Articles: Wisdom Collected from Interviews, Books, and More

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Daniel Scrivner

Who is Charlie Munger? Wit and Wisdom from the World’s Most Irreverent Billionaire and Vice Chairman of Berkshire Hathaway

This is part of my profiles on history's greatest innovators, founders, and investors. Check out the profiles of Warren Buffett, Rose Blumkin, Bernard Arnault, Steve Jobs, Rick Rubin, or browse them all. You can also browse my collection of the greatest speeches, interviews, and letters of all-time.

Charlie Munger is one of the great minds of the 20th century. Below is an attempt to capture that wisdom in one shareable place.

“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.”

Charles “Charlie” Munger, a longtime resident of Pasadena, California, is perhaps best known as the Vice Chairman of the world’s greatest compound interest machine: Berkshire Hathaway, Inc.

In the time of his and Warren Buffett’s reign as the leaders of Berkshire, the company has returned roughly 2,000,000% on its initial value, or 20,000 to 1. This was accomplished in the adult lifetime of two men, simply by investing the capital of the company in an increasing number of prosperous enterprises and without dangerous amounts of borrowing. It is a story for the ages.

Charlie is known as a “sidekick” only to people who don’t know him very well. To those who do know him, Charlie is a fiercely independent intellectual who, in the words of his partner Buffett, “Marches to the beat of his own music, and it’s music like virtually no one else is listening to.”

Besides his work co-headlining the Berkshire affair and a variety of other business and philanthropic ventures, Charlie is known for his fluent, multidisciplinary mind. Trained as a meteorologist during World War II and as a lawyer at Harvard before devoting himself to business, Munger has drawn heavily from the study of psychology, economics, physics, biology, and history, among other disciplines, in developing his system of “multiple mental models” to cut through difficult problems in complex social systems. It is a system like no other.

As a result, his insights on business and life are unique, rare, and correct with unusual consistency. Speeches and writings made long ago stand up in their logic and validity today as much as when they were written, given their basis in the deeply fundamental wisdom of the world.

Adopting the “Munger” approach to thinking is difficult, as is imitating any genius, but utilizing its core tenets will very quickly begin to remove the cobwebs from your mind. When asked his secret to success, Munger once answered simply “I’m rational.”

On this page:

Quotes and Advice from Charlie Munger

“It took a long time to get ahead. I will say, in retrospect, I'm glad it took so long because it was interesting.”

“All Berkshire does is copy the right people.”

“Take a simple idea and take it seriously.”

“It’s not a competency if you don’t know the edge of it.”

“I like people admitting that they were complete, stupid horses asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.”

“Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group… then to hell with them.”

“There’s no way you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes.”

“Extreme specialization is the way to succeed.  Most people are way better off specializing than trying to understand the world.”

The Key to Success: “I have never succeeded very much in anything in which I was not very interested. If you can’t somehow find yourself very interested in something, I don’t think you’ll succeed very much — even if you’re very smart.”

“An intense interest in any subject is indispensable if you want to excel.”

“The iron rule of nature is: You get what you reward for. If you want ants to come, you put sugar on the floor.”

“So people want to find some formula. It's what I call 'physics envy.' These people want the world to be like physics. But the world isn't like physics, outside of physics. And that false precision just does nothing but get you in trouble.”

“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day — if you live long enough — most people get what they deserve.”

“We’re just not interested in taking a substantial chance of taking a lot of very decent people back to 'Go' so we can have one more zero on our net worth.”

“I think Warren and I know the edge of our competency better than other people do.”

“If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands.”

“I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.”

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

“I paid no attention to the territorial boundaries of academic disciplines and I just grabbed all the big ideas that I could.”

“Just because you like it does not mean that the world will necessarily give it to you.”

“I always say I want to know where I would die so I can never go there.”

“I'm afraid that's the way it is. If there are twenty factors and they interact some, you'll just have to learn to handle it — because that's the way the world is. But you won't find it that hard if you go at it Darwin-like, step by step with curious persistence. You'll be amazed at how good you can get.”

“It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities.”

Charlie Munger’s three rules for a successful career:

  1. Don’t sell anything you wouldn’t buy yourself.
  2. Don’t work for anyone you don’t respect and admire.
  3. Work only with people you enjoy.

The desire to get rich fast is pretty dangerous.

Knowing what you don’t know is more useful than being brilliant.

People are trying to be smart. All I am trying to do is not to be idiotic, but it’s harder than most people think.

Life, in last, is like a poker game wherein you have to learn to quit sometimes when holding a much-loved hand. You must learn to handle mistakes and new facts that change the odds.

My idea of shooting a fish in a barrel is draining the barrel first.

Once we’d gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.

Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by the Great Crash and the Depression almost destroyed him. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.

Sit on your ass investing. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax  system gives you an extra one, two, or three percentages points per annum.

Acknowledging what you don’t know is the dawning of wisdom.

You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.

You should remember that good ideas are rare. When the odds are greatly in your favour, bet heavily.

Mimicking the herd invites regression to the mean.

I’ve never been able to predict accurately. I don’t make money predicting accurately. We just tend to get into good businesses and stay there.

If you, like me, lived through 1973-74 it even the early 1990s, there was a waiting list to get OUT of the country club. That’s when you know things are tough. If you live long enough, you’ll see it.

The way to get rich is to keep $10 million in your checking account in case a good deal comes along.

I succeeded because I have a long attention span.

It is an unfortunate fact that great and foolish excess can come into prices of common stocks in the aggregate. They are valued partly like bonds, based on roughly rational projections of use value in producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up, so far.

I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit earnings.’

Where you have complexity, by nature you can have fraud and mistakes. This will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world.

Smart people aren’t exempt from professional disasters from overconfidence.

It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.

In terms of business mistakes that I’ve seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. Anytime somebody offers you a tax shelter from here in life, my advice would be don’t buy it.

An isolated example that’s very rare is much easier to endure than a perfect sea of misery that never ceases.

Move only when you have the advantage. You have to understand the odds and have the discipline to bet only when the odds are in your favor.

View a stock as an ownership of the business and judge the staying quality of the business in terms of its competitive advantage.

I think that one should recognize reality even when one doesn’t like it. Indeed, especially when one doesn’t like it.

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying: ‘It’s the strong swimmers who drown.’

There is more dementia about finance than there is about sex.

If people weren’t wrong so often, we wouldn’t be so rich.

You have to be very patient, you have to wait until something comes along, which, at the price you’re paying, is easy. That’s contrary to human nature, just to sit there all day long doing nothing, waiting. It’s easy for us, we have a lot of other things to do. But for an ordinary person, can you imagine just sitting for five years doing nothing? You don’t feel active, you don’t feel useful, so you do something stupid.

We have a history when things are really horrible of wading in when no one else will.

By and large I don’t think much of finance professors. It is a field with witchcraft.

There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you.

Successful investing requires this crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long.

We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.

In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables — like the discount warehouses of Costco.

There are two kinds of businesses: The first warns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.

Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.

The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.

If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.

Averaged out, betting on the quality of a business is better than betting on the quality of management. But, very rarely, you find a mange who’s so good that you’re wise to follow him into what looks like a mediocre business.

From all business, my favorite case on incentives is Federal Express. The heart and soul of their system — which created the integrity of the product — is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on-time. They tried everything — moral suasion, threats, you name it. And nothing worked. Finally, somebody got the idea to pay all these people not by the hour, but by the shift — when it’s done, they can go home. Well, their problems cleared up overnight.

As you can tell in Berkshire’s operations, we are much more conservative. We borrow less, on more favorable terms. We’re happier with less leverage. You could argue that we’ve been wrong, and that it’s cost us a fortune, but that doesn’t bother us. 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.

We didn’t know when we were young which things to stretch for, but by the time we reached Iscar, which we never would have bought when we were young, we knew to stretch for the right people. It’s a hell of a business. Everything is right there. Isn’t it good that we keep learning? Better late than never.

Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day — if you live long enough — most people get what they deserve.

Know the big ideas in the big disciplines and use them routinely — all of them, not just a few.

I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.

There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.

Extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world.

Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.

Being rational is a moral imperative. You should never be stupider than you need to be.

Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind.

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.

‘One solution fits all’ is not the way to go. The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You can’t run all these places with a cookie-cutter solution.

Warren is one of the best learning machines on this earth. Warren’s investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is.

I’m getting more experienced at aging. I’m like the man who jumped off the skyscraper and at the 5th floor on the way down says, ‘So far this is not a bad ride.’

You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. But there are also cases where you have to recognise that you have no wisdom to add — and that your best course is to trust some expert.

Most people are trained in one model — economics, for example — and try to solve all problems in one way. You know the saying: ‘To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.

The best armor of old age is a well-spent life preceding it.

In my whole life, I have known no wise people who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.

Life is always going to hurt some people in some ways and help others. There should be more willingness to take the blows of life as they fall. That’s what manhood is, taking life as it falls. Not whining all the time and trying to fix it by whining.

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 highest form that civilization can reach is a seamless web of deserved trust — not much procedure, just totally reliable people correctly trusting one another. In your own life, what you want is a seamless web of deserved trust. And if your proposed marriage contract had forty seven pages, I suggest you not enter.

I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well, every missed chance in life was an opportunity to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion. That is a very good idea.

Dean Kendall of the University of Michigan music school once told me a story: ‘When I was a little boy, I was put in charge of a little retail operation that included candy. My father saw me take a piece of candy and eat it. I said, “Don’t worry. I intend to replace it.” My father said, “That sort of thinking will ruin your mind. It will be much better for you if you take all you want and call yourself a thief every time you do it.”’

It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.

Concepts from Charlie Munger

The Lollapalooza Effect
The term Charlie Munger coined for factors which reinforce and greatly amplify each other.

The most important thing to keep in mind is the idea that especially big forces often come out of these one hundred models. When several models combine, you get lollapalooza effects. This is when two, three, or four forces all operating in the same direction. And, frequently, you don't get simple addition. It's often like a critical mass in physics where you get a nuclear explosion if you get to a certain point of mass — and you don't get anything much worth seeing if you don't reach the mass. Sometimes the forces just add like ordinary quantities and sometimes they combine on a breakpoint or critical-mass basis.

More commonly, the forces coming out of these one hundred models are conflicting to some extent. And you get huge, miserable tradeoffs. But if you can't think in terms of tradeoffs and recognize tradeoffs in what you're dealing with, you're a horse's patoot. You clearly are a danger to the rest of the people when serious thinking is being done. You have to recognize how these things combine. And you have to realize the truth of biologist Julian Huxley's idea that 'Life is just one damn relatedness after another.' So you must have the models, and you must see the relatedness and the effects from the relatedness.

Outstanding Investor Digest, December 29, 1997

Speeches and Writing from Charlie Munger

The Berkshire System: Reflections Upon Celebrating 50 Years
On Berkshire Hathaway's 50th anniversary, Charlie Munger contributed his reflections on what he called "The Berkshire System."

The (Revised) Psychology of Human Misjudgement Speech by Charlie Munger
This speech is considered the magnum opus on why we behave the way we do.

A Lesson on Elementary Worldly Wisdom
Charlie describes his thoughts on how to invest, but only after going through a detailed list of useful mental models fundamental to understanding the world before you learn to invest.

Charlie Munger's 2007 Commencement Address
Charlie delivered this commencement address to the graduates of the University of Southern California Law School on May 13, 2007.

Strengths and Weaknesses After Considering Interdisciplinary Needs
Economics has often been the Queen of the social sciences. And yet, it’s still not very good. Charlie diagnoses its strengths and weaknesses, and offers some ways it could improve.

Turning $2 Million Into $2 Trillion
Charlie goes though a long mental exercise of building Coca-Cola up from scratch, starting in 1986, using only the elementary mental models that would be learned by a young college student.

Books Written on Charlie Munger

Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger
Compiled by Glenair CEO Peter Kaufman, Poor Charlie’s Almanack is the greatest compendium of Munger wisdom available.
Read my book summary →

Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger
Janet Lowe’s brief readable biography of Charlie Munger’s life.
Read my book summary →

Seeking Wisdom: From Darwin to Munger
Seeking Wisdom is the result of Peter Bevelin's quest for wisdom. In it he shares the wisdom of some of the greatest minds throughout history, including the philosophy of super-investor and Berkshire Hathaway Vice Chairman Charles Munger.

Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway's Vice Chairman on Life, Business, and the Pursuit of Wealth
Words of wisdom from Charlie Munger—Warren Buffett’s longtime business partner and the visionary Vice Chairman of Berkshire Hathaway—collected and interpreted with an eye towards investing by David Clark, coauthor of the bestselling Buffettology series.
Read my book summary →

Charlie Munger's Wesco Shareholder Letters

Wesco Financial was a diversified conglomerate that owned insurance, furniture rental, and steel servicing businesses. It was originally owned by Blue Chip Stamps, which also owned See's Candies, and merged with Berkshire Hathaway in 2011. Charlie Munger served as the Chairman and CEO of Wesco from 1984 to 2011. Below is an archive of the shareholder letters he published from 1997 until 2009.

All of Charlie Munger's Writing in a Single PDF

If you're incredibly curious, I've compiled all of Charlie Munger's writing into a single downloadable PDF that's more than 1,000+ pages long.

It includes Charlie's shareholder letters for Blue Chip Stamps, The Daily Journal, as well as all of his speeches, op-eds, and essays. It's an incredible resource for those that want to read and study everything Charlie Munger's written over his 50+ year investing career.

Download 1,000+ Page PDF of Charlie's Writing →

A Parody About the Great Recession

In 2011, Charlie Munger wrote the following parody describing the contributions of Wantmore, Tweakmore, Totalscum, Countwrong, and Oblivious to the tragic "Great Recession" in Bonehedia and the thoughts of some people relating to this disaster. It's a hilarious parable that mirrors the 2009 Financial Crisis.

In the country of Boneheadia there was a man, Wantmore, who earned his income as a home mortgage loan originator. Wantmore operated conservatively. All his home loans bore interest rates of 6 percent or less, and he demanded of all borrowers large down payments, documented proof of adequate income, and an immaculate credit-using history. Wantmore sold all his loans to life insurance companies that, before closing purchases, checked loan quality with rigor—then held all loans to maturity.

As Wantmore prospered, he eventually attracted the attention of Tweakmore, a very bold and ingenious investment banker. There was no other investment banker quite like Tweakmore, even in the United States.

Tweakmore had become the richest person in Boneheadia, driven by an insight that had come to him when, as a college student, he had visited a collection of hotels that contained gambling casinos located in a desert.

As Tweakmore saw immense amounts of cash pouring into cashiers' cages surrounded by endless sand, in business operations that did not tie up any capital in inventories, receivables, or manufacturing equipment, he realized immediately that he was looking at the best business model in the world, provided one could also eliminate commitment of any capital or expense to hotel rooms, restaurants, or facilities providing parking or entertainment.

Tweakmore also saw exactly how he could create for himself an operation that possessed all the characteristics of his ideal business. All he had to do was add to investment banking a lot of activities that were the functional equivalent of casino gambling, with the bank having the traditional "house advantage." Such casino-type activities, masked by respectable-sounding labels, Tweakmore foresaw, could easily grow to dwarf all the action in ordinary casinos.

Determined to create and own his ideal business as fast as possible, Tweakmore quit college and entered investment banking. Within 12 years, Tweakmore was the most important investment banker in Boneheadia. Tweakmore rose so rapidly because he was very successful in convincing regulators and legislators to enlarge what was permissible.

Indeed, by the time Tweakmore called on Wantmore, any investment bank in Boneheadia could invent and trade in any bets it wished, provided they were called "derivatives," designed to make counterparties feel better about total financial risks in their lives, outcomes that automatically happened. Moreover, an investment bank faced no limit on the amount of financial leverage it employed in trading or investing in derivatives or anything else. Also, Tweakmore had obtained permission to use "Mark-To-Model" accounting that enabled each bank to report in its derivative book whatever profit it desired to report. As a result, almost every investment bank claimed ever-growing profits and had ownership of assets totaling at least 30 times an ever-swelling reported net worth. And despite a vast expansion of transaction-clearance risk, no big mess had so far occurred.

Tweakmore was pleased, but not satisfied, by what he had accomplished. And he now planned to revolutionize Boneheadia's home-mortgage loan business in a manner that would makeTweakmore a national hero.

In his first proposal to Wantmore, Tweakmore held much of his ingenuity in reserve. All he proposed was that Wantmore hereafter sell all his home loans to Tweakmore at a higher price than life insurers would pay. Tweakmore said that he planned to put all loans into trusts with no other assets. Each trust would be divided into five "tranches" with different priorities in use of loan payments. Four tranches would use their shares of loan payments to pay off complex new fixed-interest-bearing, freely tradable debt instruments, called CDOs. The fifth tranche got a tiny residue in case all home loan payments were received as due. The CDOs would be sold by Tweakmore, using a highly paid sales force, to anyone who could be induced to buy, even highly leveraged speculators and small Scandinavian cities near the Arctic.

To Wantmore, Tweakmore's proposal at first appeared unfeasible. The planned operation seemed to resemble the operation of a meat vendor who routinely bought 1,000 pounds of chuck roast, sliced it up, and then sold 950 pounds as filet mignon and the balance as dog food.

But Wantmore's doubts melted away when Tweakmore revealed how much he would pay. Under the offered terms, Wantmore would double his income, something Tweakmore could easily afford because his own income was going to be three times that of Wantmore. After Wantmore accepted Tweakmore's proposal, everything worked out exactly as Tweakmore had planned, because buyers of CDOs in aggregate paid much more than the life insurers had formerly paid.

Even so, Wantmore, as he became familiar with Tweakmore's prosperity, was soon dissatisfied with a merely doubled income. With Wantmore restive, Tweakmore now displayed the full range of his ingenuity.

What Tweakmore next proposed was that Wantmore add to his product line a new class of"Subprime, pay-what-you-wish" home-mortgage loans. All loans would bear interest at 7.5% or more, and borrowers would not be allowed to state anything except that they wanted the money. There would be no down payments and no credit checks or the like. Also, each loan would be very user-friendly in its first three years, during which the borrower could make only tiny payments with all unpaid interest being added to principal. After three years, very onerous loan service was required, designed to pay off the greatly swollen principal, plus all interest, over the next five years.

This proposal would have seemed preposterous, even hilariously satirical, if it had been presented to Wantmore when Tweakmore had first called. But by now Wantmore had doubled his income by going along with a peculiar idea of Tweakmore's. So Wantmore's credulity was easily stretched to allow acceptance of the new loan product, which Tweakmore projected would triple Wantmore's already doubled income.

It is easy to see why Wantmore became a "true believer" in the new loan product. But why did the already super-rich, prominent, and sophisticated Tweakmore believe his revised scheme would work safely and well for him?

Well, we know the answer. As Tweakmore revealed in his prideful autobiography, his thought process was as follows:

  1. There would be no significant troubles during the first three years. Under the accounting standards of Boneheadia, all its accountants would be required for a long time to reserve no loan-loss provision at all against unpaid principal and unpaid interest on the new loans. And CDOs would be valued highly in traditional markets because underlying loans were booked at unreasonably high value. It wouldn't matter that homebuyers were making no down payments, had no personal liability at any time, and paid only a tiny portion of interest accrued for three years. It also wouldn't matter that any competent inquiry would have revealed extreme past improvidence on the part of most borrowers.
  2. House prices in Boneheadia would not merely rise as they had done before. Prices would rise much faster as more and more people learned they could bid to acquire homes without using any of their own money, no matter how poor were their credit-using histories.
  3. All the buyers of new CDOs would have a near-perfect investment experience. Ever-rising house prices would cause full payment of all mortgage debt as due. The market for the new CDOs would expand and expand as investors reliably earned much more and faster as the scheme fed on itself in a runaway feedback mode.
  4. True, after the first three years many overstretched homebuyers were sure to suffer somewhat as they were forced, by threats of foreclosure, to sell their homes. This would often cost them their credit and the respect of their children, friends, and employers, but that would be the only trouble, and it would prove endurable by Tweakmore and everyone else, except the people forced out of their homes.
  5. The runaway feedback mode that drove up house prices would cause no significant trouble for decades, as had happened in Japan, where a big bust in real estate prices occurred only after the Imperial Palace grounds in Tokyo were apparently worth more than the market value of the entire state of California.
  6. The principles of economics would give the scheme a large tailwind and considerable popularity. As Tweakmore, a former student in elementary economics, knew from studying Galbraith, a large undisclosed embezzlement strongly stimulates spending because the perpetrator is much richer and the victim spends as before because he does not yet feel poorer. And what Tweakmore was creating was the functional equivalent of along-running undisclosed embezzlement on steroids. The perpetrators would not be the only ones to spend more, as typically occurs during ordinary embezzlements. The CDO-buying victims also would spend more as they believed they were getting richer and richer from ever-growing paper gains embodied in accrual of interest at above normal rates.
  7. To be sure, the scheme looked a little like a chain-letter scheme, and such schemes were usually ill-regarded by prospective users, partly because the schemes were criminal and partly because the schemes always blew up so quickly, bringing criminal troubles so soon. Tweakmore's scheme, in contrast, would, by design, be lawful and benevolent, and recognized as such, because it would create big macroeconomic stimulus as a public good.
  8. And should the scheme eventually blow up after decades, like the land-price bubble inJapan, who could fairly blame Tweakmore? Nothing lasts forever. Besides, the blowup might be lost in a miasma of other blowups like those sure to come in many irresponsible countries and subdivisions of countries.

Tweakmore's revised scheme worked fantastically well for a considerable period. Naturally, there were some glitches, but Tweakmore turned each glitch into an opportunity to boost profit.For instance, when Wantmore was made nervous as hordes of scumball-salesmen were drawn into his business by rich commissions paid for production of easy-to-sell "subprime" pay-what-you-wish home loans, Tweakmore responded by buying Wantmore's business. Then Tweakmorere placed Wantmore with a new CEO, Totalscum, who did not consider any business practice optimal unless it was depraved. Totalscum soon increased loan production by 400 percent and his success caused Tweakmore to buy five additional loan businesses and replace their CEOs with people like Totalscum, causing profits to soar and soar, even though Tweakmore never again found anyone else whose depraved operations could produce results that matched those of Totalscum.

As Tweakmore's scheme went on, it was necessary for its continuing success that the accountants of Boneheadia never stop treating as trustworthy a lot of hugely important loan-payment promises that any sensible person would deem unreliable. However, there was almost no risk that accountants would act otherwise than as Tweakmore desired. The accountants of Boneheadiawere not allowed to be sensible. They had to use rote "rules-based" accounting standards set by a dominating man, Countwrong, who was head of Boneheadia's Accounting Standards SettingBoard. And Countwrong had ordained, in effect, that all loss provisions on the new loans must remain based on the zero-loss record that had existed before Wantmore met Tweakmore. And, so long as Countwrong was in charge, no one was going to use in accounting an understanding of runaway feedback modes, instead of Countwrong's rules.

Of course, if Totalscum or Tweakmore ever started to have loan losses, he would have to start making loan-loss provisions against new loans. But there weren't any meaningful loan losses for anyone for a very long time.

Countwrong was so habit-bound as a thinker that he never recognized that his cognition was anti-social. He had always sought simplicity of process for accountants at the expense of"principles-based" rigor and thought that would better serve his country. He had been rewarded in his life for his convictions, and he was now proud of his conclusions, even as they were contributing mightily to the super-catastrophe sure to come eventually from Tweakmore's scheme.

A large economic boom occurred in Boneheadia just as Tweakmore had expected. The boom made the regulators of Boneheadia feel extremely good about themselves as they passively watched the ever-enlarging operations of Tweakmore and Totalscum.

A famous regulator named Oblivious was particularly approving. He had been over-influenced in early life by classical economics. So influenced, Oblivious loved all the new derivatives, even those based on outcomes of parts of complex CDOs composed of parts of other complex CDOs.And he did not believe the government should rein in any investment banker until the banker's behavior was very much worse than Tweakmore's.

The boom initiated by Tweakmore lasted only three years. He had underestimated the boom's strength and the power of people to understand, in due course, super-sized folly. These factors had helped shorten the boom's duration. Also, Boneheadia had proved less like Japan than had been hoped.

When the boom-ending bust came, it was a doozy. Almost every investment bank had been made collapse-prone by Tweakmore's innovations before he became interested in home loans. And now, in a huge bust, most big financial institutions were sure to disappear, causing total chaos and another "Great Depression" unless there was super-massive intervention by the government, financed by printing money.

Fortunately, Boneheadia did so intervene, guided by effective leaders who somehow obtained support from politicians in both political parties. And, after this massive intervention, Boneheadia, with doubled unemployment, is enormously worse off than if the boom and bust had never happened. And its options in case of future trouble are greatly reduced because, after its money-printing spree, it is nearer to facing general distrust of its money and credit.

Boneheadia's bust is now called the "Great Recession." Yet, even so, not much has been learned by the elite in Boneheadia. Among the protagonists and too-passive types who contributed so much to the mess, only one has expressed significant contrition. To his great credit, Oblivious has recognized that he was grossly wrong.

The accounting profession remains unaware of its large contribution to public woe. And it does not recognize the cognitive defects of Countwrong, which are still believed to be virtuous qualities that reduce accountants' litigation risks and their duty to cause antagonism by opposing the wishes of some of their best-paying clients.

The professoriate in economics has barely budged toward recognition of the importance of optimized, more conservative accounting in both macroeconomics and microeconomics. And economics professors, even now, do not recognize what was so easily recognized by Tweakmore: The functional equivalent of undisclosed embezzlement can be magnified and have massive macroeconomic consequences when the victims, as well as the perpetrators are led to believe they are getting richer under conditions that are going to last for a long time.

How about the legislators in Boneheadia? Well, most are confused by what has happened to their most powerful friends and draw no useful implications from the outcome of Canadia, a country just north of Boneheadia that had no "Great Recession" because its simple laws and regulations kept in place home loan operations much like those of Wantmore before he embraced modern finance in the state preferred by Tweakmore.

How about the regulators? Well, very few important regulators or former regulators in all Boneheadia have expressed really serious doubts about the status quo and interest in really serious re-regulation of investment banking. One the doubters is Follyseer, a long-retired former minister of finance. Follyseer has argued that all contributions of Tweakmore to investment banking should be removed and banned, because it is now obvious that (1) augmenting casino-type activities in investment banks was never a good idea, and (2) investment banks are less likely to cause vast public damage when they are forbidden to use much financial leverage and are limited to few long-traditional activities.

Regarding accounting, no regulator now in power seems to understand, in a way that has any chance of causing effective remedial action, that the disaster triggered by Tweakmore couldn't have happened if Boneheadia's system of accounting regulation had been more "principles-based," with a different and less tradition-bound group creating accounting standards that were less easy to game.

The former regulator and lifelong professor who seemed extra wise after the Great Recession was England's John Maynard Keynes, dead for more than half a century. Keynes had predicted, correctly, that "When the capital development of a country is a by-product of the operations of a casino, the job is likely to be ill-done."

Afterword: The foregoing attempt is not an attempt to describe in a fair way real contributions to the "Great Recession" in the United States. Certain characters and industries, for instance, Tweakmore and investment banking, are grossly overdrawn as contributors to sin and mayhem, while other contributors are not discussed at all. The whole idea was to draw attention to certain issues in accounting, academic economics, and conceivable over-development of finance as a percentage of the entire economy, by making the characters and the story line extreme enough to be memorable.

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About the author

Daniel Scrivner is an award-winner designer and angel investor. He's led design work at Apple, Square, and now ClassDojo. He's an early investor in Notion,, and Anduril. He founded Ligature: The Design VC and Outlier Academy. Daniel has interviewed the world’s leading founders and investors including Scott Belsky, Luke Gromen, Kevin Kelly, Gokul Rajaram, and Brian Scudamore.

Last updated
Apr 28, 2024

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