Charlie Munger’s Life Lessons: From Omaha to Berkshire Hathaway

Charlie Munger, the esteemed Vice Chairman of Berkshire Hathaway, sat down with Michigan Ross Dean Scott DeRue in 2017 for a wide-ranging conversation. The discussion touched upon Munger’s remarkable life journey, his significant philanthropic contributions, and his candid thoughts on various global trends. This event, held for University of Michigan Ross School of Business alumni, offered a unique glimpse into the mind of a legendary investor.

Key Takeaways

• Embrace Rationality and Continuous Learning: Munger stresses the importance of avoiding self-deception and constantly updating one’s thinking based on new information.
• Value Prudence and Self-Reliance: His upbringing during the Great Depression instilled a deep appreciation for hard work, financial prudence, and self-sufficiency.
• Think Like an Owner, Not a Careerist: Munger advises focusing on the long-term interests of the business rather than personal career advancement.
• Avoid "Crooks, Crazies, and Egomaniacs": He strongly advocates for steering clear of individuals and situations that are likely to lead to negative outcomes.
• Luck Plays a Role, But Discipline is Key: While acknowledging the impact of luck, Munger emphasizes that consistent learning, discipline, and good judgment are foundational to success.

Growing Up in Omaha: Lessons from the Great Depression

Munger’s early life in Omaha, Nebraska, was profoundly shaped by the Great Depression. He recalled a time of extreme scarcity, where even the wealthy had little money and people would beg for food. This experience, he noted, was far more extreme than anything younger generations could imagine. He also observed how World War II, through what he called "accidental Keynesianism," helped fix the economic downturn. His family, though considered backward by modern standards, held values of self-reliance and hard work, which Munger found beneficial. He also mentioned a liberal aunt whose extreme views, while observed, didn’t sway his own developing, more rational outlook.

His paternal grandfather, a federal judge who rose from poverty, instilled a strong sense of moral duty to be rational and self-reliant. This grandfather, who started with nothing and educated himself, believed that rationality was a high moral calling. Munger also shared stories of his uncles navigating financial hardship, highlighting his grandfather’s prudence in saving his uncle’s pharmacy business and his own careful approach to lending.

On his mother’s side, his grandfather, an architect, faced immense difficulty during the Depression. Munger recounted how his grandfather, despite being a Harvard honors graduate, had to take a low-paying job with the County of Los Angeles, even being classified as a laundry worker to save money. The eventual introduction of the FHA provided him with a stable career. Munger observed that despite these hardships, his family members weren’t entirely unhappy, demonstrating the human capacity to adapt and cope.

The Path to Ann Arbor and Beyond

Munger’s decision to attend the University of Michigan in Ann Arbor, rather than Stanford as he initially desired, was influenced by his father’s financial constraints. He spent a year studying math, finding it an easy way to engage his intellect without the pressure of conforming to others’ expectations. He noted that neither he nor Warren Buffett ever used complex mathematics in business, finding that simple algebra and geometry sufficed.

When World War II began, Munger joined the Air Force as a meteorologist. He later attended Harvard Law School without completing an undergraduate degree, a path influenced by his family’s legal background and his own aversion to other professions like medicine or climbing the corporate ladder.

From Law to Investment: A Cautious Ascent

After practicing law in Los Angeles and co-founding a successful firm, Munger transitioned into investments. He described this move not as a bold leap, but as a cautious one, having saved diligently for years. He built up capital, allowing him to leave the legal profession with financial security. He co-founded Wheeler, Munger & Company, engaging in real estate and investments, and for several years, his performance significantly outpaced the market.

During the severe market downturn of 1974-75, Munger found it painful to see his investors suffer. This led him to simplify his approach by managing his own money, eliminating fees and overrides. He wanted to operate solely on his own capital, which he felt was more "manly."

The Berkshire Hathaway Partnership

Munger met Warren Buffett in 1959. He explained that Buffett, initially taught by Benjamin Graham, focused on buying undervalued, often poor-quality businesses. Munger helped Buffett shift towards acquiring better businesses, a key factor in Berkshire Hathaway’s long-term success. He emphasized that Berkshire’s strength lies in acquiring companies that don’t require extensive management intervention from headquarters, allowing talented local managers to thrive.

He shared an anecdote about helping Buffett with a struggling windmill company, highlighting the importance of practical problem-solving and efficiency. Munger’s influence helped steer Berkshire towards buying excellent businesses at fair prices rather than mediocre businesses at bargain prices.

Thoughts on Modern Trends and Advice for the Future

Munger expressed strong skepticism about Bitcoin and cryptocurrencies, calling them a "crazy bubble" and a lure for easy wealth. He advised avoiding such speculative ventures, likening them to avoiding "crooks, crazies, and egomaniacs."

Regarding tax policy, Munger believed that a tax bill was likely and that reducing corporate income tax could have positive macroeconomic effects, despite the strong opposition from some quarters. He cautioned against the intense political polarization, noting that hatred clouds reason and hinders productive policy discussions.

When asked about exciting new technologies, Munger acknowledged their transformative power but also pointed out historical oversights, like Adam Smith’s underestimation of technological advancement and David Ricardo’s failure to fully consider second-order consequences of free trade, particularly concerning China’s rise.

His most important advice for the audience was to keep their eyes wide open before marriage and half shut thereafter, a nod to Ben Franklin’s wisdom on relationships. He also stressed the importance of discipline, continuous learning, and aiming for independence rather than just wealth. Munger concluded by acknowledging the role of luck but reinforcing that intelligence, discipline, and virtue are the bedrock of a successful and fulfilling life.