In 2009 Charlie Munger did a great interview with The Stanford Lawyer. During the interview Munger discusses the skills of great investors, mistakes that he sees executives making, and the problem with banks increasing leverage in order to remain competitive saying. Here’s an excerpt from the interview:
You’ve often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.
Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It’s not a competency if you don’t know the edge of it. And Warren and I are better at tuning out the standard stupidities. We’ve left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.
If you had to characterize a few mistakes that you see executives making, which ones jump out at you?
An extreme optimism based on an inflated self-appraisal is one. I think that many CEOs get carried away into folly. They haven’t studied the past models of disaster enough and they’re not risk-averse enough. One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage. But Warren and I would not have been comfortable with more risk, entrusted with other people’s net worths. There was no reason for our financial institutions to stretch as much as they did, with the leverage, the shady people and the compromises.
Let me play devil’s advocate. People might say, “Wait a minute. I’m at bank A and I’m competing with banks B, C, and D, and they’re running at higher leverage and the system is willing to give them that additional leverage and they’re making more profits. Unless I operate at their leverage ratios, I can’t pay my traders competitively and I will fail.”
You’ve accurately described the way the culture generally works and you have seen in the present crisis how well it works for the wider civilization when everyone insists on not being left behind in lowering standards. I think the culture is simply going to have to learn to work more the way Berkshire Hathaway does, instead of the way Citigroup did.
You can read the entire interview here – Charlie Munger Interview |Stanford Lawyer | 2009
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