valueandprices
Charlie Munger

Power of collective learning

Munger: Let us look at the field of investing. Before the stock market crash of 1929, there was no structure and logic for investing in stocks. Benjamin Graham’s two major works, Security Analysis and The Intelligent Investor created an intellectual framework for sound investment. His framework had two key ideas (1) Mr Market (2) Margin of Safety. Even today Buffett and I use Graham’s two key ideas for investing in securities. Graham was using net working capital to find out the intrinsic value of a business. It worked for him as he was operating when the world was in shell shock from the 1930s. But in today’s world this approach will not work and we changed the way in which we calculate the intrinsic value. But we are still standing on his two key ideas for every investment decision and this will not change for a very long time.

Unfortunately for the would-be Grahamite, however, net current asset value situations do not exist in any quantity today – nor have they existed for most of the years since the late 50s, with exceptions in the early 70s. Therefore, Buffett prefers to give companies “a complete physical exam and then [tries] to buy the ones that are going to outlive the actuarial tables. But Ben’s approach was just to buy a group of statistically very cheap stocks. And…it is harder to find those stocks today. However, Ben would not quarrel with buying stocks that appear cheap based on the present value of their future cash flows.

Munger: Extreme outcomes like this happens due to confluence of several things. Trying to find out a single cause will lead to man-with-a-hammer. There are few reasons which I can think of (1) powerful brains; but so does chimpanzee, dolphins, and crows (2) development of symbolic language enabled humans to share knowledge and ideas very efficiently (3) knowledge is stored and passed down to next generations so that they can build upon the existing ideas instead of starting all over again. We should all thank Gutenberg whose printing press made mass production of books possible and knowledge got passed down generations after generations without any errors. All of this enabled humans to learn collectively which is the secret behind human dominance.

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