Charlie Munger's Interview with Todd Combs

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What I am is a guy who's been able to take moderate obsession and a long attention span and turn them into pretty good results. Of course, a long attention span will help you a lot if you're reasonably smart. That was Charlie Munger explaining his success. In 2022, Todd Combs sat down with Munger for a conversation that has never been released publicly until now.

The conversation was part of the Singleton Prize for CEO Excellence, and we have permission from Todd and the Singleton Foundation to share it with you today. This thing is such a gem. I went through all 20 pages and pulled out the ideas I think are most useful, not just for investors, but for anyone trying to make better decisions. On the surface, it's a conversation about Singleton, investing, and business, but underneath, it's an operating manual for life.

Three ideas run through it, how to recognize the rare people worth betting on, how to choose problems worth solving, and how to remain in control when everyone else is being forced to act. I'm Shane Parrish, and this is Outliers.

Let's start with how Munger thought about exceptional people. Commenting on Singleton, he said, He was like a guy who wears size 16 shoes and webbed feet competing with a bunch of ordinary people. So he was fun to watch because he was so cool and rational. What made Singleton so unusual was that he paid no attention to convention. He didn't buy back stock because the buybacks were popular, he bought it back because it was cheap.

Munger said, When Henry was buying stock in gobs, that was very uncommon thing to do, and now, of course, it's very common. You could say Henry has triumphed, but Henry wouldn't be buying a lot of stock. A lot of people are buying stock now, but after it's selling for more than it's worth. They like growing their stock, no matter what its value, and people like Henry and Berkshire would buy their stock on the cheap.

Munger summed up Singleton like this, you aren't going to see many Henry Singletons in your lifetime. He was valedictorian of his class at MIT, and he was valedictorian everywhere. If you want to learn more about Singleton, we did an episode on him. I'll link to it in the show notes. And if you're enjoying Outliers, follow the show. Most people who listen haven't yet, and it helps more people find us.

Singleton wasn't the only manager that Munger admired. When Todd Combs brought up Tom Murphy, Munger summed up his success in two sentences. What Tom did was he delegated enormously, and if it was really important, he went and did it himself. Very simple. And Henry was very simple. That sounds easy, but delegating enormously only works when you give power to the right people.

And Combs pointed out that Munger had spent his life recognizing great management and still underestimated how valuable it could be. And then he asked Munger, do you have any thoughts or comments you'd like to share around this and how you've identified great management? And Munger answered with a lesson from basketball. I think the great lesson of these careers is what I call the Wooten lesson.

And Wooten had the best basketball coaching record in the world, and nobody else was even close. And how did he do it? The answer was he concentrated almost 100% of the playing time on his top seven players. And of course, they got better and better during all that extra playing time. And that's what happens when you give so much power to a Wooten or Buffett or something.

You're doing the Wooten system, and it works like gangbusters. And as an investor, if you can find somebody, even a mini Wooten or a mini Singleton or a mini Buffett, and play them, and when they have a hell of a run, certainly that can be a very good way to invest. The wooden lesson only works if you choose the right people, and talent wasn't the only thing that Munger looked for when choosing people.

Comes noted that Munger's heroes like Lee Kuan Yew and Otto von Bismarck and George Marshall all shared a sense of duty and honor. Then he asked them if there's another trait he admires in them, and Munger had a name for it. He called it the fiduciary gene. I like the fiduciary gene. Think of the difference between someone like George Washington, who voluntarily left power, setting an example, and those paranoid rulers who came into power and start killing people to stay in power, trying to subvert the systems and so forth.

And of course, the George Washingtons are way the hell better. What maybe the current world is teaching us is that our forefathers who gave us term limits understood human nature. For Munger, the people most deserving of power were the people least likely to abuse it. But recognizing great management was only half the equation. Warren used to say, you don't really need to be very smart to be a very successful investor, and I think Warren was right.

It's a field where temperament is important. It's good to have the extra mental horsepower that Henry Singleton had. That is helpful, but it's perfectly possible to do splendidly well if you have the right temperament. Just go at it over a long time. Munger described his own temperament in surprisingly ordinary terms. What I am is a guy who has been able to take moderate obsession and a long attention span and turn them into pretty good results.

Of course, a long attention span will help you a lot if you're reasonably smart. But obsession wasn't enough. Munger was careful where he aimed it. I just stay away from the problems that can't be fixed and pick the ones that can. I don't like unlimited failure, and I don't want to fish forever and never catch a fish. I have to have some reinforcement, and so I pick some things that can be done and do them.

But I do think that if you're reasonably obsessed with something, even if it's intermittent, and you have a long attention span, you keep working over the serious problems, that you'll stumble into an answer. That is half the secret of life. This also tells you something about how Munger solved problems. He looked anywhere for solutions that worked.

For example, his dormitory designs were controversial, largely because some students would live in rooms without conventional windows. Whether you agree with his solution or not, the way he found it is revealing. And so I thought, how in the hell can I handle this? Well, I went to the cruise ships and figured out how they handled it, because a lot of state rooms on cruise ships can't have real windows.

They used artificial windows, and they had a system where you could leave your own place and go into the light and air and all kinds of things. So I copied the cruise ships and their invention. What kind of a mind in designing a dormitory imitates a cruise ship? Well, that's what my mind does, and it's coolly logical. That's the kind of mind Singleton had too.

He was just coolly logical. But if you don't think of the cruise ship, you get the wrong answer. He also made a really important point here. He noted that Disney had gone one step farther. It hadn't merely compensated people for the lack of a real window. In a genius move, it had made the artificial one more valuable. What cruise ships did, what Disney did, of course, is for a long time, he charged more for the room with an artificial window than he charged for the one that had a real window.

They finally stopped doing that, but they did it for years and years. And if you're wondering, how can an artificial be worth more than a real one? It's because it could do things that a real window couldn't do, like wink at your children and create this magical memory and experience. They turned a perceived weakness into a strength, and that same preference for rare, exceptional opportunities shaped the way that Munger invested.

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Combs asked him about the shift from buying cigar butts, which were cheap, mediocre businesses with a little value left. to buying great businesses that could compound for decades. And Munger said this, everybody who's smart eventually makes that transition when they think about investments. Of course, if you can get into a great company, stay in it for a long time, that's the easiest, biggest money you'll possibly make.

But it's so hard to do because they bid the great companies or things that look like great companies up so high that it makes that strategy not work. I think the people who tend to get the best results are these fanatics who just keep searching for the great businesses. And the best of them don't expect to find 10, 20, or 30. They find one or two.

And that's the right way to do it. But all you need are one or two. That was the Wooten lesson applied to investing. Find the exceptional few, then concentrate behind them. It was also the logic behind Buffett's 20-card punch idea. Imagine receiving a card with only 20 slots. Every time you made an investment, one slot gets punched. Once you use all 20, you can never make another investment again.

The limit forces you to make every decision very intentionally, and in practice, you would wait longer, study harder, and act only when an opportunity was worth using one of your 20 chances. Modern markets encourage just the opposite. They make it easy to act constantly. And Munger thought that temptation had less to do with investing than gambling.

The gambling instinct is really strong. People love gambling, and the trouble is, it's like taking heroin. A certain percentage of people, when they start, just overdo it. It's that addictive. It's crazy what we ended up with. It's absolutely crazy. And civilization would have been a lot better with And now the computers are trading with one another.

One computer algorithm is trying to outwit the other. Now, what earthly good is it for our country to make the casino part of capitalism more and more efficient, and more and more attractive, and more and more seductive? It's an insane public policy. On the other hand, I think the chances of it changing are practically zero, and yet it causes terrible things.

This wasn't just about individuals. The entire financial system has learned how to feed the gambling instinct. The global financial crisis showed us what can happen when it spreads through the system. I think if we hadn't intervened the way we did, Munger said, which we've never done on this scale before, we might have had one of the most unholy financial messes.

We were headed for something that was going to try and become the Great Depression. And what they do is they feed on themselves. The process of capitalism automatically speeds up in both booms and depressions. And it feeds on itself for a while. So it's like autocatalysis in chemistry. It's just automatic. You get this speed up in both directions, which makes it very, very dangerous.

Not just for the individual investors, but for the whole civilization. Booms create confidence, which encourages more buying and pushes prices higher. Busts create fear, which forces more selling and pushes prices lower. In both directions, the movement becomes its own fuel. This is when temperament matters most. When everyone around you is being pulled into the self-reinforcing feedback loop, you need something that keeps you from being pulled in with them.

You need something that helps you keep your head when everybody else is losing theirs. And for Munger, that something was reason. I almost worship reason. You can argue that Henry Singleton did too, and certainly Warren Buffett does too. The people I know that are good, they feel you have a duty to become as wise as you can by constantly studying and thinking about it.

Combs asked him when he most enjoyed investing, and his answer revealed that the reward wasn't only in making money. It's the sowing when you're almost sure of the wind is almost funner than the reaping. I'm not sure that I didn't enjoy the sowing. I like them both, but I think I may like the sowing better than the reaping. When you know you're going to nail it every single transaction, every day, that's a very satisfying feeling.

That is exactly what happened during the market crash of 1974 and 75. Buffett and Munger had spent years waiting. When the opportunity arrived, they were ready. Munger said, that was a very good time to be buying. That was the worst crunch in 50 years. We were very lucky to have money on hand at that time. Well, the crash might have been luck, but having cash wasn't.

This is something I think about all the time, and it's a concept I call positioning. I once asked Charlie what he thought the most underappreciated aspect of Berkshire Hathaway's success was, and he told me that it was never being forced by circumstances into a series of bad decisions. Most people focus on the decisions in front of them, but positioning happens earlier.

It determines which options will be available when the decision arrives. No matter what happened in the world, Buffett and Munger wanted to remain in control. They didn't want circumstances making their decisions for them. One reason the best in the world make consistently good decisions is that they rarely find themselves forced into bad decisions by circumstances.

You don't need to be smarter than others to outperform them if you can outposition them. Anyone looks like a genius when they're in a good position, and even the smartest person can look like an idiot when they're in a bad one. Cash gave Berkshire Hathaway two advantages. It allowed them to buy when everyone else was selling and hold when everyone else was being forced to sell.

Rockefeller's biographer put it bluntly, strong men feed on depressions. Singleton understood this too, because Teledyne's Argonaut Insurance subsidiary entered the 74-75 crash with most of its portfolio in bonds and cash. And when stock prices collapsed, Singleton put an enormous amount of that money to work, buying businesses at deeply discounted prices.

On this, Munger said, we've been in it for a long time. We just ride it out. My Berkshire Hathaway stock has gone down 50% three times in my life. You can sum up positioning like this. Arrange your affairs so that whatever happens, you still have options. Businesses have to survive in a world that keeps changing. Later in the conversation, Munger described Rockefeller's experience in a way I'd never quite heard before.

You can argue that Rockefeller, after the first 30 or 40 years, they sold kerosene for lighting. They dominated the oil world. And as that business died with Edison and electricity and so forth, along came the engine running the automobile. And that use of oil was way better than their old one. So you can argue that they were just damn lucky, that they were forced out of one business and God gave them a better business.

And they had the possessions of all the big oil fields to ride out. And they kept inventing new technologies. So whatever value they thought was there, it was really a little more. And the price of oil kept going up and up and up. Rockefeller didn't have to predict that electric lights would displace kerosene or that automobiles would create an even larger market for oil.

He owned the assets that allowed him to survive the death of one business and benefit from the one that replaced it. We did a full episode on Rockefeller and I'll link to it in the show notes. Very few businesses, however, survive. Combs asked Munger whether he thought today's leading companies would prove durable, and his answer was blunt.

You could argue that the only business still standing from the early days was Rockefellers. Everyone else, it's all a type of mortality. They all die or become insignificant. Size doesn't matter. General Motors once stood in the world like a colossus, and it eventually wiped out its own shareholders and part of its own workers' pensions, Munger said.

General Electric offered an even more personal warning because Munger had known Jack Welch. He said, GE is one of the worst cases at all because I knew Jack Welch. He was likable, and he was intelligent, but he went a little crazy trying to do well in the system. He was very competitive. He wanted to win at golf. He wanted to win at business all over.

In the end, he was lying about what had been accomplished. I think that book Lights Out, which chronicles the decline of GE, ought to be required reading in every business school in the country. It won't be because they don't want to offend anybody, but it should be. If there's anybody here who's not read Lights Out, you should buy it and read it.

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This brings us back to the fiduciary gene. Intelligence and ambition are not enough. When winning becomes more important than the truth, these strengths can become liabilities. This is why Buffett and Munger hired for intelligence, energy, and integrity. This conversation between Combs and Munger moves between basketball to dormitories and from stock markets to Rockefeller and from human temperament to the progress of civilization.

But underneath it all is the same operating system. Find the rare people worthy of your trust. Choose problems that can be solved. Keep learning, protect your ability to think clearly, and position yourself so circumstances can never take control of your decisions. You can find the complete transcript of this conversation between Todd Combs and Charlie Munger in the episode description, and it's worth reading in full.

Thank you to Todd Combs and the Singleton Foundation for letting us share this with you today, too. If you know of someone trying to build or invest for the long term, send them this episode and hit follow so you don't miss the next one.