Mr. Munger, you’ve spoken about the importance of avoiding mental biases in decision-making. In your experience, what’s the most challenging bias to overcome? And how do you personally guard against it?
Well, what — if I had to name one factor that dominates human bad decisions, it would be what I called, denial.
If the truth is unpleasant enough people kind of — their mind plays tricks on them, and they think it isn’t really happening. And of course, that causes enormous destruction of business where people will go on throwing money into — the way they used to do things, isn’t going to work at all well in the way the world is now having changed.
And if you want an example of how denial is affecting things, take the world of investment management.
How many managers are going to beat the indexes? All cost considered, I would say maybe 5% could consistently meet the averages. Everybody else is living in the state of extreme denial. They’re used to charging big fees and so forth for stuff that isn’t doing their clients any good. It’s a deep moral depravity.
If some widow comes to you with $500,000 and you charge her 1 point a year for her, you could put her in the indexes, but you need the 1 point. And so people just charge some widow, you know, a considerable fee for a worthless advice. And the whole profession is full, that kind of denial. It’s everywhere.
So I had to say I was — I always quote Demosthenes. It’s a long time ago, Demosthenes that’s 2,000 — more than 2,000 years ago. And he said, what people wish is what they believe. Think of how much of that goes on.
And so, it’s of course, is hugely important. And you can just see it. I would say the agency costs and money management, there are just so many billions, it’s uncountable. And nobody can face it. Who wants to — keep your kids in school, you need the fees, you need the brokerage, you need this or that. So you do what’s good for you and bad for them.
Now I don’t think Berkshire does that. And I don’t think we — Guerin and I did at the Daily Journal. Guerin and I never took entitlement salary or directors’ fees or anything.
And if I have a business, I talk out of my phone or use my car, I don’t charge it to the Daily Journal. That’s unheard of. It shouldn’t be unheard of, and it goes on in Berkshire. It goes on in the Daily Journal, but we have an incentive plan now in this Journal Technologies. And it has $1 million worth of Daily Journal stock. That didn’t come from the company issuing those shares. I gave those shares to the company to use in compensating the employees.
And I learned that trick, so to speak, from a guy at BYD, which is one of the securities we hold in our securities portfolio. And BYD at one time in its history, the founder, Chairman, he didn’t use the company’s stock to reward the executives. He used his own stock. It was a big reward, too.
Well, last year, what happened? BYD last year made more than $2 billion after taxes in the auto business in China. Who in the hell makes $2 billion, who’s a brand-new entrant in the auto business for all practical purposes. It’s incredible what’s happened.
And so there is some of this old-fashioned capitalist virtual left in the Daily Journal, and there’s something left in Berkshire Hathaway, and there’s something left in BYD. But most places, everybody is trying to take what they need and just rationalizing whether it’s deserved or not.
"The easiest thing of all is to deceive one's self; for what a man wishes he generally believes to be true." ~Demosthenes