Destroying Good Ideas is a Good Idea; Bad Ideas a Great Idea; Bad Behavior the Best Idea

Charlie Munger is famous for recommending that people radically reconsider even their most firmly held ideas. His oft-repeated quote, "Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year," has become something of a slogan among those interested in understanding Munger's ideas and approach to seeing the world.

A recent Farnam Street blog post outlines the way this works in doing the work Munger thinks is required in holding an opinion. Citing Munger it reads, "The ability to destroy your ideas rapidly instead of slowly when the occasion is right is one of the most valuable things. You have to work hard on it. Ask yourself what are the arguments on the other side. 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."

In this destructive process, timing is important. Warren Buffett has famously credited Munger with having the best 30 second mind in the world. I wonder if Buffett would have done better in responding to a recent query about Berkshire's abstention from voting on Coca-Cola's executive compensation if he'd had Munger next to him as he does at (this weekend's) annual Berkshire Hathaway shareholder meeting.

In a recent interview with Becky Quick of CNBC, Buffett explained his decision to abstain, "Well, we abstained because— we didn't agree with the plan. We thought it was excessive. And— I love Coke. I love the management, I love the directors. But— so I didn't want to vote no. It's kind of un-American to vote no at a Coke meeting. So that's— but we— I didn't want to express any disapproval of management. But we did disapprove of— of the plan." I'm not quite sure how to take his 'un-American' comment, it seems as though he's just trying to lighten the mood (you be the judge: the interview is embedded below). But the sentiment doesn't seem to be at all consistent with Buffett's or Munger's normal positions...or common sense.



Consider Buffett's concerns from later in the interview, "The plan— compared to past plans was a significant change. And— there's already a 9 percent or so overhang in terms of options outstanding relative to the amount of sh— shares outstanding, 8 percent— 8 percent— 8 percent to 9 percent. And— this authorization of another 500 million shares. Not all of which would've gone on options. But that's another 11 percent of the company. And— and— I thought it was too much. And— I talked to my partner Charlie Munger, and he thought it was too much. So we abstained." Buffett has been, rightly, criticized for his response. The tenor of Buffett's remarks evolved a bit after that initial response, as in this interesting interview with Stephen Gandel. But I wonder if the change was for the better or worse.

To paraphrase Buffett, I love Warren Buffett, I really do. But I disagree with his position. I realize that going against the Oracle of Omaha is kind of un-American, but I think he's wrong on this one. Worse, he's wrong in a way that's a huge departure from his past position, "The way to get big shots to change their behavior is to embarrass them. The press has great opportunities for this, but the big institutional investors could help." 

If, for example, you used Buffett's line from the CNBC interview, "but taking on a committee...is a little bit like belching at the dinner table. I mean, you can't do it too often. If you do, you find you're eating in the kitchen pretty soon" on the Charlie Munger I've read about, wouldn't you expect him to reply, "Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your new peer group...then to hell with them." Peter D. Kaufman thought this insight so important, he used the sentiment in his dedication to Munger in the edition of "Poor Charlie's Alnamack" he edited (picture below taken from "Poor Charlie's").

Charlie Munger on importance of adjusting behavior to acquired wisdom.

It's not because his son is on the board, but Buffett would have hewed closer to his principles by saying to hell with them. At the very least, he could have spoken out publicly concerning the compensation plan in advance of the vote. Yes, he's right that the vote happened on 83-17% lines. Berkshire's 9 percent wouldn't have made a difference. But the reason the Berkshire annual meeting is finance's Woodstock is because Buffett and Munger tell the truth. And, usually, have the courage of their convictions.

If destroying good ideas is important, getting rid of bad ones should be even better. Of course, making sure your behavior comports with one's best, most current ideas is crucial.    

Understanding Charlie Munger's 'Practical Thought About Practical Thought?'

 What Can Be Learned from 'Practical Thought About Practical Thought?'?

Charlie Munger's talk 'Practical Thought About Practical Thought?' from 'Poor Charlie's Almanack'

Nasdaq.com published an interesting piece on one of Charlie Munger’s most interesting (and most infamously inscrutable) talks recently: "Practical Thought About Practical Thought?".  The piece is interesting. What Munger is up to, I think, is providing a user’s guide to his concept of Mental Models.  Munger’s speech is an elaborate demonstration in how he applies his latticework of mental models. We can better understand (and better use) Munger's insights if we can recognize and think through a misunderstanding of how Munger is teaching us, and what can learn from his writing.

Munger laments that most don’t grasp the ideas in ‘Practical Thought’, which is published in “Poor Charlie’s Alamnack”, even upon reading it multiple times. The writing, like most of Munger’s, is clear enough and peppered with interesting, evocative allusions. What Munger is providing, though, is quite difficult because of his argument’s high level of abstraction.

Nasdaq.com’s contributor GuruFocus loves the piece because in it Munger deploys a “rarity of real life examples” that in turn make ‘Practical Thought’ “especially valuable”.  I don’t think that’s quite right. Munger begins with a counterfactual scenario—he uses an actual brand name, Coca-Cola—but the ‘real life’ aspect of Munger’s method ends there. He proceeds from that hypothetical starting point to examine how he’d go about solving the series of problems it presents. Obviously, he couldn’t possibly have anticipated issues like those covered in this recent Wall Street Journal piece, but doing so wasn’t the speech’s aim, anyway.

Munger gives himself the following task to solve: “You were in the year 1884 and to be chosen as the other partner in Coca-Cola's business, you must demonstrate, in 15 minutes, that your business plan will make Coca-Cola worth $2 trillion 150 years later, in the money of that time, despite paying out a large part of its earnings each year as a dividend.”

The Nasdaq.com piece then proceeds to offer a sparkling summary of Munger’s approach to solving this self-imposed conundrum. I won’t rehearse the summary or Munger’s argument; what I’m interested in is what understanding ‘Practical Thought’ means to those of us who are interested in developing and using a latticework of mental models in a way his thought suggests is possible.

What Should We Understand About How Munger Uses Mental Models in 'Practical Thought'?

It’s not too complicated trying to understand the way Munger deploys the process of simplification, or numerical fluency, or even the psychological principles that he thinks of as comprising his toolkit of mental models in 'Practical Thought'. The reason, to my mind, that people misunderstand the piece is that Munger is more interested in showing us something else. In another post on this blog, I cite an ancient Chinese proverb to explain why “Poor Charlie’s” (and any book or written material) is unlikely to provide us what we’re all looking for in using Munger’s mental models. What Munger is trying to do, though, in the piece ‘Practical Thought’ is to give us as much insight as possible into how he, to use the metaphor of the proverb, uses his chisel to cut a wheel properly. Munger is interested in the piece in showing us what the process of using mental models looks like in practice. 

Poor Charlie's Almanack. The Wit and Wisdom of Charles T. Munger. Expanded Third Edition.

Scientific though many of these models are, the system of using these models once they’re arrayed across a functional latticework (meaning that one can competently use each model individually and in concert with the others as they intersect in practice[1]), doesn’t operate by simply applying inductive reasoning. Munger’s system is bound to disappoint anyone, like Francis Bacon (no, not the one whose triptych recently sold at auction for more money than any other piece of artwork ever had), who in his "Novum Organum"  sought and tried to explicate an inductive method to understand the world. Deduction, rather, and a good deal of it, is required to operate Munger’s system.

Understanding Mental Models Means Knowing How To Use Them

What we’re looking for in trying to come to grips with Munger’s mental models is the ability to use them. As Wittgenstein reminds us, to understand is to know how to do. British thinker Michael Oakeshott, in his essay “Rational Conduct” explains why those looking for an operators manual or instruction list to the mental models will be sorely disappointed. “Doing anything both depends upon and exhibits knowing how to do it,” he writes in a vein quite similar to Wittgenstein. “And though part (but never the whole) of knowing how to do it can subsequently be reduced to knowledge in the form of propositions (and possibly to ends, rules and principles), these propositions are neither the spring of the activity nor are they in any direct sense regulative of the activity.”

Oakeshott thinks that anyone, whether a carpenter, scientist, painter, judge, cook (he doesn’t mention investor like Munger, but his thinking certainly applies to them ) “in the ordinary conduct of his life, and in his relations with other people and with the world around him is a knowledge, not of certain propositions about themselves, their tools (including mental models), and the materials in which they work, but a knowledge of how to decide certain questions.” This knowledge, he goes on to argue, is “the condition of the exercise of the power to construct such propositions.” Looking for Munger’s ‘Practical Thought’ to provide actual answers to concrete situations, in other words, is folly, because, as Oakeshott avers in another context, “a received philosophy is already a dead one.”

To make this case specific, Oakeshott argues, “‘Good’ English is not something that exists in advance of how English is written (that is to say English literature); and the knowledge that such and such is a sloppy, ambiguous construction, or is ‘bad grammar’, is not something that can be known independently and in advance of knowing how to write the language.” His point is just as true for investment as it is for language.

Thinking Clearly About What We Have To Learn

Just as Munger suggests is too often the case with his piece 'Practical Thought', Oakeshott thinks people misunderstand experience because they misapprehend how we come to learn how to do things, such as investing or applying a Munger-like latticework approach to problem solving. The reason?: "we are apt to believe that in order to teach an activity it is necessary to have converted our knowledge of it into a set of propositions—the grammar of a language, the rules of research, the principles of experiment and verification, the canons of good workmanship—and that in order to learn an activity we must begin with such propositions.” Of course, Munger operates under no such illusion. As a result, his speech ‘Practical Thought’ doesn’t offer any conclusions masquerading as ironclad propositions. And that’s much of what makes it difficult for people to understand. Munger, though, in giving us insight into his thought process provides something far better, and vastly more useful. If we can learn what to make of it.

Oakeshott can be of help here, too. Considering the rules and propositions that one might make regarding the practice of any activity, including Munger’s attempt at teaching via his Coca-Cola example in 'Practical Thought,' Oakeshott writes, “it must be observed that, not only are these rules, etc., these propositions about the activity, an abridgment of the teacher’s concrete knowledge of the activity (and therefore posterior to the activity itself), but learning them is never more than the meanest part of education in an activity.” 

Oakeshott’s understanding of what can be learned and taught is instructive—it suggests that there’s much more to learn from Charlie Munger than a set of propositions or rules. He also suggests that the stuff we have to learn beyond rules and propositions is a lot harder to learn than those rules are.

Such rules “can be taught, but they are not the only things that can be learned from a teacher. To work alongside a practiced scientist or craftsman is an opportunity not only to learn the rules, but to acquire also a direct knowledge of how he sets about his business (and, among other things, a knowledge of how and when to apply the rules); and until this is acquired nothing of great value has been learned." This is what we should hope to get out of studying 'Practical Thought'; we should appreciate this speech not because, as GuruFocus would have it, it's peppered with real life examples, but because we're afforded a peek into how Munger actually sets about his business. 

If You Made It This Far...

You're well on your way to understanding both 'Practical Thought About Practical Thought?' and effectively acquiring and using Munger's latticework system of mental models.

Congratulations. 

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[1] A fun example from Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs: once you get into the joys of synthesis, you immediately think. “Do these things interact?” Of course they interact. Beautifully. And that’s one of the causes of the power of a modern economic system. I saw an example of that kind of interaction years ago. Berkshire had this former savings and loan company, and it had made this loan on a hotel right opposite the Hollywood Park Racetrack. In due time the neighborhood changed and it was full of gangs, pimps, and dope dealers. They tore copper pipe out of the wall for dope fixes, and there were people hanging around the hotel with guns, and nobody would come. We foreclosed on it two or three times, and the loan value went down to nothing. We seemed to have an insolvable economic problem -- a microeconomic problem.

Now we could have gone to McKinsey, or maybe a bunch of professors from Harvard, and we would have gotten a report about 10 inches thick about the ways we could approach this failing hotel in this terrible neighborhood. But instead, we put a sign on the property that said: “For sale or rent.” And in came, in response to that sign, a man who said, “I’ll spend $200,000 fixing up your hotel, and buy it at a high price on credit, if you can get zoning so I can turn the parking lot into a putting green.” “You’ve got to have a parking lot in a hotel,” we said. “What do you have in mind?” He said. “No, my business is flying seniors in from Florida, putting them near the airport, and then letting them go out to Disneyland and various places by bus and coming back. And I don’t care how bad the neighborhood is going to be because my people are selfcontained behind walls. All they have to do is get on the bus in the morning and come home in the evening, and they don’t need a parking lot; they need a putting green.” So we made the deal with the guy. The whole thing worked beautifully, and the loan got paid off, and it all worked out.

Munger's Ally. Freeman Dyson's Contrarian Reminder: Intellectual Independance > Academic Credential

It Turns Out Freeman Dyson Is Pretty Smart

A wonderful recent piece in WIRED on Freeman Dyson's accomplishment doesn't establish the thinker's academic or intellectual bona fides, but does remind us what an exciting and visionary thinker he has been over the course of his long career. Writing of the two-day celebration of Dyson's "eclectic achievements in math, physics, astronomy and public affairs" at the Institute for Advanced Study in New Jersey, the WIRED piece rightly holds up the almost unlimited possibilities open to those who couple intellectual independence with continuous study. Of course, few if any of us have Dyson's native cognitive capabilities, but there are, I think, important lessons to be learned for all of us regardless of the kinds of problems we face. For those of us working in highest level mathematics, Munger's assertion that we "don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time." 

And He Hates The PHD System

Dyson follows Charlie Munger in not being a huge fan of the way academics are trained. That's an understatement. In fact, Dyson might be the only man in the Western Hemisphere who despises the system more than Munger does, even calling the fact that he's raised six children all of which he managed to steer clear of a PHD one of his proudest contributions.

"Oh, yes. I’m very proud of not having a Ph.D. I think the Ph.D. system is an abomination. It was invented as a system for educating German professors in the 19th century, and it works well under those conditions. It’s good for a very small number of people who are going to spend their lives being professors," Dyson said in an interview with WIRED. "But it has become now a kind of union card that you have to have in order to have a job, whether it’s being a professor or other things, and it’s quite inappropriate for that. It forces people to waste years and years of their lives sort of pretending to do research for which they’re not at all well-suited. In the end, they have this piece of paper which says they’re qualified, but it really doesn’t mean anything. The Ph.D. takes far too long and discourages women from becoming scientists, which I consider a great tragedy. So I have opposed it all my life without any success at all."

Freeman Dyson below Yosemite Falls in Tuolumne Meadows, California in 1955. Photo: Verena Huber-Dyson

"I was lucky because I got educated in World War II and everything was screwed up so that I could get through without a Ph.D. and finish up as a professor. Now that’s quite impossible. So, I’m very proud that I don’t have a Ph.D. and I raised six children and none of them has a Ph.D., so that’s my contribution."

Lessons From Another Scholar Without A PHD

British philosopher Michael Oakeshott's only formal academic credential was a history degree from Cambridge. Born in 1901, he was a generation older than Dyson. Like Dyson, he managed to land the job of professor at one of his country's leading universities without an advanced degree. Similar to Dyson's groundbreaking work providing mathematical language to famed physicist Richard Feynman's work, Oakeshott established his reputation with a single, masterwork as a young man: Experience and its Modes was published in his early 30s.

Charlie Munger is famous for his scathing critique of poetry professors, arguing, "all the wisdom of the world is not to be found in one little academic department. That's why poetry professors, by and large, are so unwise in a worldly sense. They don't have enough models in their heads. So you've got to have models across a fair array of disciplines." Oakeshott's take is (not surprisingly) less polemical, but it's also more nuanced. And, so long as the caveat Dyson offers, to remain intellectually independent, is observed, Oakeshott points to the possibility of more scholars behaving as Dyson has.

"Everyone who knows anything about it knows that there is a difference between the pursuit of learning and the acquisition of information," Oakeshott writes. He foreshadows Munger's idea of a circle of competence when he maintains, "a scholar is something more than a picker-up of unconsidered trifles: he knows something about what he is looking for, and can distinguish between what he knows and what he does not know." He diverges from Munger, though, as he continues, "The world's contempt for the 'poor pedant' is often mistaken; it judges the scholar's activity by its use, and finds it pedantic when it appears useless. But this is a false standard; what is reprehensible is not the pursuit of knowledge which has no immediate use, not that attention to detail which is unavoidable in scholarship, but that blind groping about among fragments of learning which are known only as fragments into which scholarship sometimes degenerates."

Oakeshott he avers, again pace Munger, that this isn't (or wasn't when he wrote the essay in 1950) as common a practice as many believe, "This does not happen as often as the world thinks; and perhaps it is less liable to happen in a university than elsewhere." While I agree with Oakeshott regarding that sentence's first clause, I side with Munger on the latter. Still, Oakeshott's and Dyson's lives and practice suggest a more robust, intellectually independent course is possible both inside and out of academia. The scholars demonstrate that a pursuit akin to Munger's vision for arraying our experience across a broad latticework of mental models and using that understanding to solve problems is possible. And richly rewarding. 

Unafraid to Stick One's Nose Where (Others Think) It Doesn't Belong

Though Dyson never lost sight of the fact that mathematics was where just about all of his training and much of his ability was, he was sufficiently playful and audacious enough to explore other avenues that interested him - a move dangerous to all those who (in language one professor admonished me) are not 'immanently tenured'.  "I was trained as a mathematician, and I remain a mathematician," Dyson said.  "That’s really my skill, just doing calculations and applying mathematics to all kinds of problems, and that led me into physics first and also other fields, such as engineering and even a bit of biology, sometimes a little bit of chemistry. Mathematics applies to all kinds of things. That’s one of the joys of being a mathematician."

Compare Dyson's take to this point made by Oakeshott, "Unavoidably, each scholar is something of a specialist who cultivates a chosen field. But it rarely happens that this is a very narrow field, and a scholar may often be found turning from one study to another or poking his nose into something which is not his chief business scholar sticking his nose in many areas that aren’t properly his business."

To give Munger, as usual, the last word, "There will be immense worldly rewards...in a more multidisciplinary approach to many problems, common or uncommon. And more fun as well as more accomplishment."

Robert Hagstrom is an incredible intellectual CrossFitter

A Connoisseurship in Determining Relevance

Michael Oakeshott stresses that the ability to think, or 'judgement', "appears first not in merely being aware that information is to be used, that it is a capital and not a stock, but in the ability to use it - the ability to use it in answering questions." Until a person displays such an ability, she doesn't have a competence. Or, as Oakeshott's contemporary Ludwig Wittgensten put it, "to understand is to know what to do."

Author and Investor Robert Hagstrom of Legg Mason Capital

Investor Robert Hagstrom has this ability. In spades. There's a great video of him discussing what will immediately be identifiable to any Crossfitter as the mental analog of CrossFit's physical program. He said, "You can't spend ninety percent of your time becoming an expert on physics or biology, because you've got work to do...but you can spend a little bit of time understanding the big models and how they work." Hagstrom points to physics, biology, evolutionary biology and a host of other disciplines as being both accessible and fruitful for study as an investor. And, of course, they're that way for those of us not involved in stock picking and trading, too.

Hagstrom, at about the 2:30 mark in the video above, begins to talk about the case of Amazon, and examined how to value it. Regardless of what he may say he's up to, what he's displaying in describing how he came to value Amazon as he did was a remarkable connoisseurship. Oakeshott and his notion of judgment explains why. "The rules may have been mastered, the maxims may be familiar, the facts may be available to recollection; but what do they look like in a concrete situation, and how may a concrete situation (an artifact or an understanding) be generated from this information?" 

In another post I pointed to Mason Meyer's expert use of taking insights learned from (what is no doubt a rich and rewarding course) Clayton Christensen's Harvard Business class and applying them within the latticework of mental models approach Charlie Munger recommends to anyone interested in becoming wise. But that post oversimplified. Yes, Mason Meyer's ability is impressive. Yes, his example is an instructive as it is impressive. But simply suggesting that it's a good idea to seek out instruction as to when to apply which model and why obscures the process necessary to acquiring judgement. Judgement is precisely the thing that allows Hagstrom to interpret data correctly; it allows him to evaluate whether a given data set suggests a reversion to the mean or whether there's been a trend change that augers something else entirely.

Oakeshott asks the important question in examining this process, "How does [a person] acquire the connoisseurship which enables him to distinguish between different sorts of questions and the different sorts of answers they call for, which emancipates him from crude absolutes and suffers him to give his assent or dissent in graduate terms?" That's the process Robert Hagstrom and Mason Meyers went through to have the insight they need to answer the questions facing them. Only a connoisseur has the understanding required to answer the questions posed by complex systems. Anything short of this is the difference between Max Planck and his chauffeur.

CrossFit provides a workout program that taps into all of the body's energy pathways, Hagstrom's example offers insight into how studying across multiple disciplines may do the same for the mind.

Hagstrom makes so many good and interesting points in that video, many of which are worth elaborating on. In an upcoming post, I'l take a look at whether philosophy is the boon to investing (and other enterprises) Hagstrom suggests it is.