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Charlie Munger in his home library in 2019, age 95
(Photo: Michael Lewis for The Wall Street Journal)
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Neither can I, so I recently attended a discussion on his life and legacy, hosted by the Museum of American Finance and Fordham University's business school.
Moderated by lawyer Larry Cunningham, the event featured three people who knew Munger well: Ron Olson, partner at the law firm Munger, Tolles & Olson; Don Graham, chairman emeritus of Graham Holdings; and Tom Gayner, CEO of the insurer Markel Group.
Before taking on your opponent in court, Olson learned from Munger, practice "shadowboxing" instead: striking blows when the opponent isn't there.
Munger, Tolles & Olson has often "shadowboxed" by hiring mock juries, making oral arguments before them and then observing their deliberations from behind a one-way mirror, Olson said. That way, the firm can detect the weaknesses in its own arguments through other people's eyes.
Graham recalled another insight of Munger's: When a corporate board of directors considers a capital expenditure or acquisition, it should inform the people advocating it that they'll have to come back three years later to compare their original projections with how it ultimately worked out.
Gayner cited one of Munger's favorite historical tidbits: In ancient Rome, when an aqueduct or bridge was built, the chief engineer had to stand directly under the arch when the scaffolding was removed.
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Still upright.
Hubert Robert, "Aqueduct in Ruins" (late 18th century), Metropolitan Museum of Art
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Munger called ideas like these "mental models." They're systematic ways of approaching decisions: minimizing bias, maximizing accountability, fighting overconfidence and widening the aperture of your viewpoints.
Imagine how much more sensible the world of business and investing would be if more people adopted Munger's mental models!
David Park, an individual investor who attended the event, took good notes (I was laughing too hard to capture it all!). Munger junkies can read them here.
I was fortunate to interview Munger often. My favorites are from 2014 and the visit my colleague Nicole Friedman and I had with him five years ago, which you can read here, here and here.
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"Markandeya Viewing Krishna in the Cosmic Ocean" (ca. 1680), Cleveland Museum of Art
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On June 18, 1948, The Wall Street Journal heralded the arrival of an exciting new technology for music lovers: vinyl LP record albums.
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The Wall Street Journal, June 18, 1948, p. 1.
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Nowadays, after decades of apparently irreversible decline, LPs are back. My colleague Bob Hagerty wrote last month about a vinyl record store in Pittsburgh that's booming.
"In business it sometimes pays to be stubborn and ignore trends that seem overwhelming," he wrote. "Even if a market shrinks drastically, there can still be a profitable business for the last suppliers standing."
Younger listeners love old vinyl. As this recent WSJ video shows, the $1.2 billion vinyl industry is "back from the dead."
Corinne Bailey Rae had it right in "Put Your Records On":
the more things seem to change, the more they stay the same.
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In the last issue, as several readers pointed out, a link didn't work.
In the section "A Few Good Reads," the correct link for "How well do experts know the limits of their own expertise? (Yuyan Han and David Dunning)" -- is:
https//onlinelibrary.wiley.com/doi/full/10.1002/bdm.2375.
Some readers may know that Dunning is the co-discoverer of what's known as the Dunning-Kruger effect. As he defines it: "On any particular topic, people who are not experts lack the very expertise they need in order to know just how much expertise they lack."
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Mary Cassatt, "The Letter" (ca. 1890), Art Institute of Chicago
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Have a question you'd like me to answer?
Want to weigh in on what you just read? Got a tip on something that I or my colleagues should investigate? Itching to tell me I'm wrong about something?
Just reply to this email and I'll see your note. Don't forget to include your name and city.
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Q:
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Backtesting: sounds like a classic case of using a crystal ball to buy low and sell high? Whenever I look at a fund (or stock) I always want to see long-term returns, i.e. 1, 3, 5 and 10 [years] at a minimum. Am I falling prey to backtesting on any of these numbers? Or is backtesting only used to project possible future returns?— Chris Adams, Ashland, Ore.
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A:
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Backtesting, which I wrote about last month in "When Past Performance Doesn’t Even Predict Past Performance," is everywhere in the investing business.
It's especially common at ETFs that track a newly created index.
As the Securities and Exchange Commission has pointed out, backtesting isn't all bad:
...backtested performance may help investors understand how an investment strategy may have performed in the past if the strategy had existed or had been applied at that time.
However, added the SEC, backtesting also
...allows an adviser to claim credit for investment decisions that may have been optimized through hindsight [and] to modify its investment strategy...until it can generate attractive results and then present those as evidence of how its strategy would have performed in the past.
The short answer is: Read the fine print!
Prospectuses and marketing materials have to tell you if past performance is based on backtested rather than real data.
Search the documents for the keyword hypothetical. Then apply skeptical common sense.
As I wrote:
If this idea is so great, why weren’t these guys using it at the beginning of the period instead of only at the end?
How long has the strategy actually been used, and with how much money? Has it been tracked over even longer periods than reported in the backtested data? How many other strategies were backtested but abandoned? Do the past numbers include trading costs?
If you can't get answers that make sense, don’t invest.
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Be well and invest well,
Jason
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Julie de Graag, "June" (woodcut, 1918), Rijksmuseum
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People chronically misappraise the limits of their own knowledge; that’s one of the most basic parts of human nature. Knowing the edge of your circle of competence is one of the most difficult things for a human being to do. Knowing what you don’t know is much more useful in life and business than being brilliant.
—Charlie Munger
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