The quotes were originally posted on 25iq. This article covers Munger's quotes on topics that begin with the letter E.
EARNINGS:
“We don't care about quarterly earnings (though obviously we care about how the business is doing over time) and are unwilling to manipulate in any way to make some quarter look better.”
“What we don't like in modern capitalism is the expectations game. It's not the kissing cousin of evil; it's the blood brother.”
“We don't give a damn about lumpy results. Everyone else is trying to please Wall Street. This is not a small advantage.”
EBITDA:
“I think that, every time you saw the word EBITDA [earnings], you should substitute the word “bullshit” earnings.”
ECONOMICS:
“Gigantic macroeconomic predictions are something I've never made any money on, and neither has Warren ”
“Economics is in many respects the queen of the soft sciences. It's expected to be better than the rest. It's my view that economics is better at the multi-disciplinary stuff than the rest of the soft science. And it's also my view that it's still lousy.”
“…Max Planck the great Nobel laureate who found Planck's Constant, tried once to do economics. He gave it up. Now why did Max Planck, one of the smartest people who ever lived, give up economics? The answer is, he said, “It's too hard. The best solution you can get is messy and uncertain. “
“economics should emulate physics' basic ethos, but its search for precision in physics–like formulas is almost always wrong in economics.”
“Economists get very uncomfortable when you talk about virtue and vice. It doesn't lend itself to a lot of columns with numbers. But I would argue that there are big virtue effects in economics. I would say that the spreading of double-entry bookkeeping by the Monk, Fra Luce de Pacioli, was a big virtue effect in economics. It made business more controllable, and it made it more honest.
“If you try and talk like this to an economics professor, and I've done this three times, they shrink in horror and offense because they don't like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second- and third-order consequences.”
ECONOMIES OF SCALE:
“On the subject of economies of scale, I find chain stores quite interesting. Just think about it. The concept of a chain store was a fascinating invention. You get this huge purchasing power — which means that you have lower merchandise costs. You get a whole bunch of little laboratories out there in which you can conduct experiments. And you get specialization. If one little guy is trying to buy across 27 different merchandise categories influenced by traveling salesmen, he's going to make a lot of dumb decisions. But if your buying is done in headquarters for a huge bunch of stores, you can get very bright people that know a lot about refrigerators and so forth to do the buying. The reverse is demonstrated by the little store where one guy is doing all the buying. It's like the old story about the little store with salt all over its walls. And a stranger comes in and says to the store owner, ‘You must sell a lot of salt.' And he replies, ‘No, I don't. But you should see the guy that sells me salt.' So there are huge purchasing advantages….” 1995 lecture at the University of Southern California entitled “A Lesson on Elementary, Worldly Wisdom as it Relates to Investment Management & Business.”
“in terms of which businesses succeed and which businesses fail, advantages of scale are ungodly important. … In some businesses, the very nature of things is to sort of cascade toward the overwhelming dominance of one firm. And these advantages of scale are so great, for example, that when Jack Welch came into General Electric, he just said, “To hell with it. We're either going to be # 1 or #2 in every field we're in or we're going to be out.”
ECONOMY:
“I think the main figure that matters to all of us, including people in the media, is: How does GDP per capita grow? And those figures have been very good. There is a huge flux both up and down, so it isn't like we're all static in status. What's important is that pie grows. ”
EDUCATION:
“I get flack for saying [when I visit a college and give a speech], “This is a nice college, but the really great educator is McDonald's.” They hate me for saying this and think I'm a slimy creature. But McDonald's hires people with bad work habits, trains them, and teaches them to come to work on time and have good work habits. I think a lot of what goes on there is better than at Harvard.”
“You could argue that [the decline of public schools] is one of the major disasters in our lifetimes. We took one of the greatest successes in the history of the earth and turned it into one of the greatest disasters in the history of the earth.”
“The theory of modern education is that you need a general education before you specialize. And I think to some extent, before you're going to be a great stock picker, you need some general education.”
“If you don't keep learning, other people will pass you by. Temperament alone won't do it – you need a lot of curiosity for a long, long time.”
“To finish first you have to first finish. Don't get in a position where you go back to go. What's interesting is that some guy whose grandfather was a lawyer and a judge—hurriedly going to Harvard Law with a wave of veterans—I was willing to go into so many different businesses. I was constantly going right into the other fellow's business and doing better than the other fellow did. The reason it was possible? Self-education— developing mental discipline, big ideas that really work.”
EFFICIENT MARKET THEORY:
“We don't believe that markets are totally efficient and we don't believe that widespread diversification will yield a good result. We believe almost all good investments will involve relatively low diversification. Maybe 2% of people will come into our corner of the tent and the rest of the 98% will believe what they've been told.”
“Berkshire's whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form. And not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance and morphed into such obscenities as the capital asset pricing model, which we also paid no attention to. I think you'd have to believe in the tooth fairy to believe that you could easily outperform the market by seven-percentage points per annum just by investing in high volatility stocks.”
“I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don't think it's totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It's efficient enough, so it's hard to have a great investment record. But it's by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.”
“I have a name for people who went to the extreme efficient market theory—which is “bonkers”. It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. It just had a difficulty in that the fundamental assumption did not tie properly to reality.”
“The possibility that stock value in aggregate can become irrationally high is contrary to the hard-form “efficient market” theory that many of you once learned as gospel from your mistaken professors of yore. Your mistaken professors were too much influenced by “rational man” models of human behavior from economics and too little by “foolish man” models from psychology and real-world experience.”
“Efficient market theory [is] a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact one of the economists who won — he shared a Nobel Prize — and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn't quite as efficient as you think, he said, “Well, it's a two-sigma event.” And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas — better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.”
ENERGY:
“I know just enough about thermodynamics to understand that if it takes too much fossil-fuel energy to create ethanol, that's a very stupid way to solve an energy problem. [Laughter] ”
“The interesting thing is the field is so big — it's enormous. One thing a modern civilization needs is energy.”
"Oil is 'Precious Stuff' That can Largely 'Remain in the Ground":
ENVIRONMENT:
“People always underestimate the ability of earth to increase its carrying capacity.”
“The laws of thermodynamic s are such that if the water is getting warmer – and I believe it is – the energy of the weather is going to go up. ”
ENVY:
“…Missing out on some opportunity never bothers us. What's wrong with someone getting a little richer than you? It's crazy to worry about this….”
“Here's one truth that perhaps your typical investment counselor would disagree with: if you're comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy.
“We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. It has happened in the past that there came bad consequences.”
“Well envy/jealousy made, what, two out of the Ten Commandments? Those of you who have raised siblings you know about envy, or tried to run a law firm or investment bank or even a faculty? I've heard Warren say a half a dozen times, “It's not greed that drives the world, but envy.”
“Suppose, any one of you knew of a wonderful thing right now that you were overwhelmingly confident- and correctly so- would produce about 12% per annum compounded as far as you could see. Now, if you actually had that available, and by going into it you were forfeiting all opportunities to make money faster- there're a lot of you who wouldn't like that. But a lot of you would think,
“What the hell do I care if somebody else makes money faster?” There's always going to be somebody who is making money faster, running the mile faster or what have you. So in a human sense, once you get something that works fine in your life, the idea of caring terribly that somebody else is making money faster strikes me as insane.”
“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?”
ESTATE TAX:
“Personally, I'm against the estate tax at its current rate, with its rapid rise to 55%. It hits owners of auto dealers, plumbers, etc. I think the exemption should be raised. “I have no problem with this rate [for estates] in the hundreds of millions of dollars. I have no problem personally with the estate tax.”
ETHICS:
“I think you'll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich–who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett (Trades, Portfolio) has done better than Marc Rich–in money–not just in reputation.” http://www.law.harvard.edu/alumni/bulletin/2001/summer/feature_1-1.html
“I think the best single way to teach ethics is by example: take in people who demonstrate in all their daily conduct a good ethical framework. But if your ethics slip and people are rewarded [nevertheless, then] it cascades downward. Ethics are terribly important, but best taught indirectly by example. If you just learn a few rules [by having ethics taught in school] so they can pass the test, it doesn't do much. But if you see people you respect behaving in a certain way, especially under stress, [that has a real impact]. [ ] “The ethics of Wall Street will always average out to mediocre at best…. This doesn't mean there aren't some wonderful, intelligent people on Wall Street — there are, like those in this room — but everyone I know has to fight their own firm [to do the right thing].”
EVA:
“I think there's an awful lot of twaddle and bull$%#* on EVA. The whole game is to turn retained earnings into more earnings. EVA has ideas about cost of capital that make no sense. Of course, if a company generates high returns on capital and can maintain this over time, it will do well. But the mental system as a whole does not work.”
EVIL:
“Avoid evil, particularly if they're attractive members of the opposite sex.”
EXECUTIVES:
“Today, it seems to be regarded as the duty of CEOs to make the stock go up. This leads to all sorts of foolish behavior. We want to tell it like it is.”
EXPECTATIONS:
“…People need to ask, “How do I play the hand that has been dealt me?” The world is not going to give you extra return just because you want it. You have to be very shrewd and hard working to get a little extra. It's so much easier to reduce your wants. There are a lot of smart people and a lot of them cheat, so it's not easy to win. (Nervous laughter)…”
“One of the smartest things a person can do is dampen investment expectations, especially with Berkshire. That would be mature and responsible. I like our model and we should do nicely.”
“I've heard that one-half of the students at elite schools want to go into private equity or hedge funds. They want to keep up with their age cohorts at Goldman. This can't possibly end well in terms of meeting these expectations. ”
EXPERIENCE:
“If you're going to be an investor, you're going to make some investments where you don't have all the experience you need. But if you keep trying to get a little better over time, you'll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work, and practice. It's like playing golf — you have to work on it.”
EXPERTS:
“… some important factor doesn't lose its “share of force” just because some “expert” can better measure other types of force.”
EXTRAORDINARY (ONE TIME) CHARGES:
“If it happens every year like clockwork, what's so extraordinary about it?”
