Deep within the 2011 Berkshire Hathaway Annual Shareholder’s Meeting lies a pocket of wisdom from Charlie Munger. Here’s how he would go about teaching finance at a business school:
Shareholder question: In a book about Charlie, “Damn Right!” by Janet Lowe, Charlie talks about his view on teaching finance. He says that he would use the histories of a hundred or so companies that did something right or wrong as a basis for teaching the course. Could each of you—and since this concerned Charlie, we’ll start with [him]—give us an example or two from either category, right moves or wrong moves?
Warren Buffett: I predict Charlie is going to talk about Costco. Go ahead, Charlie. [Laughter]
Charlie Munger: Well, Costco, of course, is—[laughter]—a business that became the best in the world in its category, and it did it with an extreme meritocracy and an extreme ethical duty, self-imposed, to take all its cost advantages as fast as it could accumulate them and pass them onto the customers. And, of course, that created ferocious customer loyalty.
It’s been a wonderful business to watch. And, of course, strange things happen when you do that and do that long enough.
Costco has one store in Korea that will do over 400 million in sales this year. These are figures that can’t exist in retailing, but, of course, they do.
So that’s an example of somebody having the right managerial system, the right personnel selection, the right ethics, the right diligence and et cetera, et cetera, et cetera. That is quite rare. If once or twice in a lifetime you’re associated with such a business, you’re a very lucky person.
The more normal business is a business like, say, General Motors, which became the most successful business of its kind in the world and wiped out its common shareholders, what, last year?
That is a very interesting story, and if I were teaching in a business school, I would have Value Line-type figures that took people through the entire history of General Motors. I would try and relate the changes in the graph and in the data to what happened in the business.
To some extent, they faced a really difficult problem: heavily unionized business, combined with great success, and very tough competitors who came up from Asia and elsewhere, and to some extent from Europe. That is a real problem, which, of course — to prevent wealth from killing you, your success turning into a disadvantage, is a big problem in business.
So there are all these wonderful lessons in those graphs. And I don’t know why people don’t do it. The graphs don’t even exist that I would use to teach.
I can’t imagine anybody being dumb enough not to have the kind of graphs I yearn for. [Laughter] But so far as I know, there’s no business school in the country that’s yearning for these graphs. Partly the reason they don’t want it is if you taught a history of business this way you’d be trampling on the territories of all the little professors in subdisciplines. You’d be stealing some of their best cases.
And in bureaucracies—even academic bureaucracies—people protect their own turf. And, of course, a lot of that happened at General Motors.
I really think the world … that’s the way it should be taught. Harvard Business School once taught it much that way, and they stopped.
I’d like to make a case study as to why they stopped. [Laughter]
I think I can successfully guess. It’s that, of course, the history of business trampled on the territory of barons of other disciplines like the baron of marketing, the baron of finance, the baron of whatever.
IBM is an interesting case. I mean, there’s just one after another that are utterly fascinating, and I don’t think they’re properly taught at all because nobody wants to do the full sweep.
Warren Buffett: Charlie and I were on a plane recently that was hijacked.
Charlie Munger: With what?
Warren Buffett: It was hijacked. I’m telling about our experience on that hijacked plane when the hijackers picked us out as the two dirty capitalists that they really had to execute.
But they were a little abashed about it. They didn’t really have anything against us, so they said that each of us would be given one request before they shot us, and they turned to Charlie and they said, “What would you like as your request?”
Charlie said, “I would like to give once more my speech on the virtues of Costco, with illustrations.” [Laughter]
The hijacker said, “Well, that sounds pretty reasonable to me.” He turned to me and said, “And what would you like, Mr. Buffett?”
And I said, “Shoot me first.” [Laughter]
Charlie Munger: Anyway …
Business schools have been criticized for years and a big part of that criticism comes from the investing community. But despite the criticism, many business schools still center their teachings around fallible concepts such as the efficient market hypothesis.
They could go a lot farther and solve most of their problems if they simply revolve all their courses around the concept of margin of safety. But they don’t. To them, low risk and low returns go hand in hand as do high risk and high returns. But the truth is that low-risk, high-return opportunities occur in all facets of life. They should be teaching how students can go out and exploit such opportunities.
What’s the key takeaway for you here?
The takeaway is that you don’t have to go to business school to study finance. It’s not at all necessary. With a little energy and curiosity, you can learn all you need to know about business, valuation, and rational decision making all by yourself.