Sunday, October 28, 2012

Charlie Munger at Harvard (2010)

Munger is definitely one of the greatest minds in value investing history. In this link you may find a transcript of an interview with him at Harvard in 2010. He is a brilliant, arrogant (in a good way), intriguing  and funny mind. Some quotes I have highlighted may be found below:

"It`s not brilliance. It is just avoiding stupidity."
"Believing just by buying volatile stocks you make an extra 7 percentage points per annum, I mean those people still believe in the tooth fairy and yet it is taught to the children." 
"Financial outcomes in security markets are not plottable. It is not a law of God that outcomes in security prices will fall over time on a curve and follow reality according to Gauss` curve. Quite the contrary, the tails are way fatter." 
"Now you think accounting is something we can trust?"
"But boy, teaching people they don`t really have to pay and a lot of the credit being given for education, a lot of it in for-profit education. This is very foolish credit given to people who are never going to learn much. (...) I think it does enormous damage to shovel out a lot of dumb credit, raising false hopes."
I must agree with him in the quote above in which people do not have the right incentives or the proper education or college programs to really develop the skills needed - within that in mind we enter into an entirely separate topic: student loans. As the economic recovery is lackluster, how will these students find jobs? (i) Students might not have the proper skills developed (I`d argue many colleges are mainly concerned on new enrollments only) (ii) There are just no jobs with so much uncertainty lingering (iii) New enrollments represents people with no jobs that are able to get easy credit to fund its full board tuition (sounds like a good option for someone with no job). Will it be the next credit bubble looking forward? Who`s gonna pay for that anyway? Ok, let`s move on...
"In a miasma of prosperity and gambling with $100,000 bills floating around like confetti, you can`t expect people to bahave as if they were in a monastery."
"It is quite serious when you have troubles and the people who do things are proud of their ignorance"
Howards Marks backs up one of Munger`s answers saying:
"I think that the problems we`ve had have stemmed from human failings and they are never going to change. You can adjust here and there, and you can encourage and dissuade with regulation - but the ability, for example, for greed to overcome morals and prudence, will never change."
Bottom line: we should not trust accounting nor use the past as a good proxy for the future. Moral hazard and conflicts of interest are a big issue that will linger going forward. Behavioral finance is something every single investor should be aware of and study deeply. Understanding our minds and how we frame scenarios and process information to make decisions is way more important than a discounted cash flow. Last but not least, avoiding mistakes is the most important thing.

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