Investor Charlie Munger Caltech Interview Transcript December 16

Interviewer: (00:02) As an investor, Charlie, if you would like to come on screen now, you have been phenomenally successful over the very long run [crosstalk 00:00:13]. But perhaps we could try to start by looking back at the time when you left the Army, which brought you to Caltech. And to start, what was Caltech like in 1944? Charlie Munger: (00:28) Well, the main campus looked very much the way it does now. And the Athenaeum was exactly the way it is now. Interviewer: (00:41) How connected was the [crosstalk 00:00:42] urology program to the rest of what was going on on campus? Charlie Munger: (00:46) I was in the part of the campus where Thomas Hunt Morgan was. And, of course, he was the world's greatest geneticist, and he used fruit flies. And they stank. And so, my whole part of the campus had the odor of dying fruit flies the whole time I was there. By the way [inaudible 00:01:06] I got used to the fruit fly odor. Interviewer: (01:09) But presumably you didn't spend all your time with fruit flies. Or were they part of the way you predicted the weather in 1944? Charlie Munger: (01:17) I was so ignorant in those days, I could have walked over and introduced myself and he would have been quite courteous with me. And he was a very great man and I was too dumb to do it. It didn't occur to me. Interviewer: (01:28) At the end of the war, you decided not to return to mathematics at Michigan or to stay and go to college somewhere else, instead you went to law school. So what can your [crosstalk 00:01:42]. Charlie Munger: (01:42) My father had gone to the Harvard Law School and my grandfather [crosstalk 00:01:47] a distinguished judge in Nebraska. So that was a natural course of activity for me. Interviewer: (01:55) In thinking about these career changes, which a lot of people go through over the course of their lifetime, what could our fellow alumni, and in particular, our soon to be new alumni, can borrow from your experiences in those early days of your life, when you were choosing a career that still has resonance today? Charlie Munger: (02:16) Well, it's very important when you choose a career. If you go into a career that's very tough you're not going to do very well. And if you go into one where you have special advantages and you like the work, you're going to do pretty well. And so I went into law because I didn't want to be a surgeon. I didn't want to be a doctor. I didn't want to be a [inaudible 00:02:41]. I finally got through, there was only one that... I just went down the family path, and it wasn't the wisest decision I ever made. Interviewer: (02:55) Once you started to get into investment, your legal training, your mathematical background, your experiences. What came to be resonant for you? Charlie Munger: (03:12) What happened was there were things I didn't like about law practice, but I had an army of children to support and no family money or anything to start with. So I had to make my way in life for this army of children. It was going to be a little difficult and there were things about law practice I saw that were quite limiting. And what happened was, my pitifully, small earnings as a young man, I kept underspending them. I kept investing fairly boldly and fairly smartly. Charlie Munger: (03:54) At the end of my first 13 years of practice, I had more liquid investments made than I'd made in all those years of law practice, pre-tax. I had done that in my spare time with these little tiny sums. So it was natural for me, partly prompted by Warren Buffett's success, to think I should just start working for myself instead of for other people. Interviewer: (04:21) Another connection [crosstalk 00:00:04:21]. Charlie Munger: (04:23) [crosstalk 00:04:23] in my spare time, I thought, well, what will happen if I do it full time? Interviewer: (04:31) One of the things that connects [crosstalk 00:04:37] Caltech tech to investing is of course the process of discovery, which creates new technologies. For an economic historian, one thing that we're very aware of is that technological change has driven a lot of the growth of the American economy over the last several centuries. But from your perspective as an investor, what have been the most dramatic transformation you've seen over those 75 years that Tom Rosenbaum reminded us that you've been connected to us, but also been living in Los Angeles. Charlie Munger: (05:08) Well, of course there have been huge booms and huge bust, and that has been very interesting. And of course the government has tried to do things that will dampen down the fluctuations and make recoveries from the busts happen faster. And of course that's caused a fair amount of inflation in a life that's been as long as mine. Charlie Munger: (05:37) What's happening in the investment field is of course that so many people have gone into it and people have made so much money and it's driven an almost frenzy of activity in the investment field. When I was young, there was practically nobody in it and they weren't very smart, and now almost everybody's smart, even a Caltech graduate. A good proportion of them are sucked into finance by the money. That's been a hugely important development. Charlie Munger: (06:10) I don't welcome it myself at all. I don't think we want the whole world trying to get rich by outsmarting the rest of the world in marketable securities, but that's what's happened. There's been frenzies of speculation and so on, so it's been very interesting, but it's not been all good. Interviewer: (06:36) At some level, once you make an investment, you're putting your money into the hands of an entrepreneur who is going to actually produce something. [crosstalk 00:06:47] seems that the value investment that you practice has that characteristic relative to a pure arbitrage approach to trying to make money in finance. Charlie Munger: (07:00) Well, I did not make my fortune by and large on the cutting edge of technology. My first investment with my pitiful savings of [inaudible 00:07:16]. I invested in a company right in Pasadena, and it was called William Miller Instruments. And I damn near lost all my money. It was hell on earth. We just barely squeaked out with a substantial outcome. Charlie Munger: (07:34) What did us in is that the [sl-o-graph 00:07:37] that we'd invented and we were so proud of, and we thought it was going to knock the world flat. Somebody invented magnetic tape without telling me, and by the time we got that sl-o-graph ready to go to market, we sold three. Three total in the whole world country. This technology is a killer as well as an opportunity. And my first experience had damn near killed me. Interviewer: (08:11) That's sort of the other part, right? Over the 75 years that you've been involved in investing [crosstalk 00:08:18]. Charlie Munger: (08:17) Well, what that did for a long time was keep me out of venture capital on the edge of technology. Interviewer: (08:23) But even so- Charlie Munger: (08:25) I tried to avoid it. Interviewer: (08:27) But even so, in the companies that you deal with, some of them are market leaders at one point in time, and as you just suggested, some technological change or change in preferences will lead those companies to be with less of a market than they used to have for their products. And so how does one think about this over the longterm? Because it's an interesting [crosstalk 00:08:51]. Charlie Munger: (08:47) Well, over the longterm, the companies of America behave more like biology than they do anything else. And biology, all the individuals die and so do all the species, it's just a question of time. And that's pretty well what happens in the economy, too. All the things that were really great when I were young have receded enormously, and new things have come up and some of them started to die. And that is what the longterm investment climate is. And it does make it very interesting. Charlie Munger: (09:24) Look at what's died. All the department stores, all the newspapers, US Steel, John D. Rockefeller's Standard Oil is a pale shadow of its former self. It's just like biology. They have their little time, and then they get clobbered. Interviewer: (09:47) How does one as a witness, or, in a certain way, one lives longer than the life of some of these companies, deal with change? You could think about an investment portfolio that you create at a point in time will only outlive you for a certain amount of time. And so how does one learn to deal with change? It's a question that I always ask my students, and I would just... How does somebody who has to take the resources of very large numbers of people, deal with this change? Any thoughts on that matter? Charlie Munger: (10:25) Well, some people try to get on the cutting edge of change. So they're destroying other people instead of being destroyed themselves. And those are the Googles and the Apples and so forth. Other people, like me, do some of that, joining things like Apple, and in some ways we just try and avoid big change that we think is likely to hurt us. Charlie Munger: (10:56) Berkshire, for instance, owns the Burlington Northern Railroad. You can hardly think of a more old fashioned business than a railroad business, but who in hell is ever going to create another trunk railroad? So it's a very good asset for us. We made that success not by conquering change, but by avoiding it. Charlie Munger: (11:15) Burlington Northern itself has been quite clever at adapting technology to their railroad. Imagine the good luck of being able to take an existing railroad and double deck all the trains and raise the heights of the tunnels and so forth, and all of a sudden you got twice the capacity at very little incremental cost, which is what that railroad has done. [crosstalk 00:11:37]. Charlie Munger: (11:39) Everybody uses new technology, but it really helps to have a position that almost can't be taken away by technology. How else are you going to carry goods from the port of Los Angeles to Chicago except on our railroad? Interviewer: (11:57) So it's innovation within an economy that continues to follow certain sets of rules, rather than looking for the new economy, is that another way one could think about it? Charlie Munger: (12:10) There are different ways. All successful investment involves trying to get into something where it's worth more than you're paying. That's what successful investment is. And there are a lot of different ways to find something that's worth more than you're paying. You can look for it rather right on the cutting edge of technology, the way Sequoia does. The most remarkable investment firm in America is probably Sequoia. That venture capital firm, which absolutely fanatically stays right on the cutting edge of modern technology, they've made more money than anybody and they have the best investment record of anybody. It's perfectly amazing what Sequoia has done. Interviewer: (13:01) You've also talked repeatedly about people's mental biases, as you said, you don't want to be the smartest person, but you want to avoid doing stupid things. So how does one guard against mental biases in one's decision-making? Charlie Munger: (13:18) I spent a lifetime trying to avoid my own mental biases. A, I rub my own nose into my own mistakes. B, I try and keep it simple and fundamental as much as I can. And I like the engineering concept of a margin of safety. I'm a very blocking and tackling kind of a thinker. I just try and avoid being stupid. I have a way of handling a lot of problems. I put them on what I call my too hard pile and I just leave them there. I'm not trying to succeed in my too hard pile. Charlie Munger: (14:00) ... in my too hard pile. Interviewer: (14:05) And do they sometimes come back and require for you to? Charlie Munger: (14:07) Oh, I sometimes get things that are too hard and when that happens, I fail. Interviewer: (14:14) So one has to accept limitations, is that one of the really important pieces of avoiding these biases? Charlie Munger: (14:22) What I would say is the single most important thing if you want to avoid a lot of stupid errors is knowing where you're competent and where you aren't, knowing the edge of your own competency. And that's very hard to do, because the human mind naturally tries to make you think you're way smarter than you are. Interviewer: (14:44) So a question that's almost personal, given my research, I can't resist asking about innovation in finance. Over the last half century, it's a sector that's gone through several upheavals, radical change. To go back to the time when you were born, there were 30,000 banks in the U.S. None of them were very, very large. A few New York banks were big, and now the top 20 banks account for almost everything. But the range of innovation in finance has been huge, and there's a debate in academic finance, for sure, about how much of this innovation is helpful to the markets versus how much actually creates instability. Charlie Munger: (15:36) Well, I have a very clear opinion on that. I think the early innovation that the Bank of America did under Gianinni, where he helped all these immigrants with these loans of all kinds, and knew which ones were good for it and which ones weren't, I think that brought banking and banking helped to a lot of people that deserved it. It helped the economy. It helped everybody. But once banking got so they wanted to be in soft white hands and make zillions as speculators, I don't think those developments have been a plus. In other words, I like banking when they're trying to avoid losses prudently. Interviewer: (16:30) So I have one more question, which I think a lot of people have in mind. COVID has been extremely disruptive to American society and to the American economy. How do you think the economy is going to emerge over the next 12 months from this period of great difficulty? And how much of the change that we've seen start to happen is going to be persistent? Charlie Munger: (16:59) Well, my opinion on that is no better than anybody else's, but I think it's quite likely that a year from now the worst of that will be very thoroughly behind us. It's amazing. I watched the polio get totally killed by the vaccinations, and I think they'll spread these vaccines over the world so fast it'll make your head swim. So I think this horrible COVID thing, it's very likely to shrink to insignificance in the course of the next year. Interviewer: (17:40) And what about the transformation to retail? So you said department stores are gone, but there seems to be at work a quite massive transformation of retail. Are we going to go back to old town Pasadena, for example, or is the shift to online retail more permanent? Charlie Munger: (17:57) Well, I don't think retailing is going to go away after it's been around for thousands of years, but certainly it's been a very difficult place to make money, because of what the internet has done. I recently had a friend send me a blue blazer made in China, bought on the Chinese internet, and it cost $42 delivered. And it may not have been a perfect blazer, but it was an amazing blazer for $42. The person who created that blazer gave some little factory an order for 100,000 at once, and those had been pre-sold using the internet. And so it's the most extreme kill all our competitors of selling I've ever seen. Of course, retailing hasn't coped with something like that. How good is it for Brooks Brothers when somebody can deliver a thing with the internet from China for $42? It didn't look like that bad a blazer to me either. Retailing has gotten very tough, and I think this online stuff is here to stay here, and we'll get more and more efficient. Interviewer: (19:25) So that could be actually good for the consumer, but more difficult for certain sets of investors, in particular, commercial real estate. Charlie Munger: (19:34) These changes are always bad for some investors and good for others, but when they're bad, they're very bad in the full brunt of the changes that are coming in terms of this online shopping. I am a director at Costco, and in the last reporting period, their online sales were up 86% over the same quarter last year. Now, that is a significant development. Is it good for other retailers? No. It's good for Costco, but it isn't good for them. Interviewer: (20:18) But how much of their brick and mortar stores, how much of this is people who would have shopped at Costco in the departments in the stores- Charlie Munger: (20:27) [crosstalk 00:20:27] mortar stores are already doing well, but their brick and mortar stores have been enormously destructive because of their low prices and efficiency to other retailers. And now they're doing all this internet thing. The last thing I would want to do in retail is compete with Costco. Interviewer: (20:51) So we've talked a bit about retail and the reorganization that the American labor force is also going to. Do you think that that is going to be a more transitory phenomenon, that once we get vaccinated, the jobs are going to return? Or are we likely to see a slow return of employment in the same way that we did after 2001, 2002? Charlie Munger: (21:13) Remember, that I did not make my fortune such as it is by predicting macro economic changes better than other people. What Buffett and I did was we bought things that were promising and then sometimes we had a tailwind from the economy and sometimes we had a headwind. And either way, we just kept swimming. That's our system. Now, after all, that's the system from Caltech has too. Caltech Just gets up in the morning and keep swimming, and pretty soon their imminent. Caltech's not trying to play the game of getting big advantage out of the booms and busts. We're just like Caltech. Interviewer: (21:55) Well, we do hope that we are committed to our path of discovery and not the victims of the current fashion and that we have our own decisions about what we think is really important to search. So in that sense, you're absolutely right. Charlie Munger: (22:10) Oh no, you're trying to get the right answers, but you're not really trying to predict what the economy is going to be like 18 months from now. Interviewer: (22:22) So perhaps we now have a large number of really interesting and imaginative questions from the audience. So perhaps I could actually have you answer some of these, and I will just read them to you. Let me just close that a second. So the one from Dr. John Victor, who was a bachelor of science in chemical engineering in 1971, and he has two questions. The first is, he has a theory that really smart people foresee the future better than others, and so we can ask, what did you think about that? And then his second question is, did you ever make a bad business decision? Charlie Munger: (23:06) Well, the answer for the second one is, of course, I've made bad business decisions. You can't live a successful life without taking some, doing some different things that go wrong. That's just the nature of the game. And you wouldn't be sufficiently courageous if you tried to avoid every single reverse. And what was the first question? Interviewer: (23:34) Do smart people predict the future better than others? Charlie Munger: (23:38) Well, that is a very interesting question. You could argue that both ways. A lot of smart people think they're way smarter than they are, and therefore they do worse than dumb people, if you ask me. And it's very common to be utterly brilliant and to think your way the hell smarter than you are. I think Warren and I have been pretty good at avoiding that one. We're pretty modest. I know what my mental capacity is, and it's pretty low compared to the best it could possibly be. When I was at Caltech, I took this course in thermodynamics from Homer Joe Stewart. By the way, a lovely human being and gifted beyond compare, and one thing I learned was that no matter how hard I would try, I could never be as good at thermodynamics as Homer Joe Stewart. And I think that is a very useful lesson. I knew what I could do and I couldn't, and I never even considered trying to compete with the Homer Joe Stewarts in the world of thermodynamics. Interviewer: (24:57) So the next question actually goes back to that time at Caltech, from James Univon, a bachelor's of 1984. "How did the study of meteorology influenced your thinking? Charlie Munger: (25:10) Well, not much, but you learn something from anything you do. It was a very empirical science in those days. We just made weather maps, which laid out the weather on the map. And then we stacked up those maps and by looking, as one followed another, you could see whether weather systems were moving, and that's the way we were predicting the weather. And, of course, that's a lot better than nothing. And we did have some little tricks like predicting icing and so forth. But basically we just were doing two things, we were trying to Burbank other pilot from going somewhere and not being able to land and therefore having to crash and die, or we were trying to prevent a pilot from going into icing that was so tough that he couldn't handle it. And if I did that in my Army Air Corp, I knew I wouldn't kill a pilot. Now, that's not very complicated by Caltech's standards. Interviewer: (26:11) Well, there's a lot of uncertainty. Charlie Munger: (26:14) Yes, there is. Interviewer: (26:16) Depending on the location you're trying to predict the weather for. Charlie Munger: (26:17) Yeah, but sometimes, it's pretty easy. And when it's likely to be bad, you can tell them not to go. I was in the Ferry Command, so I didn't have any bombing runs or anything like that. And so if it really was dangerous, we just told them not to go. It was such an empirical science. I never wanted to be in it. They threw the meteorology department out of Caltech early after World War Two, and I think it was a correct decision. It was too empirical an activity for Caltech. Interviewer: (27:03) Well we're back in climate science, so I think things have changed since then. Charlie Munger: (27:06) Climate science is different from meteorology. That's a very interesting subject about which there's a lot of disagreement. Interviewer: (27:18) Well, we're actually trying to make some progress in having better predictive model over the long run evolution of the climate of the globe. Charlie Munger: (27:25) Everybody is, but it's proven very difficult. It's better than nothing, don't misunderstand me, but it's proven very difficult. My attitude on that is that the worst that can happen in terms of global climate can be coped with by the advanced civilizations. If you had to erect sea walls to protect the entire breadth of the United States, that wouldn't take that much of GDP per capita for that many years, and it could be done quite safely, if we had to. So I don't see that as the worst tragedy that man- Charlie Munger: (28:03) ... [inaudible 00:28:00] if we had to, so I don't see that as the worst tragedy the man could get. Interviewer: (28:08) Our next question comes from Ms. Pavarti [Minnen 00:28:10] who has a bachelor's degree of 2008. What is one critique of CalTech of its alumni that we ought to pay attention, or how should CalTech or its alumni evolve in the future? Charlie Munger: (28:23) I think CalTech is doing very well, just the way it is. I think one of its great advantages is that it doesn't change too much. I think it was very smart to keep the undergraduate department pretty small and make the graduate department so outstanding. In other words, I think the whole idea was, I think, quite sound and it hasn't changed it all that much. Remember I was there when Milken was there and I knew him. Not well. It hasn't changed that much. I think that's been a strength. Interviewer: (29:04) One of the reasons, to extend, I understand that history is that we really wanted to focus on the ability of people with different backgrounds and different disciplines to talk to each other because we thought that new ways of thinking about the world, about science or about engineering, would emerge from that. That was one of the things that we've tried to privilege, but there also having situation where scale matters. In thinking about those investment opportunities or other kinds of activities in trying to be smart about things, how much of this is accepting information from a variety of different sources to cross-check the decision you want to make? Charlie Munger: (29:59) Well, I'm a big fan of knowing the big ideas in pretty much all of the disciplines, the ones that are pretty easy to assimilate, and then using those routinely in your judgments. That's just my system. I don't trust the executive ... I don't believe in just constantly consulting with experts and doing things that way. I might do that if I were building a chemical plant or something. But in investment decisions, I think it's very helpful to be able to yourself be pretty comfortable with the big ideas in all the disciplines. I think that also life's more fun if you do that. What I find it as though that academia is not very good at the interdisciplinary stuff. Academia rewards a researcher who knows more and about less and less, and there are real difficulties with that approach. Interviewer: (31:10) Well, we try to ... I mean, that is an inevitable part of the way we go about doing- Charlie Munger: (31:18) I know it. Interviewer: (31:19) ... this work. Charlie Munger: (31:19) The inevitable way of doing it. But when you're outside your own little field, it's dangerous. Interviewer: (31:30) My next set of questions are more on the finance side. Paul Goodson, who is a bachelor's degree of science in 1975, asks, "Do you expect the next 10 years to have lower returns in the equity markets than the last 10?" He doesn't give us an idea why. Charlie Munger: (31:45) The answer is yes. Interviewer: (31:47) Could you give us a hint as to why that might come to pass? Charlie Munger: (31:50) Yes. Because so many people are in it and the frenzy is so great. The systems of management, the reward systems, are so foolish that I don't think it's going to work at all. I think that the returns will go down, yes. In real terms, the returns will be lower. Interviewer: (32:15) [Schuler Coolen 00:04:17], bachelor's degree 1995, is going to ask about political economy. Two different questions. What do you think of the combinations of quantitative easing and large fiscal deficit, and where are they going to lead us? Charlie Munger: (32:32) Well, there I've got a very simple answer and that is it's one of the most interesting questions anybody could ask. We're in very uncharted waters. Nobody has gotten by with the kind of money printing we're doing now for a very extended period without some trouble. I think we're very near the edge of playing with fire. Interviewer: (33:13) It is remarkable how much we've expanded the money supply, how low interest rates are, and how little initial response there has been on- Charlie Munger: (33:22) Remarkable's not too strong a word. Astounding would be more like it. Interviewer: (33:28) I will let you choose the adjective, Charlie. Charlie Munger: (33:31) It's unbelievably extreme. Some European government borrowed money reasonably for some tiny little fraction of 1% for a hundred years. Now that is weird. What kind of a lunatic would loan money to a European government for a hundred years at less than 1%? Interviewer: (33:58) Can I ask you a question that sort of falls out of this but from a different perspective? Which is for a long time, a lot of the policymaking in the world was because capital is scarce. For a long time, the world economies were poor. Since World War II, we've been creating wealth at a very, very high rate. Have the rules changed to some extent? Because in some sense, the developed economies are just very wealthy. Charlie Munger: (34:25) Well, of course it's changed to some extent because of developing economies are very wealthy. It's changed enormously. In my lifetime, advanced civilization has gotten ahead faster than any century that existed before and nothing else was even close. It's utterly without precedent in real terms. It's unbelievable. I watched the whole thing practically because I've lived so long and it's been absolutely astounding. I can remember having a five course filet mignon dinner in Omaha for 60 cents when I was a little boy. The world has really changed. Interviewer: (35:14) Our next question, which is the converse, wealth can be high because we've accumulated a lot of wealth, or because the value of that wealth is high. Dr. David Whitner, who is an associate degree in 1975, asked, "Is it NASDAQ in a bubble and will it blow up? Do we know when?" Charlie Munger: (35:31) What? Interviewer: (35:32) Is it NASDAQ in a bubble? Charlie Munger: (35:35) Nobody knows when bubbles are going to blow up, but just because it's NASDAQ doesn't mean it'll have another run like this one very quickly again. This has been unbelievable. Again, there's never been anything quite like it. If you stop to think about it, think what Apple is worth compared to John D. Rockefeller's oil empire. It's been the most dramatic thing that's almost ever happened in the entire world history of finance. The other thing that's really remarkable. The last 30 years of China, they have had real economic growth at a rate for 30 years that no big country has ever had before in the history of the world. Who did that? A bunch of communist Chinese. Now that is really remarkable. If you're in studying finance, you got a lot of strange things to account for. Interviewer: (36:43) Bob [Ridentof 00:36:44], who is a PhD 1979 from aeronautical engineering, asked, "How would you rate investing in China with the current political tensions, or are you invested in China through the ownership of American companies that do business in China?" Charlie Munger: (36:58) Well, of course I'm invested partly in American companies to do business in China, including Coca-Cola, but I'm also invested very significantly in China through the management of Li Lu, moving the Munger family back heavily when he formed a little private equity firm to invest in China. He has had a very successful record that's made me follow very closely the leading companies in China. Of course I've had very successful experience there. I think it's likely to continue. The Chinese story is the damnedest thing that ever happened to a big country in terms of economics. No other big country ever got ahead this fast for that long. Interviewer: (37:54) Does that say that the politics don't matter so much? Charlie Munger: (37:59) Yeah, it does. That's a very interesting observation. What that shows is exactly right. Who would have guessed that a bunch of communist Chinese run by one party would have the best economic record the world has ever seen? Of course it's extreme. I think it proves ... We Americans would like to think that our free expression and allowing all kinds of opinions and all kinds of criticism of the government is totally essential part of the economy. What the Chinese have proved is you can have screamingly successful economy with a fairly controlling government. All the government has to do is create a lot of Smithy in capitalism. If you do that, having sort of a controlling one party government doesn't matter. That's not a fashionable thing to say, but I think it's true. Interviewer: (39:03) For those of us who can't only rely on that form of growth, Zach Rifkin, who's a bachelor of science 2014 in math asks, "How do you encourage young mentees to take big bets on big edges? How should this be taught at CalTech?" Charlie Munger: (39:24) Well, if you ask how can CalTech teach people how to win chess tournaments or poker tournaments, you would find that some people at CalTech are very good at that and others aren't. If you want to win at those things, you better bet on the people that are really very good at it. Not everybody is. I don't think CalTech can make great investors out of most people. I think great investors to some extent are like great chess players. They're almost born to be investors. Interviewer: (40:03) That's because of the tolerance for risk? Is it the patience? What are the traits of good investors? Charlie Munger: (40:10) Obviously, you have to know a lot. But partly it's temperament, partly it's deferred gratification. You got to be willing to wait. It's a weird ... Good investing requires a weird combination of patience and aggression and not many people have it. It requires a big amount of self-awareness and how much, you know and how much you don't know. You have to know the edge of your own competency. A lot of brilliant people are no good knowing the edge of their own competency. They think they're way smarter than they are. Of course, that that's dangerous and causes trouble. I think CalTech would have a hard time teaching everybody to be a great investor. Interviewer: (41:02) But could it help people discover that they have that temperament? Or is this something that you mostly should try on your own? Charlie Munger: (41:08) I think you find out whether you got the qualities to win at poker by playing poker. Interviewer: (41:19) That's a very empirical approach, Charlie. Charlie Munger: (41:22) Yes, but I think it's right. Interviewer: (41:26) So- Charlie Munger: (41:27) Obviously it helps to know the basic math of Fairmath and Pascal, but everybody with any sense knows that stuff. But having a temperament where Fairmath and Pascal are as much part of you as your ear and nose, that's a different kind of a person. I think it's hard to teach that. I have found ... Warren and I had talked about this. In the early days when we talked about our way of doing things, which is working so well, we found some people got it, and they instantly converted to our way. Charlie Munger: (42:03) We found some people got it and they instantly converted to our way and did very well. And some people, no matter how carefully we explained it, and no matter how successful they were, they could never adapt to it. They either got it fast or they didn't get it at all. So that's my experience. Interviewer: (42:20) So, sort of related to this, Charles Miller asks, "You've talked about the search for psychological research and education grounding how humans truly operate. Have you found it yet?" Charlie Munger: (42:39) Well, no, I haven't found anything yet except how to get by fairly well. It's harder than a lot of people think. Just think about how hard it is to get far ahead in life. Imagine. Supposed you want to get ahead in Caltech, you like the academic a lot. Caltech is very good at getting people tenure. If you're very brilliant and work 80 or 90 hours a week for 9 or 10 years, you get tenure. That is not what I call an easy life, and competing with the Homer Joe Stewarts. Interviewer: (43:22) Some of us love it. That's all I can say, Charlie. Charlie Munger: (43:24) What? Interviewer: (43:25) Some of us love that life. Charlie Munger: (43:26) Yes, of course. I know. And that's fine. I chose to avoid it because I knew I wouldn't win big at it. Interviewer: (43:37) So Laura Jalif- Charlie Munger: (43:39) A perfectly successful professor by ordinary standards, but I would not have been a star. Interviewer: (43:46) So finding your own path is something you really recommend to everyone. The place where you can shine- Charlie Munger: (43:57) No. What helps everyone is to get in something that's going up and it just carries you along without much talent or work. And so if you pick a really strong place, like say Costco, and you go to work at it and you really are reliable and nice, you're going to do fine in life. You got a big tailwind. But in the lead education, nobody wants to go to work for Costco, from Harvard or MIT or Stanford. And of course it's the one place where it would be easiest to get ahead. Interviewer: (44:36) So I have a few more questions that are more on the finance side, but there's one I can not resist asking you. [inaudible 00:44:47] asks, "I'm 16. I want to take up investing as a full-time career. What is Mr. Munger's best advice for me?" Charlie Munger: (44:57) Well, if you pursue any career with enough fanaticism, that's very likely to work better than not having the fanaticism. And so if you look at Warren Buffet, he had this fanatic emphasis in investments from an early age and he kept making small investments, even with his paper route savings and so forth. And he finally learned how to be pretty good at it. And so if you want to succeed in investments, start early and try hard and keep doing it. All success comes that way, by and large. Interviewer: (45:45) So, Laura Jalif, bachelor science, 2020, so a very recent grad asks, "What are you proudest of?" Charlie Munger: (45:59) Well, I'm proudest of avoiding some things I don't like. I don't like irrationality and I've worked to try and avoid it in my life. And I haven't succeeded, of course, nobody does, but I've done better than I thought I would starting out at a very low state and it's been a pleasant way of going. And Caltech, by and large, stands for that. Caltech really tries to figure things out. That's the value. And having that just right into your gene plasm really helps. Charlie Munger: (46:49) I work a lot these days with a Caltech postdoc who's now a professor of physics at UCSB and he's a pleasure to work from. He never says anything stupid. He's just so talented. Lars Bildsten is his name. And he heads that visiting program for the physicist of the world at UCSB. But Lars, he is trying to figure it out right. And his graduate students are trying to figure it out, everything a little faster and better than other graduate students. That's Caltech. He was at Caltech for, I mean, two or three years as a post-doc. And Lars Bildsten is a wonderful man. Caltech is full of people like that. I don't think Caltech has a lot of improvement that they can do in their physics department. I think it's pretty good the way it is. Interviewer: (47:47) Well, we are very glad of that and very proud of that. Charlie Munger: (47:51) You should be. Interviewer: (47:51) [crosstalk 00:05:56]. Charlie Munger: (47:59) It's harder to be that smart in the liberal arts, partly- Interviewer: (48:04) Well- Charlie Munger: (48:04) Many liberal arts professors are so leftist. It's hard to be pretty smart if you're a crazy leftist, you're going to have the world a lot wrong. Interviewer: (48:19) So, John [inaudible 00:48:22] 1961 asks, "What did you get out of Caltech that was the most memorable to you?" And you said a little bit about this just now, which is why I want to come back and this issue of figuring things out and also rationality. But what was the most memorable thing for you when you were at Caltech? Charlie Munger: (48:49) Well, it comes back to Homer Joe Stewart. Homer Joe Stewart was just exactly the kind of a person you want representing Caltech to the students. And I came back to my 50th anniversary for my time at Caltech, and there was Homer Joe Stewart, he must've been 88 or something. He was just sharp as a tack. And he started talking to me a little about thermodynamics. And he says, "You know," he says, "What's interesting about thermodynamics is how little of it was derived mathematically from Newtonian physics." And that is such a good thing to say. And if you understand both subjects, it's so correct. It's weird. You would think that you could just derive all thermodynamics from what Newton, but you can't. In other words, as long as you have people like Homer Joe Stewart, you don't have to worry about Caltech. Interviewer: (50:02) So, one of my students, when she knew I was going to be talking to you, asked me to ask you about the role of philanthropy, but then a question came from Grace Leishman, a bachelor of science, 2016, about which of your acts of philanthropy are you proudest of? Charlie Munger: (50:23) Well, I'm not that proud of my philanthropy. I regard it as an absolute minimal duty somebody could be reasonably successful. You ought to be reasonably generous. So I don't think you get big merit points for philanthropy, because you do that, you get a lot of this credit if you didn't. And I don't think I've been any record philanthropist. I've given away more money to my family than I've given to philanthropy. I am sort of a bad example. Now, I think my philanthropy has been pretty intelligent. I think I've done a lot of good with the money I've given away, but I don't think I deserve any credit for giving away money that caused me pain. I don't want to be under false pretenses on that. Interviewer: (51:15) So the last question comes from somebody who's not affiliated with Caltech, but it's a great question to ask you after your 75 year association with Caltech. Kristin Berry asked, "What are you most curious about in the next 30 to 40 years?" Charlie Munger: (51:35) Well, having been an investor for so long I'm of course interested in these weird present conditions and these weird economic conditions where they're printing money like crazy and so forth. And of course, that's very interesting. And I'm interested in the fact that the world has come so far and having these undeveloped countries get ahead so fast, like China, and then I compare India, which has a way worse economic record, even though they got more free speech in India and a way worse economic achievement. Charlie Munger: (52:25) I think the economic development of the modern world is very interesting. It's a very interesting subject. And I see why so many people in economics like it because it is just so perplexing and so interesting. And of course the achievements have been so great and the technology is the same way. Who would guess that the whole world could have colloquial on Zoom? We weren't doing it a year and a half ago. I mean, it's just amazing what's happened. A lot that's happened should surprise everybody. And it's very interesting. Interviewer: (53:22) Charlie, thank you very much for this conversation. I particularly appreciate your enthusiasm and ongoing curiosity, which is something that we very much value at Caltech is that there's always something new to think about, a question to ask again, and please accept my congratulations on the distinguished alumni award, and my very great thanks for participating in this event. Thank you very much. Charlie Munger: (53:56) I liked Caltech when I was there. It wasn't on the career path I was going to choose for myself, but I love the detour that I got by accident of having to participate in the war. It was good for me to be in the Caltech for my nine months. And it's been good for me to live in the same community all these decades since. No, I liked the whole thing. Interviewer: (54:21) Fantastic. And I want to thank the 2,400 people who have joined us for this conversation. Stay safe and goodbye. Charlie Munger: (54:30) Bye.