Charlie Munger: Too Many People Have "Overdosed On Ayn Rand"

Key Concepts

• Unpleasant Realities of Industry: Certain aspects of American industry, like accounting practices, are as unappealing as the making of sausage or laws.
• Influence of Ayn Rand and Economics 101: Some Republican party members are criticized for an overemphasis on Ayn Rand and basic economic principles, leading to a belief that any free-market outcome, even negative ones, is desirable.
• Federal Reserve and Alan Greenspan: Alan Greenspan is acknowledged for his generally good performance as head of the Federal Reserve but is also noted for an overreliance on the free-market principle, believing that anything occurring in a free market must be acceptable.
• Financial Innovation and Risk Diversification: The phrase "financial innovation which will diversify risk" is identified as a problematic descriptor that, if banned, could have led to better outcomes.
• 2008 Financial Crisis Origins: The current economic stresses are linked to the mortgage and residential real estate bubble, with troubles spreading from one area to others.
• Human Nature and Economic Cycles: Economic downturns are attributed to human behavior, primal urges for wealth accumulation, leverage, and a tendency to believe in unrealistic outcomes, which manifest on a large scale periodically.
• Webvan as a Case Study: Webvan, an internet-based grocery delivery service, is presented as an example of a foolish and ultimately disastrous business idea, contrasting with the more complex issues in the mortgage market.
• Political Realism: A rule is stated: "The politicians are never so bad you don't live to want them back," suggesting a pragmatic view of political leadership.
• Berkshire Hathaway's Strategy in Germany: Berkshire Hathaway aims to attract family-owned German businesses seeking to monetize their companies, positioning itself as a preferred buyer for owners who care deeply about their businesses.
• German Industrial Influence: Germany's significant contribution to inventiveness and engineering, particularly in printing equipment, is highlighted.
• Baseball Team Investments: Owning baseball teams has been a good investment, largely due to the expansion of viewership through cable and pay television, which effectively increased stadium capacity. However, at current high valuations (e.g., $700 million for the Cubs), it is questioned whether new investments would be wise.
• Psychic Income of Sports Team Ownership: Owning sports teams provides "psychic income," offering celebrity and recognition, which appeals to wealthy individuals seeking public acknowledgment of their success.

Unpleasant Realities of American Industry

The speaker begins by drawing a parallel between the unappealing processes of making sausage and laws and the less-than-desirable aspects of American industry, specifically mentioning accounting practices that people "shouldn't have to witness the making of."

Critique of Republican Economic Philosophy

A significant portion of the trouble is attributed to "prominent members of my own Republican party" who are described as having "overdosed on Ayn Rand and what they learned in economics 101." This led them to believe that any outcome of human nature in a free market system, even something as extreme as an "axe murder," was a "desirable development" and a "wise distribution of risk." The speaker expresses bewilderment at how adults adopt such "silly ideas."

Alan Greenspan and the Federal Reserve

Alan Greenspan, while generally considered to have done a "very good job averaged out," is also cited as having "overdosed a little on Ayn Rand." His tendency was to believe that "if it happened in a free market, it had to be all right." The speaker argues that certain things "should be forbidden" and that the world would have functioned better if the phrase "financial innovation which will diversify risk" had been banned from all discourse.

Analysis of Current Economic Stresses

When asked about the current economic stresses and their comparison to prior periods, the speaker notes that while all economic crises have similarities, the current one has its origins "in the mortgage field and in terms of the real estate, the residential real estate bubble." A key observation is how troubles starting in one area tend to spread to others. However, this particular crisis is unique in the "shock waves" it sent and the "exposure of other practices elsewhere to their weaknesses."

Human Behavior and Economic Cycles

The speaker dismisses the idea of "magic to the analysis" and attributes the problems to "stupid things" that were done. While these specific mistakes might not be repeated, variations are expected to "pop up at some point" because "humans are what lead to stupidity and behavior." Primal urges for wealth, leverage, and a desire to believe in unrealistic outcomes ("the tooth fairy") are identified as recurring drivers of economic behavior, sometimes manifesting on a "very big scale." The speaker admits to not having "great insights on solutions."

Webvan as a Contrasting Example

In contrast to the complex mortgage crisis, the speaker brings up the example of Webvan, an "internet-based delivery service for groceries." This is described as a "really asinine idea" and an "egregious failure," but the speaker humorously notes that it was "smarter than what the people did in this mortgage field" and wishes for the return of the "brilliant people" behind Webvan.

Political Developments and a Rule of Thumb

This leads to a general attitude toward political developments, summarized by the rule: "The politicians are never so bad you don't live to want them back."

Berkshire Hathaway's Interest in German Businesses

The speaker explains the reasons for visiting Germany: to attract more family owners of German businesses to consider Berkshire Hathaway when they need to "monetize their business." The goal is to be on their radar screen, similar to how families like Wartheimr, Paul Andrews, or Pritsker have considered Berkshire Hathaway. The speaker acknowledges that Berkshire Hathaway is not as prominent in Germany as in the United States and plans to increase visibility through upcoming European visits.

German Influence on American Industry

The discussion shifts to Germany's advanced civilization in "inventiveness and engineering." It is noted that many machines in American printing plants are of German origin, highlighting the significant influence of German companies and individuals who emigrated to America and established businesses.

Investment in Baseball Teams

Regarding the investment in baseball teams, the speaker states it "has been a good investment," not solely due to earnings growth but significantly because of how "cable television multiplied the value in a big way." Television, and subsequently cable and pay-per-view, effectively expanded the "stadium" by reaching a much larger audience than physical seating capacity. While much of this increased revenue went to players, some benefited the owners. The speaker, however, expresses reservations about buying in at current high prices, citing the Cubs potentially selling for $700 million. The "psychic income" of owning sports teams, providing celebrity and recognition, is identified as a significant driver for some buyers, especially in a society with abundant wealth.

Conclusion

The conversation highlights the cyclical nature of economic folly driven by human behavior and flawed economic philosophies, contrasting complex financial crises with simpler business failures. It also touches upon strategic business development, such as Berkshire Hathaway's expansion into Germany, and the unique investment dynamics of sports franchises, where financial returns are intertwined with intangible benefits like celebrity. The overarching sentiment is a pragmatic, albeit sometimes cynical, view of both economic and political landscapes, emphasizing the recurring patterns of human decision-making.