Charlie Munger’s biggest business mistake, and what it tells us about wisdom.
My grandmother died two weeks ago, exactly to the day. She was 92 years old. One of the things I’ve been thinking about in the days since her passing is the nature of wisdom.
My takeaway is a bit different. Reading is clearly incredibly valuable for providing perspectives and approaches that you may not have otherwise thought but it can’t possibly take the place of taking action and experience. You can’t know which concepts to instantiate without interacting with the world as it exists today.
Munger’s story seems to be more about risk mitigation. How could he have known beforehand that the transformer business was going to be so grueling? Maybe he could have read more books and realized it doesn’t have aspects of a good business but this seems unlikely to me. I’d argue that the mistake could have been avoided if he still tried, but just took a smaller bet. Then he stills learns the faults of the business, but still has more resources to make other bets in the intervening years.
This is probably an oversimplification. There is an argument that sometimes opportunities are less likely to work because you didn’t bet enough. I am an employee, saving money, looking for opportunities, so I am not very believable. My bias is against too much reading (which is what I am prone to) and not enough action but maybe this will turn out to be the correct choice in the long run. Who’s to say?
Anyway, great article Cedric. Excited to read the whole case study!
Certainly, if your tendency is to read a lot and not act, there is value in just acting — in ways that don’t lock you up for 11 years, like how you put it! — so that you gain sufficient experience. It strikes me that you can get the bulk of the benefit of Munger’s experience with Hoskins if you had simply worked at a no-moat company for two years, and you were observant enough about what it felt like to work under conditions of brutal competitive arbitrage.
The problem is that I know many people who have, and they don’t appear to think “oh, is there anything out there that can explain why this business is so horrible?” They don’t look outside of their experiences enough to discover that there are businesses that are much nicer to run. And they don’t think:
But I hear you: I am also more likely to read a lot as opposed to acting; though that has started to change after my judo experiment.
I suppose this is what makes this all hard.
I’ve edited two paragraphs in the original essay for correctness.
I think it was acceptable for Munger to burn 11 years on a moatless business in the 60s. I don’t think it is acceptable today. You can learn from Munger’s mistakes.
You don’t have to repeat them now.You shouldn’t get involved with a moatless business and then be surprised when it doesn’t go well; you don’t have to repeat his mistakes again .How did Munger
learn the right lessonslearn what he did — about good businesses and bad businesses — during those hard years with Hoskins? There is no secret to the answer: he read books. Lots of books, mostly biographies. And he was involved in Los Angeles’s business community; he must’ve been looking for concept instantiations as he observed all those businesses around him.
I fell into the trap of saying ‘learning the lessons’ of history, as if these lessons are immutable and 100% true. But of course we know that’s not the case (given what we know from CFT). It’s more accurate to say that when you get involved with a moatless business and have your face ripped off by competitive arbitrage, you shouldn’t be surprised — it is something that can happen (in fact is very likely to happen), not that it will happen 100% of the time.
@cedric it was news of your grandmother’s death that brought me back to the site after a hectic few months. So sorry to hear.
It has been 25 years since my grandmothers died within a few months of each other; I was close friends with both and I have missed them at least every month since.
The rough edges of grief do get smoothed by the flow of time - hang in there.
Thanks Michael. I know that this, too, shall pass. I hope things are good on your end as well. 
I grew up in Omaha, and while I won’t say too much, I’ve spent a bit of time with Warren and Charlie over the years. I’d say their biggest asset is spending decades chipping away at their own ignorance of the world. As they say, they’re not trying to be the smartest people, just less dumb over time. That’s a huge thing…
Sorry about your grandmother 
Joe
You can learn from reading stuff and even pick up useful models. I tried to do that with my book on SQL Patterns. But you need the writers to be at least two levels above you in the sense that they have to both be aware of their experiences and be able to synthesize their experience into clean concepts.
Anybody can take stuff they’ve experienced and generalize it into “advice” in the form of heuristics or rules. But this advice is often too specific or too generic. You could even have the same experience multiple times and extract the wrong patterns, like the guy you mentioned with the consulting firm.
It took the likes of Michael Porter to extract the right patterns and codify them into useful concepts like moats. So my rules around wisdom are to read very old books that are still relevant and to read multiple books on the same subject in order to see what actually matters.