Charlie Munger, Warren Buffett's long-time partner at Berkshire, was the feature of an academic discussion at the Pasadena Convention Center on July 1st, 2011. Thanks to The Inoculated Investor, we feature the entire scope of this interview and discussion in the slidedeck below.
Here is an excerpt of the opening discussion:
Charlie didnât think the audience would bear listening to this at the end of the conversation so he put it in the beginning. When you have a complex system, what he calls lollapaloozas can be very impactful. These almost always come from a confluence of factors operating in the same direction, but coming from different academic disciplinesâeconomics, finance, and psychology. He has never cared what disciplines they come from though. It is that they come together to have a large impact that is important.
With lollapaloozas in mind, he wanted to let us know how he approaches things. There is a problem that has bedeviled the economic departments of universities. When economists went to the movie theater, they noticed that Coke and popcorn were priced way too high relative to the prices of these goods elsewhere. There have been millions of man hours devoted to understanding this phenomenon. They understand why first class airplane seats sell for more than coach seats but canât understandâusing marginal utilityâwhy candy bars sell for so much at theaters.
Similarly, it is well know that car manufacturers sell a car for $40,000 and then sell you an extra gizmo that costs $20 for $400. When you are paying $40,000 for a car, a $400 charge is so small that people barely even notice it and the seller can extract more money out of customers this way. Nothing can be simpler than what he told us but he canât believe how many academics donât understand this. He then suggested that if you can adopt his tricks and his approach, you can do better than most other people.
He then applied the same approach to something that is far more complex. It became orthodoxy from a Keynesian point of view that you can borrow and print money to ameliorate recessions. The Keynesians believed that recessions would be short and depressions less likely as a result of borrowing and printing money. People became so enamored with this idea that they thought these economics laws were like those of physics.
The Japanese got in trouble because of an idiot boom in real estate. They now have tried everything in the Keynesian book to try to fix that. They have had to deal with 20 years of stasis, which they are uniquely able to handle. They are a nice and polite people. However, Americans and people from most other countries would likely not be able to go through 20 years of stasis. If the ânewâ laws of economics do not work as well as the professors think they will, Americans will be in trouble.
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Conversation With Charlie Munger
Hat tip: The Inoculated Investor
