Monday, June 15, 2015

Charlie Munger World's Most Humble? Believe it. Plus, the Next Investor Armed With 'Umbrella Humility'.

It’s no secret that Charlie Munger idolizes Benjamin Franklin. Warren Buffett makes the point in the forward to the excellent “Poor Charlie’s Almanack” that Munger has sought to emulate and improve where possible on Franklin’s thinking. (Buffett notes that Munger’s only addition to his predecessor’s essay “Advice on the Choice of a Mistress” was simply his trademark “I have nothing to add”).

Warren Buffett forward on Charlie Munger for 'Poor Charlie's Almanack'
Buffett on Munger's humility.

Like Franklin, Munger worked very hard at 12 virtues[1] his coryphaeus identified, though doesn’t seem to have bothered with anything like Franklin’s attempt to master the 13th virtue: humility. Perhaps this is the result of Munger’s take on opportunity cost, “Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter out buying opportunities.” Acquiring humility, for Munger, might have seemed a fabulous waste of time given Franklin’s opinion that acquiring humility wasn’t really possible. Franklin wrote, “for, even if I could conceive that I had compleatly overcome [my pride], I should probably be proud of my humility.”

Munger has even been quoted as saying, “In my whole life, nobody has ever accused me of being humble. Although humility is a trait I much admire, I don’t think I quite got my full share.” He mentions, in a comedic vein, that he has only managed to partly overcome his defect of the conventional definition of humility by “becoming very rich, and generous…it takes both to overcome a defect like that.”

I was quite surprised to come across a video in which Munger makes the claim that both he and Buffett are massively humble. Munger redefines the concept of humility. “If you know the edge of your own competency and you  aren’t arrogantly stepping over the boundary. I’m very good at that. But within my own area of competency, my best friend wouldn’t not adore me for my humility.”

In fact, he defines this characteristic as being key to his success. When asked with the question why a couple of guys from Omaha do so much better “I think we know the edge of our own competency better than other people do. And that’s humility in the umbrella sense. And that is a very important thing to know.” (The topic of humility comes up at about the 9 minute mark of the video above). 

Using Munger’s ‘Umbrella Humility’

Warren Buffett and Charlie Munger were in a reflective mood at their latest ‘woodstock for capitalists’ gathering for the Berkshire Hathaway annual shareholders meeting. The pair even offered a prospective look at what the next 50 years is likely to bring for their conglomerate—the most successful in the history of the world.

Buffett’s and Munger’s recent treatise is already well-worn ground, and has been covered much better by those vastly more qualified (and interested) than I. Yes, the talk of succession planning—some remarked that succession planning is Buffett’s and Munger’s most glaring blind-spot—has people obsessed with who’s next at Berkshire. More than that, though, it was the recent death of fellow Graham super-investor Edward Schloss—and the fine retrospective by his son—that turned my attention to a related but even more important question. Rather than finding a replacement at Berkshire, what if one could instead find the next Berkshire, the next Buffett?

Now, I don’t think there’s much chance that anyone will come along and duplicate Buffett and more than anyone will come along and be the next Michael Jordan (though LeBron’s ability to, as Haralabos Voulgaris tweeted, “reinvent himself into hyper usage Lebron. #witness” is perhaps even more superhuman than Jordan—as Buffett wrote about ‘superinvestor’ Bill Guerin, “Size is the anchor of performance. There is no question about it. It doesn’t mean you can’t do better than average when you get larger, but the margin shrinks.”—and Curry’s handle, quick release and range are qualities I’m sure even Jordan would have wished for). While I’m sure whomever takes over the CEO position at Berkshire will be extraordinarily capable, and Berkshire will be just fine. But if I were looking for performance anything like Buffett’s own, I’d look somewhere that more closely resembled Buffett’s starting point rather than his (near) end point. I’d want to find a person or team that had some room to grow.

Charlie Munger frames the issue well, speaking about Jack Welsh he averred,  “What you want is a nut, and one young enough to have a good long run…”.  I’ve taken some time off from this blog to pursue an advanced degree. Anything resembling a loyal reader I’d attracted along the way is no doubt long gone, alienated by my year-long hiatus. That’s too bad. I’ve never been interested in most of the stuff that people are looking for—even, probably, from this blog itself—either the path to riches or a strong, functional body. I’ve been concerned with the process—what processes make people fit intellectually and physically? But this post will actually deliver on the good people are looking for: where do I find the next Berkshire, and how will I know when I see it?

Greg Glassman has spelled out the basic fundamentals in physical fitness more explicitly, but both Glassman and Munger offer compelling accounts of how we can train our minds and bodies. Glassman’s general physical preparedness is very much like Munger’s latticework of mental models. Use either and you’re likely to do quite well in this world. They’re both pretty simple, but neither is anything but easy.

So people continue to look for get-rich and get-fit schemes that take shortcuts and somehow cheat the process. Glassman’s method certainly won’t help anyone who doesn’t use it. For proof, just look at Glassman himself. What about Munger’s?

Of course, no one will get any smarter who pours over “Poor Charlie’s Almanack” who doesn’t then incorporate the insights the book contains into her own thinking and practice. Both Munger and Buffett consistently stress the importance of learning continually—and that continuously applying his mental models approach is essential to this task. Most people, though, don’t care about acquiring a coherent set of mental models to put to use in solving life’s—or even investing’s!—vexing problems. What most people want is to acquire a lot of money. So, despite the fact that, as Michael Oakeshott points out, “One may purchase a painting, but not an understanding of it,” people realize that they don’t have to understand money to spend it. 

While Glassman correctly understands the nature of fitness, his understanding won’t make him any fitter.  To be fit he needs to put his understanding into practice. Warren Buffett and, to a lesser extent, Charlie Munger are popular precisely because getting rich doesn’t have this character. It’s no more possible to think like Charlie Munger without taking the steps to cultivate a mind like his than it is to get fit by reading the CrossFit Journal. But a lot of people got rich by simply having enough sense to let their money ride on Berkshire, and the geniuses Buffett and Munger. Those who bought in early enough and stayed in long enough may not be able to think like Charlie Munger or Warren Buffett, but they’re no more likely to feel the sting of the insult, “if you’re so smart, why aren’t you rich?”

Find a Combination of a Genius and a Fanatic…and One Young Enough to Have a Long Run

Charlie Munger is famous for valuing many things over IQ. Clearly, it didn’t take a massive IQ to stick with Berkshire (or Wesco—though, Munger himself did experience a rough patch (note years 1970-1974 in the chart below), leading credence to the idea that taking the long view in investing as in life is a very good idea). The guy who introduced me to Charlie Munger has a near perfect collection of all the stuff Munger prizes. It’s no accident. He’s studied Munger as long as I’ve known him. His name is Allan Mecham, and he runs a fund that does quite well. I don’t know what his IQ is—I’m suspect it doesn’t match Munger’s—but he’s plenty smart. What’s truly amazing is that he’s every bit as disciplined as his idol. You might do well buying into Munger—just take a look at what he’s done at Daily Journal Corp.—but you probably won’t sustain those returns for too many years.

Given that you don’t have to actually be able to acquire and apply Munger’s mental model approach—all you need is to be able to find someone who can—many people are invested in seeking out that kind of person. Few people have that kind of dedication. I attended the University of Utah near the end of Rick Majerus’s run as basketball coach there—Majerus might be on the Mount Rushmore of combining genius with fanaticism. I scheduled afternoon classes in the building adjacent to the team’s practice facility because I loved watching and learning from him. He was singularly devoted to—most would say obsessed with—basketball. He had little life outside the game. In his autobiography, he deflected praise of those who called him a genius saying that if he were he’d go to Wall St. and make real money.

While most of the rest of our circle of friends was concerned with youthful pursuits—like basketball—Mr. 400% was focused on learning from the best. He digested everything he could get his hands on about Buffett and Munger. He had the single-mindedness of Majerus, but the game he was interested in, unlike the ball coach, was Wall St.

I’m grateful to Allan for introducing me to Charlie Munger for the increased understanding Munger’s ideas continually afford me. The rest of you can be grateful for the understanding—and application—Mecham has acquired. Because he’s going to make a lot of people a lot of money. I obviously have no idea what it was like for those who recognized Buffett’s ability early enough to bet on it 50 years ago. But Mecham’s young—I’m not yet 40 and he was a couple grades behind me in school—enough and dedicated enough to have a good 50-year run in him.

The point of this blog was never to be focused on finance, let alone to offer advice on how people might invest their money. But in thinking about Munger’s idea of ‘umbrella humility’, it’s obvious that not everyone will be able to acquire what Oakeshott calls the practical knowledge necessary to invest successfully any more than everyone will be able to beat the market. Recognizing that Munger’s famous aversion to frictional costs in transactions suggests that simply investing in a market index fund is a pretty good way to go. I suspect there’s an even better option, though.

I don't know if Allan Mecham has any more or less conventional humility than Charlie Munger. I do know, though, that he shares with Munger the rare attribute of umbrella humility. He's also got a track record to prove it. Amazingly, he's also got a lot of years ahead of him. 

[1] Here's Franklin's full list:

1.  TEMPERANCE.  Eat not to dullness; drink not to elevation.

2.  SILENCE.  Speak not but what may benefit others or yourself; avoid trifling conversation.

3.  ORDER.  Let all your things have their places; let each part of your business have its time.

4.  RESOLUTION.  Resolve to perform what you ought; perform without fail what you resolve.

5.  FRUGALITY.  Make no expense but to do good to others or yourself; i.e., waste nothing.

6.  INDUSTRY.  Lose no time; be always employ’d in something useful; cut off all unnecessary actions.

7.  SINCERITY.  Use no hurtful deceit; think innocently and justly, and, if you speak, speak accordingly.

8.  JUSTICE.  Wrong none by doing injuries, or omitting the benefits that are your duty.

9.  MODERATION.  Avoid extreams; forbear resenting injuries so much as you think they deserve. 10.  CLEANLINESS.  Tolerate no uncleanliness in body, cloaths, or habitation.

11.  TRANQUILLITY.  Be not disturbed at trifles, or at accidents common or unavoidable.

12.  CHASTITY.  Rarely use venery but for health or offspring, never to dulness, weakness, or the injury of your own or another’s peace or reputation.

13.  HUMILITY.  Imitate Jesus and Socrates.

Wednesday, June 10, 2015

Why Charlie Munger Doesn’t Teach His Own Mental Models System (And How We Might)

I read an exchange recently that made me think about what seems to be Charlie Munger’s inscrutable rationale for not being more explicit in providing guidance to those who would follow in his mental models approach to learning. Munger’s partner Buffett, of course, gets called on more frequently to expand on the book “Security Analysis” penned by his mentor Benjamin Graham. Buffett often replies that investing is so simple that were he to write such a book, no one would believe it. 

Munger’s mental model approach isn’t that simple—Charlie admits as much, writing, “You may say, ‘My God, this [mental model approach] is already getting way too tough.’ At the same time, Munger does seem to think that the system is simple enough to be learned, and, presumably, taught. Immediately following his ‘too tough’ remark, Munger writes, “But, fortunately, it isn't that tough—because 80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person. And, of those, only a mere handful really carry very heavy freight.”

Charlie Munger teaches Mental Models
Charlie Munger Teaching Mental Models.

So why doesn’t Charlie teach it more systematically, more explicitly? I have some ideas. A recent exchange about basketball prospects in advance of the upcoming NBA draft got me thinking about why Charlie Munger doesn’t teach it and how we might profitably adopt his insights into acquiring what he calls worldly wisdom.

A participant in a recent NBA chat asked about Myles Turner, a talented prospect out of the University of Texas. He wrote that turner, “is known as a nice rim protector/defender, though when I watch him, his feet are really slow and he can't move side to side. Should I be worried?

Myles Turner Scouting Report
Myles Turner's Running is a liability. And can be improved.

Chad Ford of ESPN responded, “He's been working on it. Talking to his trainer in Vegas, he never really was taught how to run. I know that sounds weird, but when you watch him, it rings true. I'm told he looks dramatically better. It was just about teaching technique and getting his legs a little stronger….If he's fixed that, he's a very intriguing prospect.”

I was reminded of a couple other examples from the world of professional basketball. The first was from Kyle Korver who reported how jarring it was to see trainers at PPP tell him his jumping form was poor and then show him visual evidence. Seeing the excess and unnecessary strain he was putting on his body because of poor form and a lack of strength—both correctible conditions—he resolved to change.

Korver arrived at P3 in Santa Barbara a half-decade ago with a ravaged left knee, some elbow pain, and a game that was slipping away. the staff at P3 ran Korver through a series of tests, taking care to measure the amount of force the player generated on both sides of his body. Grantland’s Zach Lowe recounts, “Korver had almost no oomph, and what oomph he had was isolated in his right leg.” P3 Founder Marcus Elliot noted that, not only was he asymmetric, but “by NBA standards, he had a handicap.”

Bad mechanics were likely to lead to overstressing his right leg—and additional injuries likely to result from there. L.A. Lakers’ longtime trainer Gary Vitti in a wonderful New Yorker piece described how complicated it is trying to keep high level athletes health over the course of a long and grueling season (he might well be talking about investors keeping their minds clear over the long haul of their careers, too). “Kobe comes down wrong, and has a tibial-plateau fracture. Steve Blake is behind a pick and puts his arm out as a guy’s running by, the guy hits his arm, and he tears his ulnar collateral ligament. It’s a baseball pitcher’s injury! So it’s a complete fluke. Jodie Meeks goes for a jump shot, comes down on somebody’s foot, rolls his ankle. Pau Gasol strains a flexor muscle in his toe, we strap his toe down, now he changes the mechanics, now his pelvis shifts, and the load goes to his adductor—and he strains his adductor. Xavier Henry runs into somebody, and he gets knocked off balance, and he comes down in an awkward position. How’s that related to anything?”

In Korver’s case, Elliott and staff at P3 retrained Korver’s body in a way akin to what Munger proposes people do to improve over the ‘normal’ function that evolution has gifted them with. Simple, repetitive exercises aimed at making him stronger and improving his mechanical function were the whole plan. As Lowe concluded, “Korver would never jump high or run fast, but if he could start moving before his opponent and reach peak speed faster, he might eke out the tiny opening he needs to shoot.” That sounds a lot like Munger on making fewer errors in recreational tennis; 80 percent—and I'd argue that, especially on the men's side, that might be closer to 90 percent—of the points are decided by winners, about 80 percent are decided by unforced errors.

Charlie Munger has an amazing system for compiling experience across a broad latticework. In short, Munger’s ideas are to fix the small cognitive mistakes people make in a similar way to Myles Turner’s trainer (reportedly) fixed his gait. Unlike Turner’s trainer, though, Munger prefers not giving people too much guidance in the process of what Wittgenstein called ‘removing the crookedness’ from their thinking.

His reasoning is twofold: 1) because he doesn’t want it to be too easy, 2) because it sticks better when people have to work for it. 

I suspect Munger has another reason that I think is pretty ingenious—and remarkable given his extreme self-confidence—that I haven’t heard him express. I think Munger also doesn’t want to give too much away too explicitly to allow for individual idiosyncrasy. In just the same way my old tennis coach didn’t tinker with anyone’s swing more than he had to, Munger recognizes that people need to be comfortable with the way they use such a system. And not ‘spoon feeding’ people will afford them greater flexibility in acquiring the mental models approach and makes novel application more possible. 

Just as Buffett’s application of the ‘cigar butt’ approach to investing he learned from Graham improved by adding Munger’s key insights into investing—particularly regarding the importance of business strength. Were Munger to teach his system more exactly, he’d run the risk of turning a dynamic method into a moribund catechism. 

One of my favorite thinkers, Michael Oakeshott makes similar point in discussing the way different kinds of knowledge are acquired. While I don't think Munger is familiar with Oakeshott per se, I do think Munger's thinking demonstrates a remarkable implicit understanding of Oakeshott's distinction between technical and practical knowledge. I’ve written on Oakeshott’s distinction between these types of knowledge elsewhere, but he thinks that practical knowledge, unlike ‘technical’ knowledge, is “not susceptible of formulation of this kind. Its normal expression is in a customary or traditional way of doing things, or, simply, in practice. And this gives it the appearance of imprecision and consequently of uncertainty, of being a matter of opinion, of probability rather than truth. It is, indeed, a knowledge that is expressed in taste or connoisseurship, lacking rigidity and ready for the impress of the mind of the learner.”

Munger, like Oakeshott, recognizes that this apparent imprecision is misleading. Practical knowledge can be—and is regularly—taught. But not in the ways people think—and certainly not via some textbook. (I actually think Munger is too optimistic regarding acquiring wisdom through books—Oakeshott notes that the stuff Munger has in mind to teach can’t be learned only technical knowledge can be learned from a book or even via an online correspondence course). Where Oakeshott thinks much of technical knowledge “can be learned by heart, repeated by rote, and applied mechanically” he regards practical knowledge as impossible to be taught or learned (I think he’s either wrong about this, or he’s stated his point too strongly), it can, rather, only be “imparted and acquired.” This kind of knowledge—the kind Munger is interested in—“exists only in practice, and the only way to acquire it is by apprenticeship to a master--not because the master can teach it (he cannot), but because it can be acquired only by continuous contact with one who is perpetually practising it.”.

But what about the injuries that occur by leaving people to their own devices? If Munger could prevent such ‘injuries’, shouldn’t he? In one way, I think the answer is yes. And that’s why I’m as crazy as I am about incorporating Munger’s ideas for a system of mental models into formalized education. At the same time, though, I have come to recognize the sagacity of Munger’s not intervening in providing people more direction in acquiring the kind of wisdom he believes (and has demonstrated) is possible to acquire—even as people getting ‘injured’ because of (treatable) crooked thinking all around him.

Learning from one’s mistakes is one of the best things a person can do. Munger does talk a lot about how important it is to be able to acquire wisdom via vicarious experience so that you don’t have to experience everything first hand in order to understand it. You’ll have to suffer too much if you go about it that way. But there’s wisdom in the old adage ‘experience keeps a dear school, but it is a fool who will learn by no other.’ But there is something powerful about the lessons we learn by suffering the consequences of our own mistakes. It is, I suspect, why Buffett named his conglomerate ‘Berkshire’.

The upshot is that we can acquire and use an integrated system of mental models, just as Munger suggests. But we might have to (mostly) get it the hard way. Maybe the model of master/apprentice or coach/player is appropriate to getting this kind of knowledge—I do know I’d love to apprentice under Munger. But I wonder if there’s a way to incorporate Munger’s system into school curricula? Let me know if you have any ideas on that score.