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Transcription of this presentation provided by


Santangel’s Investor Forum
October 25, 2012
New York City

Charlie Munger at
Harvard-Westlake School
January 19, 2010
[This conversation about the financial crisis, moderated by Jim Gibson,
took place at a fundraising event for the Harvard-Westlake preparatory school,
where Charlie Munger is a longtime trustee.]

Jim Gibson: these other people if I just kind of work Let’s just go through the list, briefly.
Charlie, why did so many smart people at it steadily for a long time,’ and that Academia failed. The professors at our
get it wrong? is what I did. greatest universities [have] perfectly
asinine ideas -- first, about efficient
I think part of the popularity of
Charlie Munger: market theory. One of those people
Berkshire Hathaway is that we look like
Well, that is a marvelous question and influenced McKinsey [& Company]
people who have found a trick. It’s not
it is such a marvelous question that I so much that McKinsey came to the
brilliance. It’s just avoiding stupidity.
have devoted a big chunk of my life Washington Post at the time it was
You say it is the same thing just stated
to studying that exact question. It was selling at one-fifth of what it was
differently -- well, maybe it is the same
obvious to me for some reason, at an plainly worth as a share of the total
thing just stated differently. But you
early age, that a great many very brilliant enterprise, and said, ‘You can’t buy
understand it better if you go at it the
and disciplined people made perfectly [the stock] in because, under efficient
way we do, which is to identify the
screwy decisions that were disastrous -- market theory, it can’t be worth a fifth
main stupidities that do bright people
and that it happened, frankly, wherever of what people would pay for the whole
in and then organize your patterns for
I looked. I found this extremely curious, company.’ Of course, the kind of mind
thinking and developments, so you
and somehow early in life I got the idea that would keep a stupid idea like this
don’t stumble into those stupidities. Of
that I would never be able to play chess when they have a fact that would clearly
course, this present situation involves
blindfolded against six Grandmasters refute it -- it clearly violates traditions
massive cognitive failure at a great
and win. God just did not give Charlie of science and mental decency. They
number of places dominated by very,
Munger any such skill. But I said, ‘Oh taught this drivel to our children for
very bright people, and that is quite
my gosh, I cannot be as asinine as all decades and, by God, a lot of people

Nobody cares what the -. That didn’t bother the opportunities don’t matter. Samuelson. melt-down value of the quarter is in Berkshire Hathaway is constantly How do smart people get such dumb relationship to the dime. The new form Then these ideas from economics want to waste two seconds thinking of Gresham’s Law is brought into drifted into corporate finance. can only be earned by flim-flamming their decisions based on opportunity people on the finance contracts. anyway - got the capital asset pricing model -. got opportunity X. society with people you helped recruit.and I read through them. which is better enumerated more examples. It was in the major to the other drivel that was discussed. don’t have any coins that are worth a textbooks in economics and people as opportunity cost deserves more than lot. people at Harvard [University] or any so many different ways of doing things Pete Johnson up the street wants to of the people that were doing it. by and large weren’t emphasized you meet their wives and children and At any rate. it’s a different department. do something a little dumber and the you say. Charlie Munger at Harvard-Westlake | 2 are still doing it. Alan Greenspan is a if you want good results in life. it was perfectly obvious that bad our children and the law schools picked one rabbit. The rest of life is the same damn Berkshire Hathaway we try and let the smart people who took up with Paul way. So costs. department although it has some tinges big city. But the new form of Gresham’s Law than the new . and the have enough sales ability. The idiotic ideas are all from the It isn’t just bad loans. and you are in the course. how can smart people do such The right way to make decisions thing just goes to a mighty tide. At important lessons. Think of how it economic thought. and regurgitate it on the examinations cost available generally to the place – All of the builders [are not good and they’d get As and so forth. But we don’t have any bad money that amounts to anything. We never fire anybody. you have to choose the best have trusted you their careers and so these ridiculous examples which teach [spouse] you can find that will have forth or [make] a lot of dumb loans. You’ve immensely dumb things? in practical life is based on your got to shrink the business that you love You don’t have to make this stuff up. well. they got out into the real world have to be diversified and so on and so business of lending money to builders. and they about the new opportunity? Many play . and people would learn it out immediately by an opportunity You sit there in your little institution. opportunity cost. you’ve got [as] Joe Blow is doing down the street. of you come from places that don’t in the savings and loans crisis. I want to tell you that compared out good. If you dumb loans. and they were menaces to decency and on.more than 100 pages. Then they got you can get good results in life. you have to pretend that We sure as hell don’t want to make any smart as Paul Samuelson. engineering and arts and science by the textbooks in introductory economics - way. But that is very hard to other ideas and these spread. seriously smart person although not as you don’t. The bad loans drive out the out of academia. can melt down. I don’t know. When you get and maybe lay off the employees who Life will constantly surprise you with married. more than 100 percent of which succeeded Samuelson’s famous of reality that remind you of arts and all the profit you could possibly earn book. Why do we is ungodly important. You have to figure these things out place shrink. that have precious metals that you smart as Paul Samuelson [believed it] one sentence. Of but.and that is a significantly smart man. but and that rabbit is going to be thinking powerful that model is. that was the last time In economics textbooks they teach you if you aren’t willing to cheat people - opportunity cost was discussed in 1. Bad morals drive I’d never taken a course in the subject social science department and I would out the good. when also pure drivel. 15 years ago or so forth. Well. and if we tell them to go out and play golf. Think of the they could repeat it like a mantra from about something which would be ruled disaster that it creates for everybody. They didn’t understand it. We www. If you want to run a . the guy says smart people make science. And that are better. one something or rather. I rifled through the three leading good. You credits anymore]. They taught it to all of do that. so Gresham’s kicking off ideas [audio unintelligible] in ideas and hold them so long? I’ll try Law is a non-starter in the modern about two seconds flat. It’s easy to drift into this idea that Unless you do the same idiotic thing sound thinking. This wasn’t true in so. these ridiculous ideas came enough. You’ve got to have one horse. These are seriously you. About the put economics in the social sciences check-cashing agency in [a] downtown 20th page of Mankiw’s famous book. maybe you do if you sit in a leadership position in good ideas that are buried in economics can get by with it.santangelsreview. lending drives out good. We know we’ve to come back to that theme after I’ve world.000 Gresham’s Law: Bad money drives basically minorities . Bad money drives out good. Buddhism. It isn’t better.

This is what I Of course. It is a really serious problem your brain plays tricks on you and you We’re better off having them than not and. many in academia. Generally. They do all people solve it in the adult fashion: relationship . distinguished professors. Charlie Munger at Harvard-Westlake | 3 percent of the profit can’t be’s think the cognition of medicine tends going to get did things that were very the subconscious reality of the human to be quite good in the best places and regrettable under these pressures from mind. The who want to live a larger and better it best of all. get a man to believe non-X when his and discovered a lot that is very the new Gresham’s Law. Believing just by psychology term for this is ‘self-serving buying volatile stocks you make an bias.the psychology professors are that a free market would be way more these dumb things. Those bastards gave them an option to get out if they wasn’t the slightest chance he could do feel no duty to master the big ideas in wanted to leave. In fact.where you use if you extrapolate it too hard. they are not really helping not taught in economics courses and to believe X. if you inherited the business or department at a really great university and reality across the disciplines. department if you purported to know fairly advanced capitalist system – if the very free market orthodox economics. and that’s institutional pressure like the poor the findings of psychology against the what happened in economics. that kind of pressure is on get the right answer in a complex very simple. He said. They just like listing that happened in the free market. ‘It is very hard to psychology professors who invented life. of course. He’s party -. boy. But it is a form of Greshem’s Law. But a lot of them are under big them to synthesize . it has All kinds of people who you would be Of course. is teaching our children to avoid to what happened with our regulators. a lot of non-psychology and integrate people that were putting up the capital and [the child] didn’t believe the it beautifully with psychology. the best that can be in academia. the employment and with their high IQs. But causes more terrible cognition than any don’t know in a functional way what that is not the right answer to people other single factor. but he [it] exists. Upton Sinclair said they teach in Psychology 101. and through synthesis happened in economics that caused has to face the new Gresham’s Law. [audio unintelligible] at the economics all the disciplines and get synthesis Well. Alan Greenspan at the Federal the tooth fairy and yet it is taught to department is full of people who collect Reserve overdosed on Ayn Rand. not going to help you.’ Surely the psychology department With academia failing us. I’ve done enough for economics. With hard science glad to have marry into your family since it’s not conscious malevolence and engineering excepted . It’s not like buying www. Generally.[and] I compared to what you are otherwise that’s causing the bad cognition -. On the other hand. They reasoned correctly all these other people that are doing mess . they’d thought at the University of Chicago talked about the fatal unconnectedness be more inclined to invest because it and he had to hide his views. He the company to other people.the need for money . now we turn extra 7 percentage points per annum. it relates deeply to what think [that] what is good for the true having them [but] in terms of what is happened to create the economic crisis. The psychology Well. are rewarded in their own little shop know what else to do. employment is full of this sort for being silly and monomaniacal would call an adult problem and most of thing. It goes could sell their pieces of ownership in markets were quite as perfect as they back to what Whitehead said. an over-belief dumb things being done by these smart experiment to another. you get into the rest of the social We have psychology departments with sciences and you have to be very wary Well. beneath contempt. create a powerful machine that will Alan Greenspan’s cognitive failure is Of course. Corporate finance is can teach our young to avoid – the clobber you up behind every rock. the children.but the new Gresham’s Law. the wider civilization all that much. it’s not so. They your idiot son-in-law is in it. a smart man and [a] good man. this terrible mischief because they They learn to tolerate the . Well. you don’t unless he pretended to believe twaddle. One that is way of making a living requires him important. the psychology experiments the way a boy Basically he kind of thought anything children don’t have to work very hard collects butterflies.’ On a subconscious level. There of academic disciplines. had to be ok. biology also tends to be good . it’s very hard to deal with failed us horribly. you’d predictive than anything else. What bastard in the law department who risks of reality. surely they because there is an asininity trying to let’s go on. even if to get there so it’s a Mad Hatter’s tea them and knowing the other people it was an axe murder. and if you ask in any one ideology is going to do you in people. and they I had a friend who had a child in the be sort of dropped out of a psychology reasoned correctly that once you had a economics department at Chicago. You have these extremely Very little synthesis is done from one got it wrong.santangelsreview. I mean those people still believe in this. little me is what you should believe. should be.but this is the real world as who collect the butterflies and so forth.

You go into a trading room as effective satire. some guy gets one category too high trillions of shares traded everyday. did you had a really free. going to the strip clubs. and economics professors like only in marketable securities. Everybody wants fluctuations in securities . It’s the cranky peculiar people When I was at Harvard Law School. This is one of the most profiles of the people that headed our at hedge funds and investment banks attractive things that ever came down main investment banks. and attractive gambling devices ever created. it runs the great caricatures. and with. Now billions of shares trade -. right: You know we all get promoted in forward to trillions. the better the wrong personality type. If computer programs. If the If [Anthony] Trollope invented a crime is so bad that I have to hire a By and large. We’ve got this big share exodus and creates a big mess in the his name was at Merrill -- of the GDP – and by the way. This would hire with some exceptions. a day. half the time not going to work better if we have went crazy gambling in securities. Then cost and actually make a profit. They they reasoned that if that was true. think about. it’s a of credit. if is one of the most seductive gambling knew what they wanted and. and have been unleashed here. where you are When you talk about liberal use and so forth. Furthermore. these people got of course. knowing that people hierarchies and.and I by this extremely liberal use of credit – respectable. and the bigger and more the bigger and better it gets. Of course. that everybody likes.’ Nobody in economics wants to look very The nuts who did most of this damage It would be regarded as foolish.santangelsreview. instead of just described the captain of the team being a zero-sum game. [Then] they brought in option for this spot he is sitting in and yet of course three or four billion shares exchanges. It’s they had margin rules. wonderful devices ever invented by man. We but you don’t want them managing the made a wonderful market test of all money. people worship Keynes – who thought in investment management and you We always [were] going to have cyclical no such thing. Some very Well. What do you do programs that are trading with other created the most wonderful gambling about this? This is a serious problem. [Keynes] said a liquid know how it works. Of course. Charlie Munger at Harvard-Westlake | 4 a restaurant in the wrong place. They were and algorithmic trading places and so the pike. He’s got a big ego is way too many.they and everything else. We have many game for anybody with blood really you don’t think this is a problem with of the bright people who ought to be coursing in his veins who wants to Wall Street. the people that get promoted powerful forces of unreason have been the idea [that] unlimited trading is a logically are sort of like the people that allowed to flourish. You could only and of course half the time you have the most asinine idea you could ever borrow a limited amount to speculate someone who is utterly unqualified have to extrapolate so vigorously. Some very powerful forces testosterone in our present troubles. How could it not? GDP is calculated is peculiar. That just happened messier and more complicated as you on Wall Street and you won’t find many again and again and again. how well that theory has worked. it’s exactly wonderful. ‘It’s night watchman. There is a lot of our hands. not deeply because it makes their problem are male. to have such exacerbation of the result It has all the joy of gambling. they brought in derivatives. you would say. and it’s interesting to character like this. the better it was for it is for wider civilization. so at any rate. the wider civilization. We always were going to that the economists and most of these captain of the teams. And you make it more correctly approaching women barking into the phones and are surprised we have this big mess on reality. The things people past everyone else and that is all they www. plus it’s and tends to get things done -. You now see want them in the sales department. who to have them magnified so greatly. Maybe you wonderful it was. of course. Stan O’Neal or whatever on and so on. And not That is another problem with life. he has the power. that would be nut who took economics thinks that in investment management. But market of securities is one of the most the guy that everybody else trusts. look at the personality doing our engineering going to work get rich quick. it’s mostly a male game. I can’t get by with this one. can’t stand to lose. liquid. if you are market in securities. and some it work for them. Of course we get big plus for civilization. the way end.the more trading the better. boy. this wonderful academic faith in utterly like those sitting here who will better seldom did a million shares trade in free markets and marketable securities serve you in making these decisions. the derivative game was Latham and Watkins. Our civilization is In the old days. There is a law firm in town. [The] everyday. too extreme. that adds to the GDP. that galloped game where you can pay the frictional just unbelievable. It’s [ironic] win our athletic contests and get to be a big mess. but they guy who invented the Peter Principle is Alan Greenspan presumably are looking have new securities called derivatives. bound to lose the frictional cost. Many of you were have cyclical fluctuations in capitalism. We have computer they brought in the repo system -.

[financial] health gets worse and worse would agree to. But once securities prices will fall over time on This was very helpful to Venice. bonds. people gradually knew it stuff to our children and forcing it on of the firm. if you are making a totally over his grave now with what’s is something we can trust? Accounting different kind of loan to a different kind happening. Financial outcomes in Anybody who was anybody in Venice in making a totally different kind securities markets are not plottable. . based it is ordained in this country as we sit did this work showing from the risk on an assumption that wasn’t true. and math. terrible behavior. Of course. in lending based on his past exposure was wrong. If you want your bank to always knew this by doing what might background got into establishing their look like a big earner for two or three be called Monte Carlo simulation accounting principles. But by that time they had our companies. This is gotten so enculturated in the math and right up there. when it starts coming disaster. Quite the contrary. You similar honors of cognition. They taught it this with his own money who had they were doing. too many extreme once sort of after the mess unfolded. Nobody would do make people feel confident with what bookkeeping popular. but your outstanding bonds so on and so on and so on and you’ll they made these presentations in the are selling at 50 percent of their face look fine for quite a while. In the heyday of Venice. It is absolutely insane. Of your credit is utterly destroyed. Charlie Munger at Harvard-Westlake | 5 whole culture was into this craziness. We could finally come to? This is relatively new that will take a while to be diagnosed just see it didn’t fit. Now you think accounting of course. you report it to the analysts. named for lot of serious irrationality. which the accountants chose this crazy a curve and [follow] reality according at one time was the most important accounting convention. [a] so-called Gaussian curve. just make a bunch of lousy loans in our heads. with numbers and results that would they really made double entry it is really insane. he’s too invested in it. Warren and I these accountants with this glorious the system. Your accountants will cause the things happened that the math didn’t They came up with this loon. I’m making money. based on not kidding! This is accounting the way these corporate finance types who the application of correct math. and you use that in judging what your probably the greatest mathematician Now we turn to the accounting future bad debt losses will be. and the credit course. then people to Gauss’s curve. You want to talk about wasn’t true. thinking they were People were actually making decisions your profits get higher and higher.santangelsreview. And here. than what he is doing now. It’s hard to think of Let’s take bad debt reserving for banks. they had about how much risk to take. way with our best-loved ideas. It is not just slightly insane. What did they years. and so we just if you are on the edge of extinction. as such. You can risk management crowd with all these value -. And so have a wonderful opportunity to game the tails are way fatter. The accountants want know he’s 75 years old. Gauss must be turning profession. We used to sit at Salomon when anything. but in terms old troubles coming home and when And yet we were only two when the of the financial look must be plottable on a normal curve. which to buy the bonds. all the daily trading and the to 50 percent of the face value of the roost? Oh no. I suppose the That is a really important subject in a give it up. But. as your real that gets in trouble we’ll double again www. They are teaching this kind of management department. ‘Well. that ever lived. For sure. lot of wonderful income and you will thought they were all damn fools. We all get that a system and they ordained we have to What they did was. It’s not a profit you can eat or use home to roost. the exposure by the way. using the past experience very helpful because you could come up civilization.judge his future exposure trouble with the math: The assumption the way people draw arithmetic have made a profit equal say this will eventually come home to figures. we’ll just do twice as We would just roll eyes at one another because you don’t have any cash with much more and that will swamp the that grown men could be doing this. high IQ childish. It knew double entry bookkeeping the of loan which is obviously way safer is not a law of God that outcomes in way you know how to scratch your ear. is insane. They said loans to stay on your books accruing a correctly predict.’ – risk management. to buy agencies will believe in the income. just roughly. commercial city in the world. There was only one in all the math books of that era just any sense -. and it use it that says you compute your bad financial outcomes in securities markets happens to people who get ideas about debt reserve actuarially -. they were so good at it they couldn’t anything much worse. they said. So there was just a at your bad debt losses in past years. It’s like a friend of mine who eighth husband of Zsa Zsa Gabor or world where Gresham’s Law is going said he couldn’t give up the Catholic something would be competing for to cause a lot of terrible cognition and Church. the math was is one of the glories of modern of borrower. blah blah blah and so forth. we never bothered to learn the have no cash to do anything.

’ She may still be there for all Who in the hell would have this kind You wouldn’t have gotten that one I know. anybody at the SEC is young enough. they are not into rife and the failures of cognition from training a bunch of interns. You didn’t regulator is that going to be?To do a They sense that plaintiffs’ lawyers will know when. What’s really sound here? be hell to pay sooner or later. Almost everybody if you made them do what rationality markets are good.’ I’m not inventing earning or borrow from your folks or world. and then of course accountants can’t stand is the idea that was a fast-acting free market and free people get co-opted. very high-grade woman. That is unendurable to them. It wasn’t like all human and they are going to go back to the what is going to be really collected in experience didn’t show that there would regulated business. I in a [audio unintelligible] civilization? At any rate. to do it. That is a much better ‘Why are you doing a totally obsolete in front of his friends and tear down system of getting a trial judge than we cataracts operation?’ This guy was a his ego and disappoint his wife. And I would argue that doling If a trial lawyer is really . [But] done. but it is rare. If we are going to mark-up bonds the www. but the old Germanic virtues of to bear by voting with their feet. they have these be true. On a subconscious level. like the SEC commissioners that go he said. Sinclair. Imagine the SEC. I mean. that just unlimited who don’t think like Howard Marks. that You have to believe in the tooth fairy have bad practical consequences in the credit is unlimited. I mean. The conflicts of interest are just this story. they get a good judge and they just choose the accounting that not helping somebody when you prop he stays a good judge because he never makes it easy for them to do. you turn to the mark-down the bonds on the other accountants will let you because you are regulators. a lot of our judges are left eye before it went out for good and don’t do this in places like Switzerland. they believe what they have derivatives and market trading and And the end result is these disastrous to believe to make a living. She said to me. ‘Charlie. Charlie Munger at Harvard-Westlake | 6 and if you are deposit insured you Well. knew. could see that it was going to implode want to leave and go back to business make it a reasonable judgment about sooner or later. What genius who correctly diagnosed my a really miserable experience and they we have now. they put him all wrong and the figures create the that are likely to be unpaid does more on the bench. That way. Of course. Not that our Germans aren’t If people are asinine enough. very high IQ done as many dumb things as we’ve is one of the glories with capitalism. they get rid of kind of a mess that we’ve had than harm than good. we get into these amazing mean you wouldn’t have finished your It’s our leading accountants. That standards authority. ‘Because an insane result is going to the new money. making a lot of loans really smart and so forth. it’s such a wonderful You want to own a damn house. if you are really do something. this providing loose credit for houses. I said: using the government’s credit to attract trouble diagnosing Bernie Madoff. It is have elsewhere. of course. the people results. they had side of the balance sheet?’ Well.santangelsreview. I certainly system for trial lawyers is much better. acculturated into our culture in due customers will frequently bring reality ‘Charlie don’t you want it consistent? course. I mean. women. why shouldn’t we can do it ad infinitum as long as your you turn and. They are like Upton unlike Keynes. And. Then. the nutty as a fruitcake. and he is They would rather have the figures out credit easily. to believe he was having those figures world. just been through proves that you are more briefs. you see the drift of this everywhere firm actually owns. if you take our legislators sentence before he noticed it couldn’t you’d be glad to have marry into your on the Republican side. we wouldn’t have patients all voted with their feet. make this thing realistic -. Well. positions in the regulatory authority least tinge of shame. I think what we have one important competitor so they get face reality. keep out and join the regulated part of the operation to teach. how great a the future. It’s like him up in some house he can’t afford comes back into trial lawyering and he a surgeon once said [at] the Jules Stein and make every month agony for 12 never goes into [audio unintelligible] Eye Institute [when] I asked him. months and eventually dispossess him stuff in England. so they requires. of accounting that had any sense of all by Howard Marks for two seconds.’ And she said: ‘We don’t talk by the methods he claimed to be using. They their background and their professions was a hell of a wonderful experience don’t want a crazy boom in housing like accounting. What the use of credit had to be good because it regulatory decisions. of know an obsolete cataracts operation at the I had this discussion with this woman they are Germanic. But people get into powerful family. And not one of them has the Alan Greenspan nuts who thought. but you knew a cataclysm lot of unpleasant things? The English sue them and they really won’t be able was coming at some time. that way. and you know how he stopped doing prices and they don’t want -. If we had a more Jules Stein Eye Institute? When the who was head of the accounting Germanic culture.

given the problems gave a damn about an irresponsible they get together and each side has of the recent crisis. Before he was mugged reduces the future nonsense. country in the world.and. So this is very. any normal people in our legislature’ - entitlement process. can you imagine the who make the loans promptly dump than say. when they ask to death in due course because. They don’t do this in India. For one to Charlie Frankel. www. he lived in Manhattan in a to create the kind of education that but we are using so much leverage and different time. that is what we created and it it? It is something. Well. the civilization whatever I was. it has just shot through pretty much with us and said what should we do? I they don’t this in China. he created this philosophy easy. You are using so much credit and does enormous damage to shovel out a there is so much danger in what you are There are people who have behaved lot of dumb credit. and they don’t bear the Therefore. You shouldn’t do anything would you suspect with a bunch of is a very important subject. [This] is very foolish credit is sitting on his ass on the floor. these are not the to bring you information as to what any more is my idea of one of the scumbags of the world. And so. that opposite. If it were. teaching except in musical chairs. this is an American everybody. raising false hopes. But what degrades human responsibility and that good credit.‘We don’t want the whole thing of making lending an It finally got to be like musical chairs. we live in a nation Well that would have been very good decisions bear the consequences. by the way.santangelsreview. of course. much. He was mugged and what we have all done together them all and just say. we’ve just right-wing nuts and left-wing nuts I think the government was totally been through a period where nobody who hate each other. we have carefully created course. consultants. or 75. they don’t do through the whole civilization. Of of us are really doing anything about given to people who are never going course. The head of Freddie Mac who had a the same type of credit as people with very significant cognitive failure and Ph.’ degree that the people who make the -. Denmark or Norway or advice this man got from his friendly them on somebody else through lies something -. six or eight people . different advice if he had followed it. Every 10 years correct. relations type[s]. and you know the brakes are bad. You should go back there and fire was Charlie Frankel. investment bankers. at Harvard-Westlake School is to try you what you were doing. I think it would perish and it would deserve to. It is not the government’s credit and we simply to death. that is amoral. lobbyists? He bought responsibility when the loans are good not worse. doing that you should make no more well through this and a lot of them I I think it creates ungodly messes and it than 80 percent loans to people with can see sitting in this room. To Frankel. we should be doing it better. But you know people feel that like this was bound to happen although people with no prospects ought to get we didn’t know when. because very powerful forces of can’t afford to do anything with this of responsibility. If you can engage in business two or three decent halfway moderate the whole thing. else. He said the system self-interest and subconscious powers much leverage except to make loans is responsible in proportion to the of delusion are working against us to sound people on sound properties. public and twaddle. but there is very little on somebody else through God knows throwing them out. We have a worse problem and every dumb thing and of course the is an irresponsible system. So with different ethnic groups. of course. simple. I mean. That is like therefore we are governing it worse. after all. the largest state in the most important and a lot of the credit being given In the new form of musical chairs. a loan system where all the people civilization is a lot harder [to] manage But. in economics came out and sat prospects. They had to and we’ve in some lawful way and dump trouble people and they join together in got the problem. and of course. and that is the for education. This is people they don’t really have to pay one chair short when the music stops. a lot of it in for-profit everybody has a hell of a time and way our legislature works. How many education. two types of people in the legislature: You shouldn’t do it. Charlie Munger at Harvard-Westlake | 7 thrift and so on did not get into this to learn much and never going to pay was perfectly obvious that something kind of trouble. But . you are only and they gerrymander them out. You’ve got a bunch of experts who people that are supporting a really you have hired to lobby everybody and Another thing that is never discussed great school? I mean. ‘I’m sorry. It isn’t was young and optimistic. it is just the every dumb derivative and went into or bad. all I the legislators want and so on and so great philosophers of America who can say is that this is very serious stuff on. I said: ‘It’s very phenomenon and of course. you don’t create religious groups and so forth. Our thing. to just nationalize system.and always will be. They identify those taste that I see toward really changing what techniques. being 60 or this in Japan. In place went totally insolvent in due selling an automobile with bad brakes California. the more the merrier.D. he’d probably still be employed.

we are in a tough aggressive it go up and dumping the securities. ‘ .’ had a long phase when it behaved hurts the most is the criticism that is This is not too attractive of a human better than it has in the recent buildup true. People are not that something is legally saleable. government had people starving by banking system should behave? It was correctly: ‘He was scrupulously the millions. They are not easy then when they started losing money. I should close with are there they would just flim-flam a little more go back to the age of the robber barons. for street make more money than we do. we’ve got to get ahead. of course. Charlie Munger at Harvard-Westlake | 8 Well. They didn’t care about the era. We don’t have the hatred of the commercial banks is got people in different departments. They legislative change. shorted the securities and then letting think. But at Russell Sage.’ talking. As nearly as freight. The failure prompted the of a big transcontinental railroad that place and investment banks of course reform.’ kind of kiting from one card to another. we aren’t going to get much the railroad down artificially as they think they feel that bad about it all. you aren’t supposed to talk their troubles were way worse than description of Collis P.santangelsreview. If you to solve. ‘You were like the Jay Gould.their ideas weren’t working. investment banks. you get into Jay Gould and they took on and the lousy stuff they our system that is not so simple. Or at major institutions. Then. Somebody in the worst hatred. I don’t I can tell. business. Well. Now. When the Chinese a government assisted part of the Bierce said of Collis P.not it. we’ve had the wonderful civilization affect the very smartest people in really moral failure of flim-flamming and that you and I can remember. ‘Yeah. They are gone. he could change things. rebellion and so not only folly. we’ve believe we will go back. I have probably gone on long Well. and surely didn’t care as long as they could report we’ve had rascals and fools. if you get into the got into their share of sin.’ That was a pretty accurate By the way. Particularly in system where if the guy at the top got investment banking manipulators of a the derivative trading and in the clients a good idea. The truth of the matter is that some activity. least a lot of us can remember. but sin has ours. Maybe what I am decrying on credit cards and then they started the department that controls the risk now will -. you know. it was sin. In former age. we them report the income when they [Floor opens to questions from the are just aggressive people each trying to knew the guy had eight cards and was audience] do his own thing the best he can. ‘When they are investment management. disaster. failure sometimes does cause because they controlled railroads -. We’ve had a lot of wonderful years in Washington. There is no sin here. fortunately. and lord knows for the purpose of earning money from investment banking which of course we’ve had a lot of failure.’ We live But you can cut the hatred against games. I mean.maybe it too will pass. well. They were unbelievable sold and so forth. any hopeful signs? Well. about sin in economics. He said. Is this the way it’s a very interesting age. and there have been apologies from significant reform. we have Congress accurately described those mad at private equity or conventional to sell it. loaning to people aggressively because wants to be sure -. they had a we needed. The answer was. But. The commercial banks got The department that does the selling Gould and Russell Sage now that they too aggressive at flim-flamming people wants to do everything that is legal and are gone. how smart did you have to be to The other helpful thing about our enough about some of the problems know that that was dangerous? They present condition is that in the past that you can see everywhere. If in charge of running. Everybody regrets any rate. Huntington. they knew the accountants would let to each other. Now if you take investment banking. After their they are deep cognitive problems that the income. and we’ve Somebody like Don Graham says he guy who sold a car knowing the brakes since had Thomas Edison and Henry hasn’t seen anything like it in his 40 were defective and then went out and Ford. we’ve They were just shucking suckers by I would say that is the part of the got to provide opportunities for the manipulating the companies they were investment profession that has gotten young men who come to work here. Huntington. but for the purpose of pushing were deserved. These are the guys that had to win the are quiet they are stealing. That is what caused the change but he did create the toughest section consequences. the hatred bought life insurance on the guy to achievement and investment banking is very extreme and the criticism [that] whom you had sold the car. Ambrose that for a minute. anybody who operates exactly like Jay deserved. www. We can’t let the guy on the two men. think about to get more revenues. dishonest and had no more soul than forth -.they don’t even talk Thank you. they are lying and when they pension funds or private individuals. Angelides was to sin and folly. a shark. and so we can hopefully of this hatred is deserved and some of right. Angelides said to one of the in the aftermath of Russell Sage and investment bankers with a knife. in essence. The world is a complex in China.

Buffett. a bunch have two more of these messes ahead of of civilized Germans. said. could be way in the future. I have be stable should have a duty to was a pretty respectable place. believe me I would know how to high volume?] guaranteed to stay forever no matter to fix this. And envy was in the laws eventually. own compensation. I mean. He Munger: behave as if they were in a monastery. Well. and if Lee Kuan Yew -. happen. I think the whole idea that the place. half of them us before things change. When making $5 million a year. With enough of an economic happen is going to happen. I don’t think minor tinkering and why isn’t there much One investment bank can’t stand some is going to change it all that much. It’s just Harvard-[Westlake] School. These So you put it in the whole financial eventually you’ll have it. Not a pleasant Catholic. and in been decrying it in the same way. [he] wouldn’t The younger people are going to adopt I don’t think these things automatically have been able to do what he did in to whatever the ethos is that suffuses fix themselves. either. But I think they didn’t pay any attention to. In so you have an envy driven miasma -- Question #4: [Risk of a long a miasma of prosperity and gambling well. They didn’t pay any attention Jews really knew it would cause a lot but I can’t tell you when it is coming.if Munger: get. Charlie Munger at Harvard-Westlake | 9 Question #1: [Why didn’t the the chain of command. the we have all joined together in helping every hamlet of the world and that our ethos is going to be terrible. There are system of capital allocation ought to that simple. nobody has what happens or how big the messes that power. If you’ve got a Stanley people have to join together the way we need massive legalized gambling in O’Neal at the top that has to win. those old we will have a hell of an inflation mess. Maybe we hasn’t fully been assimilated yet. I just didn’t know when it there was one letter saying it was a of Moses. he can’t stand I knew we’d have a hell of a mess they brought in the options exchanges it. obscene. But. mess and enough chaos. But arrange everything. Envy is the great driver. reform?] And I think minor tinkering is all you other investment bank being bigger Munger: and better. all I can say is the primary schools of the Catholic I think [you are] right when [you] that if Aristotle were still alive. serious. including his that place little Albert Einstein got you diagnosed it correctly. By the way. Brooksley Born has company. I think I know eventually dumb idea -. You have to remember that to be all that good. of course it’s going to be a hell of tail geopolitical event?] with $100. If I decent place like the one that educated to do a better job getting were the Lee Kuan Yew of the United quality business as opposed little Albert in the Catholic schools is . The way to avoid envy to some like confetti. I would change the laws so government listen to the you said it was greed that has caused that all these people would have to do warnings about derivatives all this. you couldn’t even covet your was coming. It’s envy. you can’t expect people to extent was described by Aristotle. ‘People will adjust better if the Something we came as close to as we That is not the way the world works perceived difference in outcomes in came recently to real crisis is deadly and you can’t expect human cognition society are perceived as just. So I don’t think way to motivate people who Munger: you should assume that a prosperous are below the executive level Well.the whole idea is www.and it was from Warren neighbor’s donkey. I don’t think we live in the type legalized gambling of all sucking of the place [to] change down through of world where it is at all responsible in more money -. So you are just everybody that wants to help society Germany during the Pax Britannica decrying a fact of life.santangelsreview. I think that the good Singapore. I think you’ve used the wrong something else but that isn’t going to from Brooksley Born word. It to him. There was a lot of us of trouble even among sheep herders. if I were running the world.’ Therefore.000 bills floating around a mess. It’s envy. ended up supporting Hitler Question #3: [Is there a thought. The whole ethos of the other things that should be done in the have the most attractive and powerful place has to change for the behavior world. of course. are powerful forces and in human system and make it sacred and feed it affairs you can’t expect perfection. specific reform you would and creating a barbarism and an evil urge to be adopted?] that frankly makes you shiver in your Question #2: [Is there a better seat as you remember it. Even though the guy is are going to get. [to] be perceived his entire primary education from elsewhere as just. Of course. he’d be Church and it was a pretty civilized suspect not much that [you] want to a grumpy old man because his message place. I think these things are serious and he had been born here.

for greed are proud of their ignorance. I would say failed the rest of us and they are proud think that the problems we’ve had have it’s probably in the nature of human of it. I am not required to go on think the present craziness is destined prattling like this when it makes some to be our lot. I problems way worse. I and in investment banking. I think if this thing hadn’t people hate me. But that’s a homogenous nation of Munger: people who believe in courtesy and Well. in the longer term future. for example. I could be sitting on been checked. when they had their mess. I think Charlie it is close to right.I probably know Howard they had. can adjust here and there. in terms of do you view the longer term psychological feelings of net worth – future? and Japan got twenty years of stasis. No. Hitler could have interested in knowing -. They are proud of their dysfunction. never change. [This transcript has been edited lightly You want a world that elevates the right for clarity] kind of people. I don’t think we should test cataclysms are past forever. it’s a feeling of duty. LLC ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEBSITE OR IN ANY TRANSCRIPT. will talking about that exact kind of a thing. We suited by nature for just what they’ve been in all of the reported past history have serious troubles and I know of had to endure and I don’t think we are of civilization.santangelsreview. I don’t own time. OMISSIONS. It’s like Nietzsche’s character who stemmed from human failings and civilization that there will be terrible had a lame leg and said he was proud of they are never going to change. You want a world where Munger: the Lee Kuan Yews get more power Well. I don’t think we get the investment professionals I see in at all well suited for the kind of a mess to a wonderful stage where all these the room -. OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE VIDEO PRESENTATIONS. have supported the Jews in atomic energy Who is talking about changing I overstated it or is it close to right? instead of kicking them out. [END] troubles and the people who do things -. We are to overcome morals and prudence. These guys have really No. THERE MAY BE MATERIAL ERRORS. there Disclaimer THE INFORMATION CONTAINED HEREIN IS A TEXTUAL REPRESENTATION OF A PRESENTATION GIVEN BY MR.Howard. and you can going to have 500 years of perfect calm. You cataclysms and I don’t think you are it. They are ideally will be terrible messes as there have of these things as best we can. www. WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION. IN NO WAY DOES SANTANGEL’S Japan. bequeath that to a new generation. It isn’t just the and on and the mess had been greater fun of doing this that brings me here. if it had just gone on the country club porch. I don’t time where the behavior was better in know how you get there but I have to finance and investment management -. I mean. particularly. -. USERS ARE ADVISED TO REVIEW THE APPLICABLE VIDEO PRESENTATION ITSELF BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. weren’t a lot worse. tried to do the best that I can in my That world could come back. the asset values were about three times higher than they were here in relation Question #5: How cataclysmic to GDP so their fall back. Charlie Munger at Harvard-Westlake | 10 not to participate in trying to fix some obeying authority. It is quite serious when you have encourage and dissuade with regulation Won’t matter to . I think we Marks as well as I know anybody our situation with more stupidity that were very lucky that our cataclysms and he is a very smart man and I’d be causes results like that.but the ability. I lived in a world for a long and the damn fools get less. CHARLES MUNGER AT HARVARD-WESTLAKE SCHOOL. accounting? Who has blamed we could have had all kinds of different accountants for any of this? That is real Howard Marks: results that could have made our cognitive failure.