Charlie Munger on Business Philosophy

At the 2022 Berkshire annual meeting - Munger's last before his death in November 2023 - he was characteristically blunt about what he refused to touch. He told the audience that he tried to avoid things that were evil, stupid, and made him look bad relative to someone else. The formulation compressed Munger's lifelong filter into a single line: a thing did not have to be all three to be avoided; any one of the three was sufficient. The investor who internalized the rule would refuse most of the propositions the market pressed on him. He sharpened the point with reference to crypto. Munger had been a public critic of cryptocurrency for years, and at the 2022 meeting he did not soften. He told the audience that he regarded crypto as a disgusting development and that those who promoted it were, in his view, either deluded or self-interested. He did not pretend that the asset class might be a legitimate innovation in payments or a hedge against monetary debasement; he treated it as a speculation that exploited the same incentive biases and psychology of crowds that had produced every previous speculative mania, and he refused to participate in any form. The avoidance principle, in Munger's telling, was not the absence of strategy. It was the strategy. The things he refused to touch - crypto, complex derivatives, structured products, financial engineering generally - defined the perimeter inside which he was willing to operate. The perimeter was deliberately narrow. The great investment decisions inside the perimeter - See's, Coca-Cola, BYD, Costco, the Japanese trading houses - had produced returns that an investor following the broader market could not have matched. The avoidance of the evil and the stupid was, paradoxically, what made the great investments possible.

Munger used the 2015 meeting to draw an explicitly Darwinian picture of corporate mortality. The room was watching one business die while the company tried to replace it with another. Most of the other newspaper companies that had tried to do the same thing had failed. Some of them had bought other businesses - television stations, for instance - with the profits they had, but most of the ones that simply tried to take their newspaper and transform it into something else had failed. That, Munger said, is the common result. The lesson was that technological change is one of the hardest things to cope with, which is why so many incumbents fail at it. He reached for three exhibits. Kodak had owned the world in silver-based photography, was the dominant company on the planet, the second most important trademark in the world, with armies of PhD chemists who knew more about silver-based photography than anybody. It had been a fabulous business right through the Great Depression - a total widow-and-orphan stock. And then it wiped out its shareholders with technological change. General Motors had been the most important automobile company in the world when Munger was young - number two was not close - and it too wiped out its shareholders. IBM had gone from butchers' scales to dominating the early computer market, and when the next evolution came along it failed a lot. Munger said Bill Gates had told him it happens again and again and again when the technology changes enough. The age of Daily Journal's board - the youngest director was 60 and Munger, the chairman, was 91 - only underlined the absurdity of attempting a Half Dome pivot. He told the room, with characteristic understatement, that he didn't understand computing. But he was doing it anyway, because the alternative was to accept the slow death of the print franchise.

Speaking to USC Law graduates in May 2007, Munger argued that wisdom acquisition is a moral duty, not merely a career strategy. He had come to that conviction early, he said, and had lived by it ever since. The corollary, in his telling, was uncompromising: you are hooked for lifetime learning, and without it you will not get very far. What you already know is barely the down payment; what you learn after you leave the hall determines the trajectory. He grounded the claim in the Berkshire record. The skill set that got Berkshire through one decade would not have sufficed for the next, he said. Without Warren Buffett functioning as a continuous learning machine, the documented long-run investment record would have been absolutely impossible. He then generalized the lesson: at lower walks of life he constantly sees people rise who are not the smartest and sometimes not even the most diligent, but who are learning machines. They go to bed every night a little wiser than when they got up. With a long run ahead of you, he said, that habit does the heavy lifting. He closed the thought with Alfred North Whitehead's observation that civilization advanced only when man invented the method of invention. Munger flipped the same logic onto the individual: if civilization can only progress when it invents the method of invention, you can only progress when you learn the method of learning. Coming to law school already equipped with the method of learning, he said, was the luckiest break of his long life and the one that paid off most reliably.

Munger told the graduates that he had figured out, very early, that there is no love so right as admiration-based love, and that such love should include the instructive dead. He lived by that idea, he said, and it had been very useful to him. The opposite kind of love, the compulsive attachment-driven sort celebrated in Somerset Maugham's Of Human Bondage, he described as a sickness, a disease. If you find yourself in its grip, his advice was to turn around and fix it; eliminate it. He paired that lesson with what he called the funeral test. He had read somewhere, he said, of a man who had lived such that, at his funeral, the preacher had invited anyone to stand up and say something nice about the deceased. Nobody came forward. Nobody came forward. Nobody came forward. Finally one man rose and said, 'Well, his brother was worse.' Munger told the audience that is not where you want to go. That is not the kind of funeral you want to have. You will leave entirely the wrong example. The takeaway for the room was that living admirably, being the kind of person other people name in their wills to raise their children, is not a soft virtue but a shrewd one. People who are admired, who can be trusted with the most important commitments other people make, end up doing something very right. The moral framing and the practical outcome run in the same direction.

Munger argued that the really big ideas carry ninety-five percent of the freight, and so acquiring them is not a heroic task but a discipline. He had been pushed into the discipline in law school when some wag offered the definition of a legal mind as one that could responsibly think about one thing while ignoring another. Munger found the proposition perfectly ridiculous, and it accelerated his natural drift toward learning all the big ideas and all the big disciplines. The alternative was to be a damn fool trying to reason about one aspect of a situation that could not be separated from the totality. He gave the room his standard method. If you can't be the best in the world at some narrow thing, he said, then become competent in all of the major disciplines and the big ideas in each. Economics, biology, psychology, physics, mathematics, history - the canon is finite and learnable. Then organize the ideas into a latticework of mental models and hang experience on the lattice as it accumulates. He warned that people who do not do this end up reaching for one hammer when the situation calls for a screwdriver. He grounded the whole approach in inversion. He liked to tell students that the way to be useful in life is not to figure out how to succeed directly, but to figure out how to fail - sloth, deceit, envy, self-pity, resentment - and then rigorously avoid those things. The clean, inverted formulation was his preferred intellectual move. Combined with the cross-disciplinary mental-models approach, he said, it had taken him further than IQ ever could have.