The following came from a 1994 article by Charles Munger, best known as one of the lead Berkshire Hathaway investors with Warren Buffett.
As a warning, its very long and talks about a lot of topics from role of math and psychology, business management, stock picking, etc but its very informative.
I've picked out a few more juicy paragraphs from it but if you have time, make sure to read it. I've broken it up into several smaller chunks that I found interesting and will post them out over a few days.
Source: (Courtesy: The Big Picture)
Charles Munger, USC Business School, 1994
A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business
As a warning, its very long and talks about a lot of topics from role of math and psychology, business management, stock picking, etc but its very informative.
I've picked out a few more juicy paragraphs from it but if you have time, make sure to read it. I've broken it up into several smaller chunks that I found interesting and will post them out over a few days.
Source: (Courtesy: The Big Picture)
Charles Munger, USC Business School, 1994
A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business
See Part 1 - Value Investing
See Part 2 - Fewer But Bigger Bets
See Part 3 - Efficient Market Hypothesis & Race Tracking Betting Model
See Part 4 - Advantages & Disadvantages of Scale
See Part 5 - Bureaucracy & Yes Men
See Part 6 - Efficiencies & Profitability Differences from Competition
See Part 7 - Negative Effects of Technology on Business Profits
See Part 8 - Focusing on Your Competitive Edge & Follies of Investment Management
See Part 9 - Sector Rotation & Yearly tax avoidance
See Part 2 - Fewer But Bigger Bets
See Part 3 - Efficient Market Hypothesis & Race Tracking Betting Model
See Part 4 - Advantages & Disadvantages of Scale
See Part 5 - Bureaucracy & Yes Men
See Part 6 - Efficiencies & Profitability Differences from Competition
See Part 7 - Negative Effects of Technology on Business Profits
See Part 8 - Focusing on Your Competitive Edge & Follies of Investment Management
See Part 9 - Sector Rotation & Yearly tax avoidance
- Importance of making fewer but larger bets
Here again, look at the pari-mutuel system. I had dinner last night by absolute accident with the president of Santa Anita. He says that there are two or three betters who have a credit arrangement with them, now that they have off-track betting, who are actually beating the house. They’re sending money out net after the full handle—a lot of it to Las Vegas, by the way—to people who are actually winning slightly, net, after paying the full handle. They’re that shrewd about something with as much unpredictability as horse racing.
And the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.
It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced be—that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.
That is a very simple concept. And to me it’s obviously right—based on experience not only from the pari-mutuel system, but everywhere else.
And yet, in investment management, practically nobody operates that way. We operate that way—I’m talking about Buffett and Munger. And we’re not alone in the world. But a huge majority of people have some other crazy construct in their heads. And instead of waiting for a near cinch and loading up, they apparently ascribe to the theory that if they work a little harder or hire more business school students, they’ll come to know everything about everything all the time.
To me, that’s totally insane. The way to win is to work, work, work, work and hope to have a few insights.
How many insights do you need? Well, I’d argue: that you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man—Warren’s a lot more able than I am and very disciplined—devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying, that most of the money came from ten insights.
So you can get very remarkable investment results if you think more like a winning parimutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple.
...
And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. You’re much more likely to do well if you start out to do something feasible instead of something that isn’t feasible. Isn’t that perfectly obvious?
How many of you have 56 brilliant ideas in which you have equal confidence? Raise your hands, please. How many of you have two or three insights that you have some confidence in? I rest my case.
And the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.
It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced be—that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.
That is a very simple concept. And to me it’s obviously right—based on experience not only from the pari-mutuel system, but everywhere else.
And yet, in investment management, practically nobody operates that way. We operate that way—I’m talking about Buffett and Munger. And we’re not alone in the world. But a huge majority of people have some other crazy construct in their heads. And instead of waiting for a near cinch and loading up, they apparently ascribe to the theory that if they work a little harder or hire more business school students, they’ll come to know everything about everything all the time.
To me, that’s totally insane. The way to win is to work, work, work, work and hope to have a few insights.
How many insights do you need? Well, I’d argue: that you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man—Warren’s a lot more able than I am and very disciplined—devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying, that most of the money came from ten insights.
So you can get very remarkable investment results if you think more like a winning parimutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple.
...
And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. You’re much more likely to do well if you start out to do something feasible instead of something that isn’t feasible. Isn’t that perfectly obvious?
How many of you have 56 brilliant ideas in which you have equal confidence? Raise your hands, please. How many of you have two or three insights that you have some confidence in? I rest my case.
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