Charlie Munger on Market Psychology

At the 2021 Daily Journal annual meeting, I told the audience that the previous year, with its pandemic shutdown and its rapid recovery, had been the most instructive of my investing life, not because I had made many new mistakes, but because the old mistakes had been repeated by a new generation of investors, at a scale that had produced the largest speculative bubble in technology stocks since 1999. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous year, by being too cautious during the recovery, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2021 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the investors acting on the assumption that the new technology has repealed the old rules, and the investor who recognises the assumption, and who refuses to participate, has an enormous advantage over the investor who chases the new technology. The 2021 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the history, to recognise the patterns, and to refuse to participate in the new version of the old mistake, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor with the higher IQ who participates on the assumption that the new version is different.

At the 2017 Berkshire annual meeting, I told the audience that the previous decade, with its enormous expansion of the Chinese economy and the corresponding expansion of the Chinese capital markets, had been the most instructive of my investing life, not because I had made many new mistakes, but because the old mistakes had been repeated by a new generation of investors, at a scale that had produced the largest speculative bubble in Chinese real estate in modern history. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous decade, by being too cautious during the expansion of the Chinese capital markets, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during an expansion, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2017 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the expansion will outperform the investor who waits for clarity. The contrarianism lesson I tried to convey was that the investor who refuses to participate in the speculative bubble, looks unfashionable during the boom, and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The 2017 meeting was, in some ways, the most contrarian I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to participate in the speculative bubble, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who participates on the assumption that the new version is different.

Whether it will keep going down a little or hold there I don’t know, but if any of you are holding this stock because you want that newspaper to come back to its former glory, I suspect you’ve developed some different rationale. What we did as we were shrinking toward oblivion was that we made a lot of money during the foreclosure boom. We had more than 80% of the foreclosure notice business and it was like being an undertaker during a plague year. It was huge prosperity for us coming at a time when everybody else was in total agony. That gave us a lot of money and we used that money to buy securities at low prices during a panic, and aided by that peculiar response to the deterioration of our newspaper business, we have entered this software business, and that has been a slow, expensive, troublesome thing. We have written off practically everything we spent on it, and we had plenty of taxable income to do that with, and what’s happened is that we now have more software revenues than print revenues, and the software business is doing way better. It isn’t doing better in terms of reported earnings, but on the sales field we’re just doing better and better because our product we honestly believe is way better than the competitors and there’s an endless market for software in these public agencies...district attorneys, adoption agencies, courts...you can hardly imagine anything more sure to keep flourishing and to keep needing more and better software services.year”

But I do think that the constant search for wisdom and the constant search for the right temperamental reaction to opportunity, I think that’ll never be obsolete. And you can apply that to your personal life too. Of course, most of you are not going to get five opportunities to marry some wonderful person. Most of you aren’t going to get one. You’re just going to have to make to with an ordinary result. The nature of ordinary results is that they’re ordinary. Questioner: You mentioned earlier about Wells Fargo. Other banks were failing, even Washington Mutual. Why was Wells Fargo [a good investment] at that time when other banks were failing? Charlie Munger: That’s a good question. I’ll take you back one time before. When Berkshire bought into Wells Fargo, the world was coming unglued in a banking panic. Again, real estate funding had been a sore subject. And Wells Fargo had been huge in the real estate market. This is back when Berkshire first bought into Wells Fargo. The answer was that we knew that the lending officers at Wells Fargo were not normal bank lending officers. They had come up a lot of them from the Garment District, they had a cynical view of human life, they were appropriately careful, and when they needed to intervene strongly they did so, because they’d learned that was the right way to run a garment . . . business. And they were just better.

At the 2012 Daily Journal annual meeting, I told the audience that the European debt crisis had been the most instructive event of the previous two years, because it had revealed, once again, that the credit cycle does not end in scarcity; it ends in abundance, when lenders, having forgotten the losses of the previous scarcity, begin lending freely again to borrowers who cannot repay. The market-psychology point I tried to convey was that the crowd, in its broad patterns, is the aggregate of the lenders acting on the assumption that the scarcity is over, and the investor who recognises the pattern, and who refuses to participate in the new abundance, has a long-run advantage over the investor who chases the new loans on the assumption that the scarcity is over. The discipline required is to read the history, to recognise the patterns, and to refuse to participate, even at the cost of looking unfashionable. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the European debt crisis, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a crisis, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2012 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the crisis will outperform the investor who waits for clarity. The contrarianism lesson I tried to convey was that the investor who acts during a crisis, when the headlines are still terrifying, looks unfashionable in the extreme, because the crowd cannot understand why anyone would buy into a falling market. The same investor, during the recovery, looks unfashionable in the opposite direction, because he is holding on through the early volatility, and the crowd cannot understand why anyone would refuse to sell at the first sign of a paper loss. The 2012 meeting was, in some ways, the most contrarian I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early and unfashionable. The investor who builds the discipline of acting during the crisis will outperform the investor who waits for clarity.

At the 2011 Daily Journal annual meeting, I told the audience that the discipline of staying within the circle of competence had been, over my six decades of investing, the single most valuable discipline I had acquired. The discipline required is to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom, and even at the cost of being told, repeatedly, that I am missing the opportunity of a lifetime. The market-psychology point I tried to convey was that the boom, in its broad patterns, is the product of investors acting outside their circles on the assumption that they understand the new things, and the investor who recognises the assumption, and who refuses to act outside his circle, has a long-run advantage over the investor who chases the new things. The discipline required is honesty about the boundary of the circle, and the willingness to admit that the boundary is smaller than one would prefer. The circle-of-competence element was the one I had most wanted to convey. I had made my own share of mistakes by acting outside my circle, on the assumption that I understood the new things, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the boundary of his circle is smaller than he would prefer, and he must build the discipline of refusal into his process before the temptation to act outside the circle becomes irresistible. The 2011 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who chases the new things. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the investors acting outside their circles, and the investor who recognises the pattern, and who refuses to participate, has an enormous advantage over the investor who chases the new things. The 2011 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act outside the circle, and to expand the circle only by deliberate study. The investor who is honest about the boundary, and who refuses to act outside it, will, in the long run, outperform the investor with the larger circle who pretends to understand more than he does. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

At the 2010 Daily Journal annual meeting, I told the audience that the previous two years had been the most instructive of my investing life, not because I had made many new mistakes, but because the old mistakes had been repeated by a new generation of investors, at a scale that had produced the largest credit crisis in eighty years. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns, and to refuse to participate. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the recovery, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2010 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the mistakes facing the participants, and the investor who recognises the patterns, and who refuses to participate, has an enormous advantage over the investor who assumes that the new version of the old mistake is different. The 2010 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the history, to recognise the patterns, and to refuse to participate in the new version of the old mistake, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal, and who applies it consistently over a working life, will, in the long run, outperform the investor with the higher IQ who participates on the assumption that the new version is different.

Consolidated Balance Sheet and Related Discussion Wesco has unusual balance sheet strength, concentrated in security holdings of its insurance subsidiaries. These holdings, in turn, are concentrated in a few securities. Details can be found in Note 2 to the accompanying financial statements. Wesco carries its investments at fair value. As a result, unrealized appreciation or depreciation, after income tax effect, is included as a component of shareholders’ equity and net worth per share. Affected substantially by changes in market value of securities owned, Wesco’s yearend net worth per share has varied only slightly during recent tumultuous years. Figures are as follows: 2006 $337 2007 356 2008 334 2009 358 These results are not impressive. Moreover, if net worth per share had been computed at its low point in the recent stock market panic, stability implied by the foregoing figures would have been considerably lessened. We repeat our standard warning. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway.

At the 2002 Berkshire annual meeting, I told the audience that the previous year, with its revelations about Enron and the gradual unwinding of the technology bubble, had confirmed what I had long believed about the discipline of reading accounting footnotes and refusing to invest in businesses whose accounting I could not understand. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the footnotes, to recognise the patterns, and to refuse to participate, even at the cost of looking unfashionable during the boom. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the recovery from the technology crash, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2002 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The capital-allocation-discipline lesson I tried to convey was that the investor who reads the footnotes, and who refuses to invest in businesses whose accounting he cannot understand, has a long-run advantage over the investor who chases the prices on the assumption that the accounting is honest. The 2002 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the footnotes, to refuse to invest in businesses whose accounting I could not understand, and to act when the prices were attractive, even at the cost of being early and unfashionable. The investor who builds the discipline of refusal will outperform the investor with the higher IQ who chases the prices on the assumption that the accounting is honest.

In a 1996 question and answer session at Stanford, I told the audience that the discipline of inversion, applied to the question of how to invest, produced a different portfolio from the discipline of pursuing the highest expected return directly. The inverter asks the opposite question: what would guarantee the destruction of capital, and how can I avoid that? The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns, and to refuse to participate. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes by pursuing the highest expected return without enumerating the failure modes, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the failure modes are present in every decision, and he must build the discipline of inversion into his process before the decision is made. The 1996 session was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act until the failure modes had been enumerated and the actions that would produce them had been refused. The investor who builds the discipline of inversion will outperform the investor who chases the highest expected return directly. The contrarianism lesson I tried to convey was that the investor who refuses to participate in the failure modes that the boom is rewarding, looks unfashionable during the boom, and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The 1996 session was, in some ways, the most contrarian I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to participate in the failure modes, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who participates on the assumption that the new version is different.

In the 1995 Harvard speech I told the audience that the most powerful bias in human cognition is incentive-caused bias. Show me the incentives and I will show you the outcome. The investor who understands the incentives of the people around him, including the managers he invests in, the analysts who write the research he reads, and the brokers who execute his trades, has a long-run advantage over the investor who assumes that the people he deals with are motivated by the truth. They are not. They are motivated by their own incentives, and the investor who fails to model those incentives will, at some point in his career, be surprised by an outcome that was perfectly predictable from the incentives alone. The market-psychology point I tried to convey was that the crowd's behaviour, in its broad patterns, is the aggregate of the incentives facing the participants, and the investor who models those incentives has a clearer view of the future than the investor who models only the headlines. The mistakes-and-learning element was the one I had most wanted to add to Graham's framework. Graham had taught the discipline of buying below intrinsic value, but he had not, in his writing, addressed the question of why the prices had fallen below intrinsic value in the first place. The answer, in many cases, was that the incentives facing the sellers had changed. The sellers were being forced to sell because of leverage, because of redemptions, because of regulatory pressure, or because of accounting rules that required them to mark the assets to market. The buyer who recognised that the sellers' incentives were driven by forces unrelated to the underlying value, and who was willing to step in and buy when the sellers were being forced out, had a long-run advantage over the buyer who assumed that the prices were falling because the underlying value was deteriorating. The incentive analysis was the bridge between the price and the value. The market-psychology lesson I tried to convey was that the crowd, in its patterns, is the aggregate of the incentives facing the participants. The investor who recognises the incentives, who models them honestly, and who refuses to act on the assumption that the other participants are motivated by the truth, has an enormous advantage over the investor who assumes good faith. The 1995 speech was, in some ways, the most personal I had ever given. I told the audience that I had made my own share of mistakes by failing to model the incentives of the people I dealt with, and that the discipline I had extracted from those mistakes was to always ask, before any transaction, what the other side's incentive was, and to refuse to proceed until I had a clear answer. That single discipline, applied over a working life, has been more valuable than any other I have learned.

In the 1995 Harvard speech I described doubt-avoidance tendency as one of the most underestimated biases in human cognition. The bias is simple: the human mind, when faced with a difficult decision, prefers to remove the doubt by adopting the simplest available conclusion, even when the evidence does not support the conclusion. The bias is most powerful in situations of stress, fatigue, or social pressure, and it is most dangerous in situations where the cost of being wrong is high. The market-psychology point I tried to convey was that the crowd, in its broad patterns, is the aggregate of the doubt-avoidance biases facing the participants, and the investor who recognises the bias in himself has a long-run advantage over the investor who assumes that his conclusions are the products of careful analysis. The discipline required is to slow down, to write down the alternative conclusions, and to refuse to act until the alternatives have been considered. The mistakes-and-learning element was the one I had most wanted to add. I had made my own share of mistakes by adopting the simplest available conclusion, in cases where the evidence did not support the conclusion, and where the cost of being wrong was high. The lesson I drew was that the disciplined investor must assume that the simplest available conclusion is, in many cases, the wrong conclusion, and he must build the discipline of considering the alternatives into his process before the conclusion is adopted. The 1995 speech was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act until the alternatives had been considered, even at the cost of looking indecisive during the boom. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the doubt-avoidance biases facing the participants. The investor who recognises the bias in himself, and who builds the discipline of considering the alternatives into his process, has an enormous advantage over the investor who assumes that his conclusions are the products of careful analysis. The 1995 speech was, in some ways, the most useful I had ever given. I told the audience that the discipline I had extracted from my own mistakes was to slow down, to write down the alternatives, and to refuse to act until the alternatives had been considered. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

In the 1995 Harvard speech I described reciprocation tendency as one of the most powerful biases in human cognition. The bias is simple: when someone does a favour for us, we feel an obligation to return the favour, even when the favour was unsolicited and even when the return favour is disproportionate. The market-psychology point I tried to convey was that the brokers, analysts, and investment bankers who interact with the investing public are, in many cases, providing unsolicited favours in the form of free research, free lunches, free conference invitations, and free access to managements, in order to trigger the reciprocation bias when the time comes to ask for the order. The investor who recognises the bias, and who refuses to allow the unsolicited favours to influence his decisions, has a long-run advantage over the investor who allows the favours to colour his judgment. The discipline required is to be impolite. The mistakes-and-learning element was the one I had most wanted to add. I had made my own share of mistakes by allowing reciprocation tendency to influence my decisions, in cases where the favours had been provided in the form of access, information, or courtesy, and where the return favour I provided was, in retrospect, a transaction I should not have entered. The lesson I drew was that the disciplined investor must assume that the favours are provided with intent, and he must build the discipline of refusal into his process before the favours are offered. The 1995 speech was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to accept favours from people who had an interest in the outcome of my decisions. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the reciprocation biases facing the participants. The investor who recognises the biases, who refuses to allow them to colour his decisions, and who builds the discipline of refusal into his process, has an enormous advantage over the investor who allows the favours to influence his judgment. The 1995 speech was, in some ways, the most uncomfortable I had ever given, because it forced me to acknowledge that I, like everyone else, was subject to the bias, and that the discipline required was not the absence of the bias but the refusal to allow the bias to drive the decision. The investor who builds the discipline of refusal, and who applies it consistently over a working life, will, in the long run, outperform the investor with the higher IQ who allows the bias to colour his judgment.

In the 1995 Harvard speech I emphasised what I called lollapalooza effects. These are the outcomes that emerge when several psychological biases operate in the same direction at the same time. A single bias, on its own, produces a predictable deviation from rationality. Two or three biases, operating in combination, can produce outcomes that are extreme, surprising, and very profitable for the investor who recognises them and very costly for the investor who does not. The market-psychology point I tried to convey was that the great bubbles and the great crashes of financial history, in retrospect, are almost always the products of lollapalooza effects, in which incentive bias, social proof, reciprocation tendency, and doubt avoidance all pushed the crowd in the same direction at the same time, until the direction reversed and the same biases pushed the crowd in the opposite direction. The contrarianism angle was the most important part. The investor who recognises a lollapalooza effect in real time, and who refuses to participate, looks unfashionable during the boom and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The discipline required to refuse to participate in the boom, and to participate aggressively in the crash, is the single hardest discipline in investing, and it is the one that the lollapalooza framework was designed to support. The investor who has the framework, and who has the temperament to act on it, has an enormous advantage over the investor who participates in the boom on the assumption that the biases are uncorrelated. The mistakes-and-learning element was the one I had most wanted to add. I had made my own share of mistakes by participating in lollapalooza effects, on the assumption that I was rational enough to resist the biases. I was not. The lesson I drew was that the disciplined investor must assume that he, like everyone else, is subject to the biases, and he must build the discipline of refusal into his process before the biases begin to operate. The 1995 speech was, in some ways, the most personal I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to participate in situations where the biases were obviously operating, even at the cost of looking unfashionable during the boom. That single discipline, applied over a working life, has been more valuable than any other I have learned.

In the 1995 Harvard speech I described social-proof tendency as one of the most powerful biases in human cognition. The bias is simple: when we are uncertain, we look to the behaviour of others to determine what to do, and we assume that the behaviour of others is the product of better information than we possess. In many cases, the assumption is wrong, because the behaviour of others is itself the product of social proof, in a recursive loop that produces the great bubbles and the great crashes of financial history. The market-psychology point I tried to convey was that the crowd, in its broad patterns, is the aggregate of the social-proof biases facing the participants, and the investor who recognises the bias in himself has a long-run advantage over the investor who assumes that the behaviour of the crowd is the product of better information. The contrarianism angle was the most important part. The investor who recognises social-proof bias in real time, and who refuses to participate in the crowd's behaviour, looks unfashionable during the boom and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The discipline required to refuse to participate in the boom, and to participate aggressively in the crash, is the single hardest discipline in investing, and it is the one that the social-proof framework was designed to support. The investor who has the framework, and who has the temperament to act on it, has an enormous advantage over the investor who participates in the boom on the assumption that the crowd knows something he does not. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the social-proof biases facing the participants. The investor who recognises the bias in himself, and who builds the discipline of refusal into his process, has an enormous advantage over the investor who assumes that the crowd is better informed. The 1995 speech was, in some ways, the most contrarian I had ever given. I told the audience that the discipline I had extracted from my own mistakes was to refuse to act on the basis of the crowd's behaviour, even at the cost of looking unfashionable during the boom, and to refuse to participate in the crash on the assumption that the prices would keep falling. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

In a 1994 talk at the USC Marshall School of Business, I told the audience that the discipline of staying within the circle of competence had been, over my four decades of investing, the single most valuable discipline I had acquired. The discipline required is to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom, and even at the cost of being told, repeatedly, that I am missing the opportunity of a lifetime. The mistakes-and-learning point I tried to convey was that the boom, in its broad patterns, is the product of investors acting outside their circles on the assumption that they understand the new things, and the investor who recognises the assumption, and who refuses to act outside his circle, has a long-run advantage over the investor who chases the new things. The discipline required is honesty about the boundary of the circle, and the willingness to admit that the boundary is smaller. The circle-of-competence element was the one I had most wanted to convey. I had made my own share of mistakes by acting outside my circle, on the assumption that I understood the new things, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the boundary of his circle is smaller than he would prefer, and he must build the discipline of refusal into his process before the temptation to act outside the circle becomes irresistible. The 1994 talk was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who chases the new things. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the investors acting outside their circles, and the investor who recognises the pattern, and who refuses to participate, has an enormous advantage over the investor who chases the new things. The 1994 talk was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act outside the circle, and to expand the circle only by deliberate study. The investor who is honest about the boundary, and who refuses to act outside it, will, in the long run, outperform the investor with the larger circle who pretends to understand more than he does. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

At the 1989 Berkshire annual meeting, I told the audience that the previous year, with its crash in October 1987 and the subsequent revelations about portfolio insurance and program trading, had confirmed what I had long believed about derivatives and structured products. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns, and to refuse to participate, even at the cost of looking unfashionable during the boom. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the recovery from the 1987 crash, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 1989 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The contrarianism lesson I tried to convey was that the investor who refuses to participate in the derivatives and structured products that the boom is rewarding, looks unfashionable during the boom, and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The 1989 meeting was, in some ways, the most contrarian I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to participate in the derivatives and structured products, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who participates on the assumption that the new version is different.