Charlie Munger on Mistakes

Biggest mistakes

Munger: “The most extreme mistakes in Berkshire’s history have been mistakes of omission. We saw it, but didn’t act on it. They’re huge mistakes — we’ve lost billions. And we keep doing it. We’re getting better at it. We never get over it.”

“There are two types of mistakes: 1) doing nothing; what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.”

Dare to play hard.

Munger mentioned that, when we make decisions, in spite of doing and working hard to stack the odds in our favor, we are likely to encounter losses along the way. Munger suggests taking an understanding approach, since these outcomes are to be expected from time to time, and, most importantly, they shouldn’t leave us outside the table for our next big play.

Charlie Munger learned about business in the best way possible: by making mistakes and being successful actually being in business. Reading about business is vital Charlie has said many times, but there is no substitute for wading in and actually taking the plunge as a business manager or owner.

Einstein once said, anyone who has never made a mistake (if there is such a person) has never tried anything new.

Munger advises that people strive to make *new* mistakes and learn as a consequence:

Charlie Munger admits he still makes mistakes even after many decades as a business person and investor.  He has also said that it is important to “rub your nose” in your mistakes.

“Forgetting your mistakes is a terrible error if you are trying to improve your cognition. Reality doesn’t remind you. Why not celebrate stupidities in both categories.”

“Mistakes of Omission” (mistakes you make by not doing something):

“The most extreme mistakes in Berkshire’s history have been mistakes of omission. We saw it, but didn’t act on it. They’re huge mistakes — we’ve lost billions. And we keep doing it. We’re getting better at it. We never get over it. There are two types of mistakes:  1) doing nothing; what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.

The list of big business mistakes is long. But for an ordinary investor the simple act of not saving or contributing to a 401(k) can be a huge mistake of omission.

Charlie, thinking in terms of “opportunity cost”

“We are apparently slow learners. These opportunity costs don’t show up on financial statements, but have cost us many billions.”

“Since mistakes of omission don’t appear in the financial statements, most people don’t pay attention to them.” http://www.buffettfaq.com/

“You can learn to make fewer mistakes than other people- and how to fix your mistakes faster when you do make them.”

As for mistakes others have made, Groupon rejecting Google’s $6 billion purchase offer at one point was a wonderful mistake from Google’s standpoint but not for Groupon shareholders.  AOL buying Time Warner for $182 billion is among the very worst business mistakes ever made. Quaker Oats buying Snapple was also a monster mistake in the annals of business.

Of course, you can also learn from success, particularly if you remember that success can be a lousy teacher since what you may believe is the outcome of skill may be luck.   Charlie has said that more than once that he and Buffett have made a mistake only to be bailed out by luck:

“The amazing thing is we did so well while being so stupid. That’s why you’re all here: you think that there’s hope for you.  Go where there’s dumb competition.”

If you make a mistake, capitalism’s “competitive destruction” forces will expose it swiftly and sometimes brutally.

“It is fun to watch a business tackle the biggest problems we face in this world.

“Where you have complexity, by nature you can have fraud and mistakes.”

If you can’t understand the business you can’t determine what you did wrong.

Not trying to be too clever with things like taxes is another way to avoid mistakes argues Munger. Complexity can be your friend or your enemy depending on the circumstances.

“…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. I see terrible mistakes from people being overly motivated by tax considerations. Warren and I personally don’t drill oil wells. We pay our taxes. And we’ve done pretty well, so far. Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it.”

Other investors like complexity and spend a lot of time deferring or avoiding taxes in complex ways.

 The more complex the game, the easier it is for the best players to beat the patsies.” And, of course, if you do not know who the patsy in the game is, it is you.

Go where there are inefficiencies in which you can get an advantage and where there are fewer people looking at the stocks. Go where the competition is low.

Einstein didn’t work in isolation. But he never went to large conferences. Any human being needs conversational colleagues.”

Another important source of mistakes is overconfidence.

Smart people are not exempt from making mistakes. A person with a high IQ can actually make more mistakes that someone who’s IQ is 30 points lower due to overconfidence. It is the person with the high IQ who falsely thinks that is 30 points higher than it really is that gets you in serious trouble. People who are genuinely humble about their IQ can sometimes make far fewer mistakes if they do the necessary work, have a sound investment process and think in rational ways. Munger has said on this: “Terribly smart people make totally bonkers mistakes.”

“The easiest person to fool is yourself”

“The ethos of not fooling yourself is one of the best you could possibly have. It’s powerful because it’s so rare.”

Optimism is the enemy of the rational investor. Rationality comes from a combination of clear thinking and relatively unemotional temperament when it comes to investing.

 If you think things through from the simplest building blocks in a step-by step process you can avoid making so many mistakes or at least make more new mistakes.

“Rationality is not just something you do so that you can make more money, it is a binding principle. Rationality is a really good idea. You must avoid the nonsense that is conventional in one’s own time. It requires developing systems of thought that improve your batting average over time.”

Nothing seduces rational thinking and turns a person’s mind in mush like a big pile of money that was easily earned. About Berkshire, Charlie said once: “This is a very rational place.”

“Most people are too fretful, they worry too much. Success means being very patient, but aggressive when it’s time.”

The passage of time is the friend of the investor or business person and impatience his or her enemy.

Zero. This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact you can argue that 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.

Buffett has said about the importance of patience: “The Stock Market is designed to transfer money from the Active to the Patient.”  Both Munger and Buffett believe that so-called chasing performance (“buying high and selling low”) is one of the worst mistakes an investor can make. “Be greedy when others are fearful and fearful when others are greedy” they both advise.  People being greedy and fearful at the wrong times are what creates many significant investing opportunities Munger has said.

Having to make one hard financial decision after another in running a company can be damaging to your financial health even if you or your mangers are very talented. Munger is emphatic on this topic:

Owning a business with lousy underlying economics of the business facing one hard problem after another may not have a good financial outcome even with a top-notch management team according to Charlie.


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