts on successful investing

  1. Fast Money. “The desire to get rich fast is pretty dangerous.”
  2. Circle of competence. “Knowing what you don’t know is more useful than being brilliant.”
  3. Avoid being an idiot. “People are trying to be smart – all I am trying to do is not to be idiotic, but it’s harder than most people think.”
  4. Walking Away. “Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much loved hand – you must learn to hand mistakes and new facts that change the odds.”
  5. Easy Shooting. “My idea of shooting a fish in a barrel is draining the barrel first.”
  6. Revelation. “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 abotu better businesses.”
  7. Graham’s Error. “Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him… It left him with an aftermath of fear for the rest of his life, and all of his methods were designed to keep that at bay.”
  8. Sitting on your Ass. “Sit on your ass investing. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives tyou a extra one, two, or three percentage points per annum.”
  9. The Dawning of Wisdom. “Acknowledgiing what you don’t know is dawning of wisdom.”
  10. Analysis. “In the corporate world, if you have analysis, due diligence, and no horse sense, you’ve just described hell.”
  11. A mispriced gamble. “You’re looking for a mispriced gamble. That’s what investing is. And you hve to know enough to know whethere the gamble is mispriced. That’s value investing.”
  12. Diversification. “This worshippinig at the altar of diversification, I think is really crazy.”
  13. When to bet heavily. “You should remember that good ideas are rare – when the odds are greatly in your favor, bet heavily.”
  14. The Herd. “Mimicking the herd invites regression to the mean.”
  15. Foresight. “I’ve never been able to predict accurately. I don’t make money predicting accurately. We just tend to get into good businesses and stay there.”
  16. Financial Crisis. “If you, like me, lived through 1973-74 or even the early 1990… there was a waiting ist to go OUT of the country club – that’s when you know things are tough. If you live long enough you’ll see it.”
  17. Cash is key. “The way to get rich is to keep $10 million in your checking account in case a good deal comes along.”
  18. A demoralized generation. “Thanks to the early 1930s and the behavior of the capitalists to the robber-baron days.. stocks yielded dividents that were twice as much as the interest rates of bonds. It was a wonderful period to be buying stocks. We profited from others’ demoralization from the previous generation.”
  19. Patience. “I succeeded because I have a long attention span.”
  20. Stock Prices. “It is an unfortunate fact that great and foolish excess cancome into prices of common stocks in the aggregate. They are valued partly like bonds, based on roughly rational projections of use value in producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up, so far.”
  21. EBITDA. “I think that, every time you see the word EBITDA, you should substitute the world ‘bullshit earnings.’”
  22. Dangers of Finance Companies. “When you have complexity, by nature you can have fraud and mistakes… This will always be true of financial companies, including ones run by governments. If you want accurate number from financial companies, you’re in the wrong world.”
  23. Overfonfidence. “Smart people aren’t exempt from professional disasters from overconfidence.”
  24. Investment Managers. “I know one guy, he’s extremely smart and a very capable investor. I asked him, ‘What returns do you tell your institutional clients you will earn for them?’ He said, ‘20%’. I couldn’t belive it, because he knows that’s impossible. But he said, ‘Charlie, if I gave them a lower number, they wouldn’t give me any money to invest.’”
  25. Waiting. “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
  26. Tax Shelters. “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… Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it.”
  27. Enduring Problems. “An isolated example that’s very rare is much easier to endure than a perfect sea of misery that never ceases.”
  28. Surprises. “Favorable surprises are easy to handle. It’s the unfavorable surprises that casues the trouble.”
  29. Understanding the Odds. “Move only when you have the advantage – you have to understand the odds and have the discipline to bet only when the odds are your favor.”
  30. A few good companies. “If you buy something because it’s undervalued, then you have to think about selling it when it approaches year calcualtions of an 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.”
  31. Ownership of a Business. “View a stock as an ownership of the business and judge the staying quality of the business in terms of its competitive advantage.”
  32. Recognizing Reality. “I think that one should recognize reality even when on doesn’t like it; indeed, especially when one doesn’t like it.”
  33. Not being Stupid. “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stypid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, ‘it’s the strong swimmers who drown.’”
  34. Opportunity. “You do not get accassional opportunity to get into a wonderful business that’s beinig run by a wonderful manager. And of course, that’s hog heaven day.”
  35. THe future of Berkshire Hathaway.
  36. Financial Dementia. “There is more dementia about finance than there is about sex.”
  37. Business Valuations. “If people weren’t wrong so often, we wouldn’t be so rich.”
  38. Waiting is the hardest part.
  39. Wading In. “We have a history when things are really horrible of wading in when no one else will.”
  40. Academic Sorcery. “By and large I don’t think too much of finance professors. It is a field with witchcraft.”
  41. Greedy Bankers. “Mortgage lending became a dirty way to make money. You take people that can’t handle credit and try to make very high returns by abusing and encouraging their stupidity – that’s not the way I want to make monehy in banking. You should try to make money by selling people that are good for the customers.”
  42. Investing in Banks. “I don’t think anyone should buy a bank if they don’t have a feel for the bankers. Banking is a business that is a very dangerous place for an investor. Without deep insight, stay away.”
  43. No Single Formula. “There isn’t a single formula. You need to know a lot about business and human nature and the umbers… It is unreasonable to expect that there is a magic system that will do it for you.”
  44. On Technology. “The great lesson in microeconomics is to determine between when technology is going to help you and when it’s going to kill you.”
  45. Successful Investing. “Successful investing requires this crazy combinations of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long.”
  46. Beating the Average. “It is the nature of stock markets that they go down. So people suffer then. Conservative investing and steady saving without expecting miracles is the way to go. Some people in the room can figure out how to average twice the rate of return. I can’t teach eeveryone else to do it. It is pretty difficult.”
  47. Commossions. “Everywhere there is a large commissions, there is a high probability of a rip-off.”

Part II - Charlie on Business, Banking, and the Economy

  1. The Great Depresion. “You don’t ever want to do anything to push an economy to collapse. Terrible things result.”
  2. Regulating Banks. “Banks will not rein themselves in voluntarily. They need adult supervision.”
  3. Too Big to Fail. “Capitalism without failure is the reglion without hell.”
  4. Borrowed Money. “We have monetized houses in this country in a way that’s never occured before. Ask Joe how he bought a new Cadillac – from borrowing on his house… We have financial institutions, including those with big names extending high-cost credit to the least able people. I find a lot of it revolgint. Just because it’s free market doesn’t mean it’s honorable.”
  5. Free-Market Folly. “These crazy booms should be watched. Alan Greenspan didn’t think so. He’s a capable man but he’s an idiot. You should not make him the father of all banking. His hero is Ayn Rand. It’s an unlikely place to look for wisdom. A lot of people think that if an ax murderer goes around killing people in a free market it’s all right.”
  6. Banking Deregulations. “People really thought that giving a predatory class of people the ability to do whatever they wanted was free-market enterprise. It wasn’t. It was legalized armed robbery. And it was incredibly stupid.”
  7. Wall Street Excesses. “We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. When it happened in the past, there were bad consequences.”
  8. The Wealth Effect. “The wealth effect is the extent to which consumer spending is goosed upward due to increases in stock prices. Of course it exists, but to what extend? I made a speech a while back in which I said that the wealth effect is greater than economists believe. I still say this.”
  9. Printing Money. “I think democracies are prone to inflation because politicians will naturally spend – they have the power to print money and will use money to get votes.”
  10. Asset Inflation. “I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I’ve seen a tremendous amount of inflation in my lifetime. Did it ruin the invesment climate? I think no.”
  11. Oil Reserves. “I think the hydrocarbon reserves in the UNited States are one of the most precious things we have, every bit as precious as the topsoil of Iowa. Just as I don’t want to export all the topsoil in Iowa to Iran or someplace, just because they are willing to give us some money. I dlove the hydrocarbon reserves we have in the ground. The fashion is to be independent and to use them up as fast as we can. I think that’s insanity as a national policy.”
  12. Korea. “Koreans came up from nothing in the auto business. They worked 84 hours a week with no overtime for more than a decade. At the same time every Korean child came home from grade school, and worked with a tutor for four full hours in the afternoon and the evening, driven by these Tiger Moms. Are you surprised when you love to people like that? Only if you’re a total idio.”
  13. Carrots & Sticks. “IF we’re going to prosper, we have to work. We have to have people subject to carrots and sticks. If you take away the stick the whole system won’t work. You can’t vote yourself rich. It’s an idiotic idea.”
  14. Out-of-Control Bankers. “I do not think you can trust bankers to control themselves. They are like heroin addicts.”
  15. Derivative Danger. “If you intelligently trade derivatives it’s like a license to steal, so you can understand why they all want to do it… but what is the big plus in having everyone gamble with everyone else? I lived in a world with low gambling for decades when I was younger and I liked it better. I think it was better for the country. It’s like having thousands of professional poker players. What damn good are they doing for everybody?”
  16. Carry-trade Folly. “There’s a lot of leverage in those carry-trade games. Other people are more certain than I am that the aircraft can always be leased.”
  17. Corruption in Asia. “You cannot just go invest in China, however. The first movers can get killed. There’s a saying in Indonesia: What you’re calling corrupt is Asian family values.”
  18. THe miracle of China. “If you take what China has done from what China was, there’s been no achievement on this scale in the entire history of the world.”
  19. Free Trade. “I don’t see how we bring back that age where an uneducated man can march ahead rapidly. As long as we have free trade and worldwide competition, and I don’t want to stop having free trade with a big nuclear power like China. China and the United States have to get along. Each country would be out of its mind not to get along with the other. I think trade helps us to get along.”
  20. The Miser. “I don’t care if somebody makes a lot of money and holds it like a miser. MOst people have a vast propensity to spend, helped by spouses and children.”
  21. Corporate Taxes. “If I were running the world I would have low corporate taxes, and get at the yearning for equality some other way, like consumption taxes.”
  22. Reducing Standards. “The whole world is better when you don’t reduce engineering standards in finance. We skipped a total disaster by a hair’s breath… I’m a big fan of the people who took us through the crisis. I’m not a big fan of the people who caused the crisis. Some of them deserve to be in the lowest circle of hell.”

Part III - Charlie’s Philisophy applied to business and investing

  1. Buy and Hold. “We just keep our head down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.”
  2. Corporate Mergers. “When you mix raisins with turds, you still have turds.”
  3. Going to Extremes. “In business we often find that the winning system goes almost ridiculously far in mazimizing and or minimizing one or a few variables – like the discount warehouses of Costco.”
  4. Big-Money Equation. “A great business at a fair price is superior to a fair business at a great price.”
  5. Two kinds of Businesses. “There are two kinds of businesses: The first earns 12% and you can take it out at the end of the year. The second earns 12% but all the excess cash must be reinvested – there’s never any cash. It remiinds me of the guy who looks at all of his equipment and says, “There’s all of my profit.” We hate that kind of business.”
  6. Few Companies Survive. “Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company‘s owners are slim at best.”
  7. See’s Candies. “When we bought See’s Candy, we didn’t know the power of a good brand. Over time, we just discovered that we could raise prices 10% a year and no one cared. Learning that changed Berkshire. It was really important.”
  8. Easy Decisions / Painful Decisions. “The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad business throw up painful decision time after time.”
  9. Market Declines. “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 sharefholder 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.”
  10. Where to place your bet. “Averaged out, betting on the quality of a business is better than betting on the quality of management 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.”
  11. Incentives.
  12. AIG and GE. “AIG is lot like GE. It is fabulously successful insurance operator, and with success it morphed into a massive carry business – borrowing a lot of money at one price and investing it at another price. AIG was a big operator that was a lot like GE Credit. We never owned either because even the best and wisest people make us nervous in great big credit operations with swollen balance sheets. It just makes me nervous, that many people borrowing so many billions.”
  13. Less Leverage. “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 caould 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.”
  14. Master Plans. “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.”
  15. Decentralization. “How is [Berkshire] organized? I don’ tthink in the history of the world has anything Berkshire’s size been organized in so decentralized a fashion.”
  16. Enron. “The people who carry the torch in accounting are in a noble profession, yet these people also gave us Enron.”
  17. GM. “Berkshire is in GM because one of our young men likes it. Warren, whe 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 cards, they ahve the same suppliers, and cars last forever. It is just has all these commoditized features. So I don’t think the auto industry is the place to be.”
  18. ISCAR. “We didn’t know when we were young which things to stretch for, but by the time we reached Iscar, which we never would have bought whe we were young, we knew to stretch for the right people. It’s hell of a business. Everything is right there. Isn’t it good that we keep learning? Better late than never.”
  19. Wells Fargo. “Even the best bank drift with the times and do stupid things, but I suspect Wells Fargo will face up to it better.”
  20. McDonald’s. “This is a nice college, but the really great educator is McDonald’s… I think a lot of what goes on there is better than at Harvard.”
  21. Liquidity. “After the South Sea Bubble, Britain outlawed public corporations – only private ones allowed. And they led the world for 100 years. A modest amount of liquidity will serve the situation. Too much liquidity will hurt human nature. I would never be tenured if I said that. But I’m right and they are wrong.”
  22. Singapore. “In a democracy, everyone takes turns. But if you really want a lof 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 Buffet of Singapore.”

Part IV - Charlie’s Advice on Life, Education, and the Pursuit of Happiness

  1. One step at a time. “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.”
  2. What We Deserve. “The best way to get a good spouse is to deserve a good spouse.”
  3. Using Big Ideas. “Know the big ideas in the big disciplines and use them routinely – all of them, not just a few.”
  4. Career Advice. “Threee rules for a career: (1) Don’t sell anything you wouldn’t buy yourself; (2) Don’t work for anyone you don’t respect and admire; and (3) Work only with people you enjoy.”
  5. Know it Alls. “I try to get rid of people who always confidently answers questions about which they don’t have any real knowledge.”
  6. A waste of education. “A big percentage of Caltech grads are going into finance… They’ll make a lot of money by clobbering customers who aren’t as smart as them. It’s a mistake. I look at this in terms of loses from the diversion of our best talent going into some money-grubbing exercise.”
  7. Admitting Stupidity. “I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.”
  8. Making Mistakes. “There’s no way that you can live an adequate life without many mistakes. 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.”
  9. Specialization. “Extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world.”
  10. Not Working. “It’s been my experience in life, if you just keep thinking and reading, you don’t have to work.”
  11. Not Living Beyond our Means. “Mozart is a good example of a life ruined by nuttiness. His achivement wasn’t diminished–hemay well have had the best innate musical talent ever–but from the start, he was pretty miserable. He overspent his income his entire life–that will make your miserable.”
  12. Out with Old. “Any year that passes in which you don’t destroy one of your best-loved ideas is a wasted year.”
  13. A Moral Imperative. “Being rational is a moral imperative. You should never be stupider than you need to be.”
  14. Secret of Success. “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 faily smart.”
  15. Being Frugal. “One of the great defenses–if you’re worried about inflation–is not to have a lot of sily needs in yoru life–if you don’t need a lot of material goods.”
  16. Ideology. “Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind.”
  17. Idea Destruction. “We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”
  18. Catechism. “Oh, it’s just so useful dealing with people you can trust and getting all the others the hell out of your life. It ought to be taught to be a catechism… But wise people want to avoid other people who are just total rat poison, and there are lot of them.”
  19. Cookie-Cutter Solutions. “‘One solutions fits all’ is not the way to go… The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You can’t run all tehse places with a cokkie-cutter solution.”
  20. Learning Machines. “Warren is one of the best learning machines on this earth… Warren’s investing skills have markedly increased siince he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is.”
  21. Secret to Wisdom. “Look at this generation, with all of its electronic devices and multitasking, I will confidently predict less success than Warren, who just focussed on reading. If you want wisdom, you’ll get it sittig on your ass. That’s the way it comes.”
  22. Legal Business. “The best legal experience I ever got was when I was very young. I asked my father why he did so much work for a big blowhard, an overreacting jerk, rather than for this best friend Grant McFadden. He said, ‘That man you call a blowhard is a walking bonanza of legal troubles, whereas Grant McFadden, who fixes problems promptly and is nice, hardly generates any legal work at all.’”
  23. Getting Older. “I’m getting more experienced at againg. I’m like the man who jumped off the skyscrapper and at the 5th floor, on the way down says, ‘So far this is not a bad ride.’”
  24. Positie Reinforcement. “All Human beings work better when they get what psychologists call reinforcement. If you get constant rewards, even if you’re Warren Buffet, you’ll respond… Learn from this and find out how to prosper by reinforcing the people who are close to you.”
  25. Incentive-Caused Bias. “You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar pshychological force that is obviously present. Bit there are also cases where you have to recognize that you have no wisdom to add – and that your best course is to trusts some expert.”
  26. Narrow-Mindedness. “Most people are trained in one model – economics, for example – and try to solve all problems in oone way. You know the saying, ‘To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.”
  27. Living Well. “THe best armor of old age is well-spent life preceeding it.”
  28. Marriage Advice. “In marriage, you shouldn’t look for someone with good looks and character. You look for someone with low expectations.”
  29. The Worried Rich. “If you get Warren Buffet for 40 years and the bastard finally dies on you, you don’t really have a right to complain.”
  30. The Coca-Cola Company. “Coke for many decades has been a basic product full of sugar, and it grew every year. Full-sugar Coke is now declining. Fortunately, the Coca-Cola Company has a vast infrastructure. Coca-Cola is declining some, but the rest of the businesses are rising. I think Coke is a strong company, and will do very well. It’s still like shooting fish in a barrel.”
  31. Envy. “Well, envy and jealousy made, what, two out of the Ten Commandments? Those of you who have raised children you know abotu envy, or tried to run a law firm or investment bank or even a faculty? I’ve heard Warren say a half a dozen times, ‘It’s not greed that drives the world, but envy.”
  32. Reading. “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 read – and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
  33. Taking the Blows. “Life is always going to hurt some people in some ways and help others. There should be more willingness to take the blows of life as they fail. That’s what manhood is, taking life as it falls. Not whinning all the time and trying to fix it by whinning.”
  34. Useless Worry. “I don’t think it’s terribly constructive to spend your time worrying about things you can’t fix. As long as when you are managing your money you recognize that a terrible thing is going to happen, in the rest of your life you can be a foolish optimist.”
  35. Learning Machines. “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, bit they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy does that help, particularly when you have a long run ahead of you.”
  36. Tragedy. “You should never, when faced with one unbelievable tragedy, let one tragedy increase into two or three because of failure of will.”
  37. Multitasking. “I think people who multitask pay a huge price.”
  38. Felicity. “They once asked me what one person accounted for most of my personal felicity in life, and I said, ‘That’s easy – that would be my wife’s first husband.’”
  39. Health. “I eat whatever I want to eat. I have never paid any attention to my health. I’ve never done any exercise I didn’t want to do. If any success has come to me, it came because I insisted on thinking things through… all these people who think they are going to get ahead by jogging or something, more power to them.”
  40. A seamless Web. “The highest form that civilization can reach is a seamless web of deserved trust – not much procedure, just totally reliable people correctly trusting one another… In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has fortyseven pages, I suggest you not enter.”
  41. Missed Chances. “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.”
  42. Lying to Oneself.
  43. Truth. “Remember Louis Vincenti’s rule – tell teh truth, and you won’t have to remember your lies.”
  44. Perspective. “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.”
  45. Multidiscipline. “It you have enough sense to become a mental adult yourself, you can run rings around people smarter than you. Just pick up key ideas from all the disciplines, not just a few, and you’re immensely wise than you are.”
  46. Civilization. “Over the long term, the eclipse rate of great civilizations being overtaken is 100%. So, you know how it’s giong to end.”
  47. Reflection. “I like you all because you remind of myself. Who doesn’t like his own image staring back at him?”