Long read: [Outliers] Charlie Munger’s Interview with Todd Combs

Charlie Munger passed away three years ago and yet people crave for that extra wisdom we wish he could share. Here’s a transcript of an unreleased interview Charlie gave Todd Combs, the former investment manager at Berkshire and once considered a successor to Warren Buffett. There are plenty of gems in there to go through it in its entirety. We shall feature a few we found of most interest:

First, the importance of rational thinking. Often, economics is criticised as a field that is built on a fundamentally flawed assumption that humans are rational, when in reality it is indeed a rarity. He says this in the context of picking good business managers like Henry Singleton of Teledyne who Charlie calls remorselessly logical.

“I almost worship reason. … The people I know that are good, they feel you have a duty to become as wise as you can be by constantly studying things and thinking about it.” But he points out that reason alone isn’t sufficient. It is powerful when married with temperament: “it’s perfectly possible to do splendidly well if you have the right temperament. Just go at it over a long time. You talked about me. I’m not a polymath. What I am is a guy who has been able to take moderate obsession and a long attention span and turn them into pretty good results. Of course, a long attention span will help you a lot, if you’re reasonably smart.”

He alludes to an important insight about how being rational is also a result of good temperament. He attributes much of his and Buffett’s success to them being rational and of sound temperament. Charlie cites a story about how one of his father’s friends would go berserk despite being a genius. “A world where even geniuses are that nuts, I have a chance…” And how Buffett saw the widespread irrationality in Vegas’ casinos to believe that he will be immensely successful if he can just keep his wits about him.

The same rationality and temperament led them to move from ‘cigar butt’ investing to finding compounders. And why finding compounders is so hard but you don’t need to too many anyway: “Ballard Petroleum, one of the biggest independent refineries. I bought that stock personally at $17 a share. Inventories, buried reserves, selling below book value. It was just an incredible bargain, but it was still an ordinary commodity-type business. When it tripled, I sold it. It’s doubled since then. That’s long years ago. But it’s perfectly acceptable to invest in the Ballard Petroleums of the world. But I think the people who tend to get the best results are these fanatics who just keep searching for the great businesses. And the best of them don’t expect to find 10 or 20 or 30. They find one or two. And that’s the right way to do it — but all you need are one or two. I know the guy who invests with the banker that backed the Costco copy which was Home Depot. He also backed Eli Lilly very early. He has several billion dollars between those two investments. He didn’t need any more. And in a lifetime of investment banking, that’s what he got: two. I regard that as a successful life.”

He then laments about the hypergambling culture that capitalism has created making casinos out of the stock market: “We have a liquid stock market which is two things at once — it’s a place for people who are doing long-term investment rationally to go and make their transactions, and it’s a place for another bunch of people to do casino gambling. We mix them up totally. It’s an absolutely insane thing for the country. It would work a lot better if we didn’t mix up — It’s like we mixed up running the Army with child prostitution, or something. It’s ludicrously crazy. But that’s what we did, and everybody that’s making money out of it loves it this way.” He is referring to the brokers and exchanges – the casino owners.

He notes why this is a serious failure in public policy and we should pay attention to the social, economic and political consequences of this. He reminds us of how the excesses of the 1920s led to the Great Depression which brought in Hitler who brought us close to the end of civilisation. “…what earthly good is it for our country to make the casino part of Capitalism more and more efficient, and more and more attractive, and more and more seductive? It’s an insane public policy. On the other hand, I think the chances of changing it are practically zero. And yet it causes terrible things. You could argue that it caused the Great Depression. And the Great Depression brought in Hitler, which came pretty close to ending the civilized world. So, I think this stuff is quite serious, but I don’t think we can do much about it.” That we can’t do much about is a sobering thought indeed.

When asked what part of investing he enjoyed, he says it’s the process more than the outcome: “…it’s the sowing when you’re almost sure of the wind is almost funner than the reaping.…I like them both, but I think I may like the sowing better than the reaping. When you know you’re going to nail it, every single transaction, every day, that’s a very satisfying feeling.”

On the flipside an obsession to win all the time can have its own pitfalls. He cites Jack Welch of GE: “I knew Jack Welch. He was likable and he was intelligent, but he went a little crazy trying to do well in the system. He was very competitive. He wanted to win at golf, he wanted to win at business, all over. He just let it… he got them into that wretched excess. In the end, he was lying about what had been accomplished. I think that that book, “Lights Out,” which chronicles the decline of GE, ought to be required reading in every business school in the country. It won’t be, because they don’t want to offend anyone. But it should be. If there’s anybody here’s who’s not read “Lights Out,” you should buy it and read it.”

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