The Tao of Charlie Munger by David Clark (Summary)

Part 1: Charlie’s Thoughts on Successful Investing

The desire to get rich fast is pretty dangerous.

To get rich quickly, one often has to use leverage/debt to amplify small price swings into really huge gains. If things go against us, they can also turn into really large losses.

In his early days, Charlie did use a lot of leverage on his stock arbitrage investments, but as he got older he saw the grave danger he was putting himself in and now passionately avoids using debt and bets only on the long-term economics of a business, not the short-term price swings of its stock price.

Knowing what you don’t know is more useful than being brilliant.

Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him. . . . It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.

Diversification is a way to protect financial consultants and stock brokers from ever looking really bad, but it also stops them from looking really good as well. What happens with broad diversification—holding a portfolio of, say, fifty or more different stocks—is that the winners will be canceled out by the losers, just as the losers will be canceled out by the winners. Diversification creates a situation that basically mimics the market or an index fund. An adviser who counsels diversification never looks very good or very bad, just average.

Charlie discovered that if we invest in companies that have great economics working in their favor, at a reasonable price, we can bring the number of companies we own down to ten or fewer and still be protected against an unexpected business failure, and have good growth of our portfolio over a ten- to twenty-year period.

Financial crisis = opportunity

Both Charlie and Warren let cash pile up, waiting for a recession/crash, even if it means getting low rates of return on their cash holdings as they wait for the inevitable.

The way to get rich is to keep $10 million in your checking account in case a good deal comes along.

Charlie advocates keeping $10 million in cash, and Berkshire keeps $72 billion sitting around in cash, waiting for the right deal to show up.

The crashes of 1929 and 1932 decimated stock prices so badly that it took until 1954 for the Dow Jones Industrial Average to return to its 1929 high. Many of the companies whose stock prices were devastated by the crash returned to profitability by the 1940s, but no one was interested in owning their shares.

As investing in common stocks came back into vogue in the late 1950s and early ’60s, the companies’ stock prices started to rise, making Charlie and Warren multimillionaires.

By the late 1960s the bargains started disappearing, and by 1972 they were pretty much gone; the bull market had overpriced everything.

I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit earnings.

EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.” Charlie considers interest, depreciation, and taxes to be very real expenses that have to be paid.

According to Charlie, if we use EBITDA to determine the earnings of a company, we will get an unrealistic view of the company’s true economic nature.

Where you have complexity, by nature you can have fraud and mistakes. . . . This will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world.

How complex are financial companies? Charlie says that it is almost impossible to know if one has gone astray until the day a company collapses.

What makes financial companies so complex? Derivatives make it possible to hide risk from the prying eyes of regulators and investment analysts.

With AIG it was impossible to see all the credit default swaps it had written on subprime mortgages, because it never set aside any reserves to cover its losses. That meant the company’s risk exposure was hidden from the investing public.

You could have read Lehman Brothers’ annual report a hundred times and never realized that it was borrowing hundreds of billions of dollars short term and lending them out long term to finance subprime mortgages that they then used as collateral to borrow even more money.

Smart people aren’t exempt from professional disasters from overconfidence.

• Here Charlie is referring to the collapse of Long-Term Capital Management, which was a hedge fund set up by the famed Wall Street bond trader John Meriwether in the late 1990s. Meriwether brought together some the smartest people from Wall Street and academia, including PhDs in mathematics and economics, several of whom who were Nobel laureates. Those brilliant minds devised strategies for investing in bonds and derivatives using tremendous amounts of leverage, which, if things went their way, would earn outrageous returns on their partners’ invested capital. The problem with the strategy was that the potential for losses was catastrophic.
• Meriwether thought that the company could protect itself by using a trading strategy that employed bond spreads. It would measure the historical spread between very similar bonds—such as the yield spread between two-year Treasury bonds trading in January and March. If the spread between January and March Treasuries greatly decreased or increased in relation to its historical average, LTCM would buy one and sell the other, betting that at some time in the future the spread would close back up—which it always did because they were essentially the same bond.
• LTCM often made 1% or less on a trade. That might not seem like much, but multiply 1% by the $124 billion in capital it was working with, and it amounts to a profit of $1.24 billion. Do that a couple of times a year, and you start showing outrageous returns on investors’ equity investments of $4.7 billion. In the second year of operation Meriwether earned his investors a 43% return on their invested capital in LTCM, and 41% the next year.
• Everything was going well until Russia surprised the world in 1998 by defaulting on its domestic debt, devaluing the ruble and declaring a moratorium on payment to foreign creditors all in the same week. That caused the bond market to panic, and LTCM’s spreads all went in the wrong direction, causing the company to show a massive loss. When that happened, the banks that had loaned LTCM a total of $120 billion wanted either (1) more collateral or (2) their money back, neither of which was forthcoming. Literally overnight, LTCM became insolvent. The Federal Reserve Bank of New York went in and organized a group of Wall Street banks to take control of LTCM, and its investors lost the majority of their money.
• Charlie’s lesson here is that a combination of supersmart people and large amounts of leverage often ends in disaster. I might add that the combination of really dumb people and large amounts of leverage usually ends in disaster as well.

I know one guy, he’s extremely smart and a very capable investor. I asked him, ‘What returns do you tell your institutional clients you will earn for them?’ He said, ‘20%.’ I couldn’t believe it, because he knows that’s impossible. But he said, ‘Charlie, if I gave them a lower number, they wouldn’t give me any money to invest!

Charlie believes that the fee-driven investment management business is insane because, as he says, “Everyone wants to be an investment manager, raise the maximum amount of money, trade like mad with one another, and then just scrape the fees off the top.” Why are they so reckless with our money? Because it is not their money! Let’s say I manage a hedge fund; you give me your money to invest, and I use it to help me borrow more money. I then use your money and the borrowed money to place a really big bet. If it works out, you make a ton of money and I make a ton of money in fees. It’s a win-win. But if I lose it, you and the bank will be crying, not me. That, for a hedge fund, is a great business model. But first it needs to get your money. The second thing it needs to do is keep its hands on your money—it doesn’t want you pulling it out and going somewhere else. So how does it do that?

There are two hedge fund rules for raising and keeping money. The first rule: Promise investors the sky, because if the hedge fund doesn’t promise to make you a lot of money, you won’t invest your money. The second rule: Any hedge fund that invests your money conservatively won’t keep it for very long because the guys down the street who leveraged up, threw the dice, and won will show much higher returns. That means that in a year or two your greed will motivate you to leave my underperforming conservative fund for the winning, highly leveraged gambler down the street. So there is no economic advantage for hedge funds to be conservative with your money.

Yes, they might lose a lot of your money after a few years, but when they do, you will just go find the next high flyer and the fund manager who lost your money will just go and start another fund. Don’t believe me? Consider this: After the famed Wall Street bond trader John Meriwether crashed Long-Term Capital Management in 1998, he started another fund, JWM Partners, in 1999, which he successfully ran for eight years, getting assets up to $3 billion. Then the financial crisis of 2007–09 cost him 44% of the fund’s assets and he had to close it. He then went on to start another fund, JM Advisors, in 2010.

By and large I don’t think too much of finance professors. It is a field with witchcraft.

In the old days banks kept home mortgages on their own books, so they were very careful whom they loaned money to. But then the business model changed and banks started selling the mortgages they wrote to other companies. It no longer mattered whom they loaned money to, because they were going to sell off the mortgage as soon as they wrote it. The game then became the more home mortgages the bank wrote, the more money the bank made. And if a homeowner defaulted, who cared? The bank was out of the equation. That’s how banking went from being a boring business with boring salaries, to being an exciting business with outrageous salaries.

There isn’t a single formula. You need to know a lot about business and human nature and the numbers. . . . It is unreasonable to expect that there is a magic system that will do it for you.

People are looking for a simple method they can learn from reading one book that will make them rich. It doesn’t happen that way—unless they get real lucky. One is actually better off reading a hundred business biographies than a hundred books on investing. Why? Because if we learn the history of a hundred different business models, we learn when the businesses had tough times and how they got through them; we also learn what made them great, or not so great. Which allows us to get a feel for whether or not a business has some kind of durable competitive advantage working in its favor, which is key in figuring out if it would make a great long-term investment.

In addition to business biographies, study accounting, economics, and central banking.

But then the search for a good investment takes even more reading—so count on reading two or three hundred annual reports a year and the Wall Street Journal every day.

In a commodity-type business with lots of competitors, it is only the customer who profits from the new technology.

When a company has a durable competitive advantage in a particular market niche, there are no competitors.

He was able to do so because (1) he was focused on looking for a good investment, and (2) he was sitting on a pile of cash, patiently waiting until an opportunity presented itself.

Part 2: Charlie on Business, Banking, and the Economy

I think democracies are prone to inflation because politicians will naturally spend—they have the power to print money and will use money to get votes.

One of the reasons the United States will never default on its debt is that it has the power to print the dollars it needs. How does it do that? The Federal Reserve Bank prints the money and then goes into the open market and buys US government Treasury bonds or any other debt it wants to buy. Say the US Treasury needs $100 billion to pay off some US government debt coming due; it simply issues more debt, which the Federal Reserve Bank buys on the open market. As a rule the Federal Reserve Bank doesn’t like doing this; it would rather the US government borrow its money from places like China—which at present owns $1.2 trillion in US government bonds (which means the US government has borrowed $1.2 trillion from China). But China doesn’t have to worry about the good old USA defaulting on its debt, because the Federal Reserve Bank can always print an extra $1.2 trillion and loan it to the US government to pay off the bonds the US government sold to China.

The problem that Greece, Italy, and Spain have is that when they made the euro their currency, their respective central banks gave up the power to print money and turned that power over to the European Central Bank. So unless the ECB is willing to print an extra couple of hundred billion euros for them, Greece, Italy, and Spain all have the potential to default on their debt and cause a systemic collapse of the world’s financial system.

As a hamburger rises in price, so does the price of the shares of the company that sells the hamburger. Inflation raises the prices of both commodities and assets, and shares in a company represent ownership in the company’s assets. Inflation is the friend of people who own assets. Inflation is also the enemy of the people who own cash or bonds. Why? When the Federal Reserve prints money and circulates it into the economy, interest rates go down. This drives up the prices of financial assets such as stocks and real estate. But the Fed’s printing of more money also means that our dollars buy less and less, which means that things cost more and more. Fifty years ago a hamburger cost $0.40, now it costs $7; and a house that cost $50,000 in 1965 now costs $500,000; and the Dow Jones Industrial Average, which stood at 910 points in 1965, now stands at 17,000. If you hang on to cash, it will buy less and less every year. If you bought twenty-year bonds in 1996 and cashed them in 2016, the cash you got back bought less than it did when you bought the bonds.

Inflation really helps the banking and insurance industries. Since that $50,000 house is now a $500,000 house, people have to borrow $450,000 more from the bank. And there will be a hell of a lot more bank fees for a loan that size than for a $50,000 loan. The property insurance company is also going to earn a whole lot more on insuring a $500,000 property than it ever earned insuring our $50,000 property.

In the example above, both the bank and the insurance company saw inflation cause a 1,000% rise in business, but neither institution had to add any more employees or increase the size of its operating plant. Now you know why Charlie and Warren are so big on insurance companies and banks: not only are they the perfect hedge against inflation, they actually benefit from it. For banks and insurance companies, inflation truly is the gift that keeps on giving.

Charlie grew up during the Great Depression, in which everyone, if he could even find a job, worked tirelessly to put food on the table. But as time went on and the country became richer and richer, Americans started getting lazy. Gone is the work ethic that drove people to work ten hours a day, six days a week.

• The successful people will be the hard workers, not the lazy Americans of today.

Charlie is a true “nose to the grindstone” capitalist at heart. If people don’t work, they will be hungry and homeless; that is the stick. It wasn’t greed that drove our grandparents to work so hard, it was the fear that they wouldn’t be able to pay the rent and their family would go hungry.

Today that fear is gone. It has been replaced with a sense of entitlement that demands that health care be free, that a college education be free, that free food and housing be provided if one is out of work. Our nation is losing its will to work, maybe not because it has grown lazy but because it has lost its fear of not working.

Part 3: Charlie’s Philosophy Applied to Business and Investing

Costco is obsessed with keeping operating costs to a minimum. It does not provide shopping bags—customers bring their own bags or use an empty packing box the store supplies—saving Costco 2 to 5 cents each on plastic bags and 10 to 25 cents each on paper ones. That might not seem significant, but consider this: Costco does $15 billion in sales a year. If the average customer spends $100 per shopping trip, that means that Costco has approximately 150 million customer checkouts every year. If three paper bags at 10 cents per bag were used per checkout, the total bag cost per checkout of 30 cents, multiplied by 150 million, would cost Costco approximately $45 million a year. By simply by getting rid of paper bags at checkout, Costco arguably saves itself $45 million a year.

GEICO did something that seemed outrageous—early on it got rid of the insurance agent and his commission by selling directly to the consumer—thereby reducing its costs, which allowed it to be more competitive in the pricing of its insurance products and still maintain its profit margins.

Unlike its competitors, Berkshire Hathaway’s Nebraska Furniture Mart buys huge quantities of furniture from a single manufacturer, at a huge discount, which allows its stores to sell us a sofa cheaper than the competition and still keep its margins high.

The one thing that all of Berkshire’s businesses have in common is that they are managed by people who are willing to go to great lengths to keep costs low. That goes for Berkshire’s home office as well—it doesn’t have a public relations or investor services department, and for many years the annual report was printed on the cheapest paper possible and had no expensive color photos. (Note: In recent years the paper quality has improved and the annual report now sports one color photo—which may be a sign that management is starting to slip.)

A great business at a fair price is superior to a fair business at a great price.

There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested—there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.

Berkshire’s textile business: in good times it made money, even created a small surplus, but as time went on the textile business became so competitive that every dollar the company made had to be spent trying to keep the business afloat.

Charlie had the exact opposite experience with See’s Candies—the pots that hold the chocolate were fifty years old and still didn’t need replacing, and the product was the same year after year. The business required very little in capital expenditures, so it was possible to take money out of it every year to invest in other businesses.

AIG is a lot like GE. It is a fabulously successful insurance operator, and with success it morphed into a massive carry business—borrowing a lot of money at one price and investing it at another price. AIG was a big operator that was a lot like GE Credit. We never owned either because even the best and wisest people make us nervous in great big credit operations with swollen balance sheets. It just makes me nervous, that many people borrowing so many billions.”

The people who carry the torch in accounting are in a noble profession, yet these people also gave us Enron.

In 2001 it came out that one of Enron’s greatest innovations was creatively planned accounting fraud.

What was most shocking was that Arthur Andersen, one of the nation’s top accounting firms at the time, had been complicit in the acts of fraud. Sometimes really smart people can do really stupid things.

Charlie and Warren learned with the purchase of Nebraska Furniture Mart that if the dominant player is large enough and well enough entrenched with its customer base, the cost of entry into its market is much too high for potential competitors.

Size and market domination can create their own kind of durable competitive advantage.

Even Wells Fargo’s total derivatives exposure of $5 trillion is tiny compared to JPMorgan Chase’s $63 trillion, Citicorp’s $60 trillion, and Goldman’s $57 trillion. Which tells us that the next time the derivatives market implodes, Wells Fargo may be the last big bank left standing.

It wasn’t till World War I that England discovered deficit financing via running the central bank’s printing presses.

Liquidity is the measure of how easy it is to turn assets into cash.

The more active the market there is for certain shares, the more liquid those shares are.

But if you really want a lot of wisdom, it’s better to concentrate decisions and process in one person.

It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in an enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.

Quote from Lee Kuan Yew himself: “With few exceptions, democracy has not brought good government to new developing countries. . . . What Asians value may not necessarily be what Americans or Europeans value.”

To help keep government employees honest, Lee paid them what they could make in the private sector.

The key to it all was providing an honest, effective, and efficient government to provide businesses with the stable, uncorrupt, working environment they needed to grow and prosper. In the process Singapore went from being a third-world country to being a twenty-first-century world financial and manufacturing center. Lee’s book From Third World to First: The Singapore Story is well worth a read. Charlie became so enamored of Lee that he commissioned a bronze bust of him to keep the one he owns of Benjamin Franklin company.

Part 4: Charlie’s Advice on Life, Education, and the Pursuit of Happiness

Spend each day trying to be a little wiser than you were when you woke up.

He has often said that he is a much better investor at ninety than he was at fifty, a fact he attributes to the compounding effect of knowledge.

Quality attracts quality, be it in business or in marriage.

Know the big ideas in the big disciplines and use them routinely—all of them, not just a few.

Study psychology, science, economics, and history.

If you understand psychology, you can grasp how a product such as Coca-Cola can own a piece of consumers’ minds—which makes it a candidate for a long-term investment.

So as we said earlier, in 2008, when banks’ stocks were getting hammered on fears that the Fed would have to nationalize them, Charlie was loading up on Wells Fargo at $8.58 a share. Today Wells Fargo trades around $47 a share. But if he had never studied how central banks such as the Fed work, he would have joined the great mass of fearful investors jumping ship, instead of making the buy of a lifetime.

Three rules for a career: (1) Don’t sell anything you wouldn’t buy yourself; (2) Don’t work for anyone you don’t respect and admire; and (3) Work only with people you enjoy.

Why don’t we sell things we would never buy? Because every book ever written on selling says that if we don’t like, understand, or believe in a product, we are going to be a disaster when we try to sell it. Great salespeople believe in their products. That is one of the secrets of their success.

Why don’t we work for people we don’t respect? Because they have nothing to teach us and cannot help us advance our intellect and life.

Why shouldn’t we work with people we don’t enjoy? Because work is our life, and one of the measures of living a rich life is enjoying what we do and who we spend time with. If we are miserable at work, even if we are making millions, it is a poorly lived life.

The problem here is one of trust. If people don’t have the integrity to admit when they don’t know something, how can one ever trust them?

Advanced computer technology to designing sophisticated mathematical models to help Wall Street trading desks make investment banks even more money. From Charlie’s perspective the best and brightest young minds should be engineering solutions to solve the world’s problems, not squandering their intellects on finding better ways to win a game of chance in a Wall Street casino.

There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.

Charlie is a better investor today because he rode a bull market way too long and got slaughtered in the crash of 1973–74.

Specialization is the key to survival in any species, and it is the key to success in any business. Specialization protects us from the competition. Why? Because specialization presents a barrier of entry to the competition—and the more difficult it is to become specialized, the greater the barrier.

Do we take our Porsche to the local car mechanic who works on everyone’s car? Of course not. We take it to the shop that specializes in Porsches. It charges us twice the normal hourly rate and gets away with it because it is a “Porsche specialist.” The same phenomenon holds true for medicine, law, and even the trades, such as plumbing and carpentry. It’s specialists who make the big bucks—everyone else, the little bucks.

It’s been my experience in life, if you just keep thinking and reading, you don’t have to work.

Charlie reads up to six hundred pages a day—which includes three newspapers a day and a weekly diet of several books.

[One man] overspent his income his entire life—that will make you miserable.

One of the keys to Charlie’s accumulation of wealth is that in his youth he was fanatical about not spending money. He didn’t buy his first new car until he was almost sixty, and he lived in an upper-middle-class house long after he became a multimillionaire. Every dollar saved was a dollar that could be invested.

Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.

The world of business is a dynamic environment that can experience radical change over a very short period of time. In a mere seventy years the United States went from no electricity to the entire country being electrified. That completely destroyed candle making, gas lighting, and the kerosene lamp businesses, all great enterprises in the eighteenth and nineteenth centuries. In 1930 there weren’t any televisions in people’s homes. By 1960 just about every American home had one, and the home radio business, the Internet of the 1920s, pretty much died. In 2000 there wasn’t such a thing as Wikipedia. Today we can’t live without it, and Wikipedia killed the 244-year-old encyclopedia business—which had been a really good business. In 1974 the digital camera didn’t exist. Today Kodak doesn’t exist—and for a hundred years previously Kodak had been an amazingly successful business! In the world of business and investing it is best to keep up with new developments and review our best-loved ideas every year, just to make sure that in thinking we are right, we don’t get it wrong.

Being rational is a moral imperative. You should never be stupider than you need to be.

• Immanuel Kant, the eighteenth-century German philosopher, who argued that reason is the source of all morality.
• Being rational, to Kant and Charlie, means ignoring our emotions, and following logic and reason in making our decisions.

I have never succeeded very much in anything in which I was not very interested.

Charlie often says that the key to being a great business manager is to have a passion for the business.

To be successful in something, we need to be passionately interested in it. And that passion, more than raw intelligence, tends to determine whether or not we will be successful at what we do. As Steve Jobs said, “Work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.”

If you don’t need something, you don’t have to buy it—so who cares if it goes up in price? Do you really think Charlie has ever lost sleep over the ever-increasing price of a new Ferrari?

Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind.

Charlie believes that youth is easily influenced and often becomes obsessed with an ideology to the point that it is impossible to think of anything else or to see another side of an argument. Passion blinds young people to any kind of rational thought process.

it was only with Charlie’s help that Warren broke his chains of habit and ideology and finally set aside the Graham approach of investing in mediocre companies at bargain prices. Invest in great companies at fair prices and holding them forever.

You must force yourself to consider arguments on the other side.

When it comes to selling an investment, companies that aren’t publicly traded are the toughest to get rid of.

Oh, it’s just so useful dealing with people you can trust and getting all the others the hell out of your life.

• What Charlie is advocating here is a philosophy that says we need to jettison our least trustworthy friends and business associates.

His experience tells him that businesses are all unique, that we can’t take one structure that works for one business and expect it to work with another.

When Berkshire Hathaway buys a business, it generally leaves the existing culture intact and is very reluctant to change it.

Charlie has attributed this reluctance to shifting Berkshire’s managers around to be one of the reasons why Berkshire went from being a tiny textile manufacturer to eventually outgrowing General Electric in size.

Warren is one of the best learning machines on this earth. . . . Warren’s investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is.

It pays big to keep on learning well after we hit retirement, especially in the investment game. There is another point that I’ve noticed with men and women who truly excel at their craft or profession: they keep on learning and improving themselves long after most people would have retired. Learning is just something those people have to do.

Look at this generation, with all of its electronic devices and multitasking. I will confidently predict less success than Warren, who just focused on reading. If you want wisdom, you’ll get it sitting on your ass. That’s the way it comes.

Reading personal biographies allows one to experience multiple lives and successes and failures; reading business biographies allows one to experience the vicissitudes of a business and learn how problems were solved. Both Charlie and Warren are copious readers of personal and business biographies.

Charlie has never had a prostate exam or PSA test, because he doesn’t want to know if he has prostate cancer. He figures that since most men eventually have prostate problems, why worry? Nor does he worry about California earthquakes. All the things that are inevitable he refuses to worry about. That’s made for an almost stress-free life and may be the reason he is now pushing ninety-three.

The secret to learning is to teach.

The secret to getting people to excel is to reinforce their positive qualities.

You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. But there are also cases where you have to recognize that you have no wisdom to add—and that your best course is to trust some expert.

Charlie likes to tell the story of the CEO who couldn’t understand why his company’s newer, cheaper, and better-designed product wasn’t outselling its older, more expensive model until he realized that the sales commission on the older model was higher than on the newer one. His salesmen simply made more money selling the old one. The CEO’s solution was to raise the commission on the new product.

Most salesmen, whether a surgical center peddling a surgery, a tire company selling tires, a real estate company selling houses, or an engineering firm selling a client on a particular design, have a money incentive driving their desire to make the sale and are predisposed to pressure you into the sale even if it is not really in your best interest.

Or as the playwright George Bernard Shaw once said, “All professions are a conspiracy against the laity.”

However, there are times when we can see the underlying biases that we need to consult an expert, in which case it is always wise to get a second opinion and sometimes even a third, and just to be on the safe side, maybe even a fourth.

Take David Ricardo’s economic theory of free trade, which has led to millions of American jobs being shipped overseas and is helping fuel unemployment.

Keynesian economic theory says that problems of unemployment can be solved by dropping interest rates and printing money to stimulate the economy.

So with one hand our government pursues an economic policy of free trade, fueling unemployment, while on the other hand the Federal Reserve is pursuing a course of lower interest rates and printing money in an effort to fight unemployment.

We should treat our body like it is the only car we will ever own.

Which is why he is famous for avoiding any and all forms of physical exercise, other than playing bridge at the club and turning the pages of a book.

A high-expectations spouse is never pleased, and you will spend your life being miserable trying to jump through hoops to please him or her.

Yet there are those who are never satisfied with what life brings them, even if it’s millions or billions of dollars.

Francis Bacon, the sixteenth- and seventeenth-century British philosopher, scientist, and statesman, noticed a very similar phenomenon: that with some people, the richer they got, the more miserable they became—that becoming rich, for some, is more of a curse than a blessing.

What happened at the Coca-Cola Company is that in its early days, when it was awash in cash, it went around the world buying up the most popular soft drink brands in almost every country.

As the world’s population increases, so does the number of Coca-Cola customers. It took forty-six years to double the world’s population from 1970 to 2016, and if it takes another forty-six years to double it again, from 2016 to 2062, Coke could easily double the number of servings that it sells of all its five hundred brands. Double the number of servings that it sells, double the profit it makes.

Envy and jealousy made, what, two out of the Ten Commandments?

I’ve heard Warren say a half a dozen times, ‘It’s not greed that drives the world, but envy.’

No stranger to the seven deadly sins, I can attest that envy and jealousy are the least enjoyable. Wrath, greed, sloth, gluttony, and lust—particularly lust—can all be great fun as one travels the self-indulgent road to disaster; however, envy and jealousy, even in small doses, will make one utterly miserable. But if Charlie and Warren are right and envy really does drive the world, it is no wonder there are so many unhappy people in it.

“In my whole life, I have known no wise people who didn’t read all the time—none, zero. You’d be amazed at how much Warren reads—and how much I read.” —Charlie Munger

By age eight both Thomas Jefferson and Benjamin Franklin had permanent places on the bookshelf above his bed. It is reading that helped put him ahead of the pack.

Life is always going to hurt some people in some ways and help others. There should be more willingness to take the blows of life as they fall. That’s what manhood is, taking life as it falls. Not whining all the time and trying to fix it by whining.

I don’t think it’s terribly constructive to spend your time worrying about things you can’t fix. As long as when you are managing your money you recognize that a terrible thing is going to happen, in the rest of your life you can be a foolish optimist.

As we said earlier, in the world of finance a terrible thing happens on average about once every eight to ten years. Why? Mostly because of the highly leveraged banking system.

The power of positive thinking has no place in investment decisions.

As for worrying about the coming earthquake that is going to destroy the city of Los Angeles, according to Charlie, thinking about that, too, is a waste of time.

I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy, does that help, particularly when you have a long run ahead of you.

Think of it as compounding our intellect; the longer we work at it, the richer we become.

If Charlie were a surgeon, there would come a time when he just wouldn’t have the physical stamina to stand fifteen hours at an operating table. The same if he were in a trade such as bricklaying. As an investor the only physical attributes he needs are his eyesight, a clear mind, and the digital dexterity to turn the pages of a book. Which is why, at ninety-two, he can still knock the ball out of the park and run circles around the new young Turks.

You should never, when faced with one unbelievable tragedy, let one tragedy increase into two or three because of a failure of will.

I think people who multitask pay a huge price.

• Psychologist Robert Cialdini has verified this.

Charlie believes that if you don’t have time to think about something deeply, you are giving your competitors, who are thinking deeply, a great advantage over you. Charlie’s ability to focus intensely and really think about something has been his competitive edge in beating Wall Street at its own game.

I eat whatever I want to eat. I have never paid any attention to my health. I’ve never done any exercise I didn’t want to do. If any success has come to me, it came because I insisted on thinking things through . . . all these people who think they are going to get ahead by jogging or something, more power to them.

The highest form that civilization can reach is a seamless web of deserved trust—not much procedure, just totally reliable people correctly trusting one another. . . . In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has forty-seven pages, I suggest you not enter.

Charlie and Warren often quote the twentieth-century Omaha construction titan Peter Kiewit, who once said that he wanted to hire people who were smart, hardworking, and honest.

But out of the three, honesty was the most important, because if they weren’t honest, the two other qualities, smart and hardworking, were going to steal him blind.

Epictetus taught that philosophy is a way of life—that all external events are determined by fate and are beyond our control. But as individuals we are responsible for our own actions.

In Charlie’s investment life each and every loss has been a learning lesson. If he had never experienced troubles with a business in very competitive industries—textiles, shoes, retail clothing, and airlines—he might never have gained the insight into the wonders of owning a business that had a consumer monopoly such as Coca-Cola or See’s Candies. He would never have seen how a low-cost producer such as GEICO can have a competitive advantage over its much bigger competitors. If he had never experienced the pain of the market crash of 1973–74, he never would have had the foresight to stockpile the cash he used to buy Wells Fargo stock in 2008–09. Thomas Edison once said, “I failed my way to success.” Though Charlie never experienced as many failures as Edison did, he can still credit his early failures as the source of much of his success.

Dean Kendall of the University of Michigan music school once told me a story: ‘When I was a little boy, I was put in charge of a little retail operation that included candy. My father saw me take a piece of candy and eat it. I said, “Don’t worry. I intend to replace it.” My father said, “That sort of thinking will ruin your mind. It will be much better for you if you take all you want and call yourself a thief every time you do it.”’

The French philosopher Jean-Paul Sartre called lying to oneself an act of “bad faith” because it negated “truth,” which would destroy not only the moral fiber of the individual but also the society in which we live. Why society? Because, as Sartre argued in the smoke-filled cafés of 1940s Paris, we can’t build a successful civilization on a bed of half-truths and lies.

The little lies that people tell themselves to justify their bad acts can often grow into bigger lies that will destroy not only their lives but also the lives of many others—as in 2007–09, when the “bad faith” acts of the nefarious denizens of Wall Street nearly destroyed much of the world’s economy.

Remember Louis Vincenti’s rule: ‘Tell the truth, and you won’t have to remember your lies.’

Louis Vincenti called it like it was and always told the truth. It is said he was the embodiment of integrity and a huge influence on both Charlie and Warren.

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.

• This mental exercise comes from Charlie’s early training in law, where it is an advantage to be able to argue both sides of a case.
• The most interesting thing about this mental exercise is that after learning the other side’s arguments we just might discover that they are right and we were wrong. Which is probably why so few people take Charlie’s advice on this.

If you have enough sense to become a mental adult yourself, you can run rings around people smarter than you. Just pick up key ideas from all the disciplines, not just a few, and you’re immensely wiser than they are.

A man who can play all the instruments in an orchestra can write a symphony, but a man who can play only the viola, even if he is the greatest viola player on earth, can play only the viola. Charlie is a man who can discuss Charles Darwin’s thoughts on evolution, Stephen Jay Gould’s thoughts on Darwin’s thoughts, Albert Einstein’s unified field theory, Walter Bagehot’s 1873 treatise on central banking, Isaac Newton and Gottfried Wilhelm Leibniz’s development of calculus, Marcia Stigum’s voluminous work on the money market, Marquis and Jessie R. James’s history of the Bank of America, the conflict between Robert Oppenheimer and Edward Teller over the development of the hydrogen bomb, and E. O. Wilson’s theories of sociobiology all in the same breath. He can even quote Mark Twain and Immanuel Kant when the occasion calls for it. Though he is not as well versed in the areas of twentieth-century German Expressionist theater, Dadaism, and Diaghilev’s Ballets Russes, he makes up for it by knowing a hell of a lot about how to make money in the stock market.

Just because you aren’t number one anymore doesn’t mean you can’t make a ton of money as number two. If you don’t believe me, just look at Charlie; he has been the number two man at Berkshire Hathaway since 1979, and he hasn’t done too shabbily.