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A month shy of reaching 100 years on this blessed earth, Charles Thomas Munger or better known as Charlie Munger, a celebrated investor, someone who is now referred to as an Investment saint, gave up the ghost. As millions of tributes came in from all parts of the world, it is time to reflect on his legacy and what he taught us. There are insights for investors of course, but there are also insights he shared for general humanity and he came across with much empathy for one and all. Not only for the rich and wealthy. He had advice for just about anyone who cared to listen.
Charlie, as he was known to many, began his career working for the legendary Warren Buffet’s grandfather in his grocery store at the age of 19. Thus began a friendship that would last their lifetime. Their celebrated partnership led to a plethora of books and investment wisdom being written as they shared their folksy advice in the now famous Berkshire Hathway annual meetings.
Munger, along with Buffett, was one of the main inspirations behind the book Seeking Wisdom: From Darwin to Munger. Author Peter Bevelin explained his key learnings from both Munger and Buffett in a 2007 interview: “How to think about businesses and investing, how to behave in life, the importance of ethics and honesty, how to approach problems but foremost how to reduce the chance of meeting problems.”
Perhaps he was best known for what he coined as the Lollapalooza effect. We humans have many inherent biases and tendencies that can sway our behaviour one way or another. When several of them act in concert to drive us toward a particular action, you have a Lollapalooza effect. The Lollapalooza effect can create large-scale drivers of human behaviour — and often error.

What it means in the real world

Though the Lollapalooza effect is often shown in a bad light, it can have both positive and negative outcomes. One positive example of the Lollapalooza effect is the Alcoholics Anonymous program, which, as Munger explained, boasts a no-drinking rate of 50% in cases where all other social and health-related factors fail to motivate alcohol abusers to quit. Munger hailed Alcoholics Anonymous as a clever system that makes constructive use of people’s psychological tendencies. For example, one reason AA often works is people’s natural tendency to imitate those around them. AA members are surrounded by people who have fought to become sober, which makes newer members more likely to follow suit.
On the other hand, Munger also pointed to the open auction system as a negative example of the Lollapalooza effect. He believed that in this environment, several psychological biases converge, causing people to act foolishly. As a result, during an auction, participants will often engage in bidding wars because that’s what the people around them are doing — not because they’re passionate about acquiring the item up for auction, or because they’ve drawn the logical conclusion that they’re offering a good price for the item. This effectively describes the stock market as we know it today. He also mentioned the “herd effect” that led investors to buy what was in “fashion” and shun what was not. This often leads to losses and something he was very keen to avoid.
He once said “Its remarkable how much long term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be intelligent”.

If investors are to follow his wisdom, here are some pearls to pick:

  • “We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”
  • “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time–none, zero. You’d be amazed how much Warren reads–and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
  • “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.”
  • “The idea of caring that someone is making money faster [than you are] is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?”
  • “The big money is not in the buying or selling, but in the waiting.”

And one final quote:
“The best armour of old age is a well spent life preceding it.”
It certainly sounds like Munger had that well spent life.

“Good Ethics is Good Business”

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