Charlie Munger: Turning $2M Into $2T

https://fs.blog/turning-2-million-into-2-trillion/

by vikrum • 3 years ago

92 112 3 years ago

fs.blog

ragestorm• 3 years ago

Step 1: Have $2M in 1880s Step 2: Wait 150 years

jjtheblunt• 3 years ago

that only gets you to the 10 billion mark roughly, if i calculated right with wolframalpha curated data

downrightmike2• 3 years ago

Ben Franklin left Philly and Boston $1,000 each and after 200 years, that was $2m and $4.5m respectively. https://www.mentalfloss.com/article/627475/200-year-old-gift...

missedthecue2• 3 years ago

He had some fairly guarded rules on how to manage it though, it wasn't thrown into Apple and Exxon shares.

jshprentz• 3 years ago

Michael Meyer's recent book Benjamin Franklin's Last Bet details the origin and fate of his bequests to Philadelphia and Boston.

The funds were intended to be loaned to aspiring tradesmen, who would repay their loans with interest over ten years. The two cities would receive some of the funds for public works after 100 years and the balance after 200 years. Both cities failed to manage the funds as Franklin intended.

From Meyer's book, I learned more about Benjamin Franklin's life, about the challenges of fund management, and about the difficulty of controlling events from beyond the grave.

[1] https://www.harpercollins.com/products/benjamin-franklins-la...

tcgv• 3 years ago

You would be starting at a much higher amount since $2,000,000 in 1880 is worth $60,201,176.47 today.

The challenge is to get to these initial amounts in the first place.

Source: CPI Inflation Calculator [https://www.in2013dollars.com/us/inflation/1880?amount=20000...]

amelius• 3 years ago

There should really be a law that says that "just waiting" gives you $0, otherwise your monetary theory is unstable and you need to go back to school.

hiddencost3• 3 years ago

That is doubling 20 times.

If 100 million people flipped 20 coins, 95 would get 20 heads.

There are approximately 25M millionaires in the US.

bluesign• 3 years ago

Problem is flipping the coin 20 times. I don’t think even 1 in 100 million would do that.

sdfghswe6• 3 years ago

Problem is flipping the coin 20 times. I don’t think even 1 in 100 million would do that.

2^20 = 1048576

So roughly 1 in 1 million.

You're off by 100x.

sdfghswe6• 3 years ago

Suppose to have an idiotic model like for example "investing is flipping a coin". Then you calculate how many coin flips waiting a certain amount of time corresponds to. Then you conclude, see, these N people are the lucky coin flippers.

Now suppose of all the crazy investing philosophies in existence, you learn that all N greatest investors (or "N luckiest coin flippers" according to you), suppose you learn all of them have the exact same investing philosophy.

Would this make you reconsider whether your "investing is coin flipping" model is a useful model?

Luc• 3 years ago

I might as well link to it for those who haven't read it:

"The Superinvestors of Graham-and-Doddsville"

https://www8.gsb.columbia.edu/sites/valueinvesting/files/fil...

hiddencost3• 3 years ago

Typically their model is regulatory capture.

lisper4• 3 years ago

That's not a very useful model for four reasons: First, there are many more possible outcomes of making an investment than 100% gain or 100% loss. Second, the outcome of an investment is a function of time. And third, what matters is not the actual number, but the purchasing power that number represents, so you have to measure your returns relative to inflation. You can "guarantee" yourself a positive return by buying T-bills, but the average rate on those is 2% and the average inflation rate is higher than that. So you can "double" your money in ~35 years, but your actual spending power will almost certainly go down. Finally, investment returns necessarily regress to a mean that is the growth rate of the overall economy, which historically has been positive. So to the extent that you are flipping a coin, it's a coin that is biased towards positive returns.

hiddencost3• 3 years ago

It's what is commonly called a baseline.

vladimirralev3• 3 years ago

True, but with some tweaks this is a representative model.

You can just carry any non-100% gain/loss "swimlane" as a game still-in-progress. Eventually on larger time scale, puchasing power adjusted or not, a swimlane of an investment will certainly hit one of those outcomes.

The outcome is a function of time but a large number of swimlanes guarantees that you can sample any time and observe the same distribution of settled outcomes. You can reasonably assume that the probability of transition from unsettled to settled state at any time is constant. You could model it as markov process. In fact there are many economic agent models doing something like this (OLG models where generations of economic agents overlap in time as child/worker/retiree). Even though these models make sense only on generational scale, with enough agents you can see the micro-structure being consistent in smaller time scales by "ticking" or sampling at smaller time steps the markov process.

The spending power issue could be ignored as "without loss of generality" in most cases or the thesis could be restated in terms of something that preserves purchasing power as part of the coin toss game.

Investment returns mean-revert only if allowed to by policy. Policy can override economic forces for very long generational time scales, thus making it still relevant for individuals.

And I personally don't agree with (or don't understand) these models being used for micro-structure analysis, but I think macro-level interpretations such as wealth distribution may be valid.

xyzelement3• 3 years ago

// There are approximately 25M millionaires in the US.

Really? Population of the US is like 350M. Is 7% of US population millionaires? Like, one of out every 14 people out there? I guess that's believable but counter-intuitive.

nly• 3 years ago

Property wealth

GartzenDeHaes• 3 years ago

One Million Dollars isn't exactly a lot of money anymore. Seems as if single family homes cost nearly a million in many larger cities.

ReptileMan• 3 years ago

If average house prices in desirable densely populated areas are above 1M$ it is not hard to have a lot of millionaires.

BurningFrog• 3 years ago

The US is still much wealthier than other industrial nations.

missedthecue2• 3 years ago

Remove minors from the population, and it's 1 in 10 americans that are millionaires.

mcguire• 3 years ago

https://www.census.gov/content/dam/Census/library/publicatio...

"The median household wealth in 2021 was $166,900. The 10th percentile of household wealth was zero dollars, meaning 1 in 10 households had wealth of zero dollars or less. The 90th percentile of household wealth was $1,623,000, meaning 1 in 10 households had wealth exceeding $1.6 million."

jmann99999• 3 years ago

As of 2020 there were 21,951,000 U.S. millionaires (Net Worth), according to Credit Suisse[0]. So the number isn't far off.

[0] https://financebuzz.com/us-net-worth-statistics#sources

tick_tock_tick• 3 years ago

The USA is crazy rich even compared to Europe or most western nations.

oh_sigh• 3 years ago

To be clear, you need 100 million people to risk *100% of their wealth on a coinflip* 20 times in a row.

rufus_foreman• 3 years ago

> If 100 million people flipped 20 coins, 95 would get 20 heads

If they were starting out with $2 million and betting it on a coin flip, they would owe 37% income tax on the winnings of each flip.

And try finding someone to bet you $1 trillion on a coin flip.

Charlie Munger's strategy was not to start out with $2 million and bet it with a 0.0001% chance of winning $2 trillion and a 99.9999% chance of losing it all.

Some people invest money out of each paycheck, study how to best allocate that money between the investment options available to them, do that for many decades, and become millionaires. Some people buy a $2 lottery ticket and become millionaires that day. They both just got lucky, am I right?

wenc• 3 years ago

For passive investments, it’s partly the Law of Large Numbers at work.

The key to exploiting LLN is to avoid “game over” scenarios. You have to survive and stay in the game in order for LLN to converge.

If let’s say your expectation of winning in the long run is 0.7, you’ll only achieve this if you don’t get wiped out anywhere in the process (if you do your expectation drops to 0 immediately).

matwood• 3 years ago

Yep, which is why investing (life?) is really about risk management.

User232• 3 years ago

That was how I learned to trade options. I didn't put a penny in until I learned the fundamentals of risk management. Then I played around, won some, lost some, learned a ton, and came out a bit ahead. And never once was I at any risk of a catastrophic outcome, because that's the whole point of risk management.

gottorf• 3 years ago

As they say, return of capital is more important than return on capital.

cornholio• 3 years ago

the Law of Large Numbers at work.

Also known as "it's easy to become a rich man, if you start out as a rich man".

Realizing a positive real return is not very hard - just buy the index or some real estate. If you start with a large amount of capital, you can simply watch it multiply, and, for the adventurous, maybe risk some of it into more speculative deals.

If you start out with just the human capital of your hands and brain, any reasonable rate of return will be squashed by living expenses and basic quality of life, dependents etc. You will need many decades to build enough wealth using the same methods a rich man uses, and by that time your own human capital starts to depreciate and you are forced to move to a capital conservation strategy.

So, to make it big as a poor person, you always have to take on crazy risks that the rich never would and/or be exceptionally lucky, or be extraordinarily talented and hardworking - to an statistically implausible degree - so as to make your starting human capital much more valuable.

You will always find the rags to riches story presented as a tale of hard work and determination, but rarely will any "self made billionaire" acknowledge their immense luck. The entire VC space is basically an attempt from capital owners to cash in on this statistically rare phenomenon, by hedging their bets on the destinies of many many people attempting to make it big.

lostcolony2• 3 years ago

'or be extraordinarily talented and hardworking'

Maybe you meant "and possibly", since otherwise the 'or' there detracts from the point I think you're trying to make (that ludicrous amounts of wealth requires luck regardless of what talent, skill, or determination you bring).

lvl102• 3 years ago

There can only be x amount of dollar that can return y return.

neogodless• 3 years ago

This is a long read, and I skimmed it, but I can hazard a guess that a lot of comments are not about the article, but simply about the headline and early premise. Surprisingly (perhaps), the intention of the overall article is more about the state of academic education and behavioral psychology.

In short, academic psychology departments are immensely more important and useful than other academic departments think. And, at the same time, the psychology departments are immensely worse than more of their inhabitants think.

In effect, much of the story is merely to illustrate that we're bad at learning from history, because we aren't very good at understanding how we think about things.

bmitc5• 3 years ago

I have little want to listen to what Charlie Munger has to say about academia, or anything really. Having done a decent dive into him when I found about how he pushes his amateur architect designs for dorm rooms (basically prisons) on universities, I found that Munger is so up his own ego, it's hard to think of him as a thinker who considers appropriate viewpoints.

Ultimately, he's an uber rich guy who got lucky getting rich. Why should we listen to him about anything?

I read bits of the posted article. It's about what I would expect from Munger, and most of it isn't worth quoting and arguing against.

robertlagrant5• 3 years ago

How do you know he got lucky?

flybrand• 3 years ago

It’s nice to read someone else who feels similar; I purchased the best known ‘book’ of his. It’s a coffee table treatise that is repetitive, dull, and self congratulatory.

regnum93• 3 years ago

I used to think the same as you, but I would suggest giving this a read before you pass off his success as luck as it's a direct rebuttal to the normal argument. Unless by luck you mean him meeting Warren Buffett.

https://www8.gsb.columbia.edu/sites/valueinvesting/files/fil...

musicale• 3 years ago

amateur architect designs for dorm rooms (basically prisons) on universities

I hope UCSB backed out of building one of these monstrosities.

"Public policy graduate student Luiza Macedo didn’t see the sun for a full week when she had to isolate in her room at Munger Residence due to a Covid-19 scare."

https://www.cnn.com/2021/11/02/business/munger-residences-mi...

winter_blue• 3 years ago

Wow, this sounds horrible. I have a through contempt for inhumane or ugly architecture.

marcinzm• 3 years ago

Interestingly based on this you would have $500B simply by investing the money in the S&P500 and holding it for 140 years. If we move the date back to 1874 then after 150 years you'd have $1T:

https://www.officialdata.org/us/stocks/s-p-500/1884?amount=2...

In other words the whole game of corporate planning is fairly pointless imho and merely a shell game around market growth.

xyzelement3• 3 years ago

Would the market grow if underlying corporations didn't plan how to make money? (at least, that's what I think u r talking about)

robertlagrant5• 3 years ago

The market only grows because of corporate planning in some way or another.

kjkjadksj2• 3 years ago

The market grows because people are want to participate in it. See crypto currency. Thats a market that grew with no corporate planning, simply from people increasingly participating. Many people think they should have exposure to markets they don’t fully understand and automatically have a portion of their pay go to such investments made on their behalf, be it crypto or a more ‘grown up’ seeming fund.

sdfghswe6• 3 years ago

Are these numbers right? Is 1/4th of all water ingestion a coca-cola product?

antonvs• 3 years ago

Mungers' comment is part of a speculative forecast being made in a fictional story set in 1884, so it's not clear to me what relationship it's supposed to have to the real world.

But according to the link below, "3.1% of all beverages consumed around the world are Coca-Cola products" :

https://www.businessinsider.com/facts-about-coca-cola-2011-6

This is supported as follows:

Of the 55 billion servings of all kinds of beverages drunk each day (other than water), 1.7 billion are Coca-Cola trademarked/licensed drinks.
Source: Coca-Cola 2011 SEC Filings, Coca-Cola

So that 3.1% apparently excludes water and would be even smaller if water is counted.

lowbloodsugar• 3 years ago

The academically correct reaction to this immense and well-publicized fiasco would have been the sort of reaction Boeing would display if three of its new airplanes crashed in a single week. After all, product integrity is involved in each case, and the plain educational failure was immense.

Irony.

lostcolony2• 3 years ago

Also a missed opportunity for an obvious pun, 'plane educational failure'

riazrizvi2• 3 years ago

Hard eyeroll. How many proprietary soft drinks did different pharmacies and restaurants provide across the nation in 1886? The concept of the soft drink business is so pervasive that in the US, the lemonade stand is the most basic business we teach kids. So a lot, probably. Somehow common sense logic and business basics should have turned any of them into a $2Tn empire, 150 years later (oh and $66mm in seed money in today's terms with no time restriction from the investor). I haven't seen hindsight applied with such conviction since I hung out with the last super successful investor who fell pray to applying his expertise in one domain to another where it doesn't belong. Whatever Mr Munger did for Mr Buffet, writing insights of this type was not it.

jodrellblank3• 3 years ago

"The concept of the soft drink business is so pervasive that in the US, the lemonade stand is the most basic business we teach kids. So a lot, probably. Somehow common sense logic and business basics should have turned any of them into a $2Tn empire, 150 years later"

That doesn't work because look at all the companies selling generic cheap soft drinks, competing for the lowest cost, and not being anywhere near 150 years old or $2TN. Munger's talk is about what Coca-Cola would need to do over and above ordinary "selling a soft drink" to achieve such a thing.

danielmarkbruce2• 3 years ago

You have to get to the end of the speech. His point is that there are a handful of relatively simple things that can add up to such an outcome, and that academic institutions teach in such siloed ways that people aren't learning how to do the cross-field synthesis required to understand something, even retrospectively.

riazrizvi2• 3 years ago

Though that is a valid point about great business, the text here does not teach/demonstrate this skill in a way that would help one realistically apply it.

The important points to make, are that it's far more important to maneuver oneself into a position where you can see the landscape clearly, deliver the power to make moves, and then just use uncluttered thinking to chose those moves but chose them you must as the more moves you make, the faster you learn. As opposed to lingering in the ivory tower devising ever more ingenious strategies to excuse weak execution.

1B05H1N• 3 years ago

It probably helps that 2 M USD in 1884 money is worth like 63 M today. /s

Yes, in general, we are not great at learning from history. How does blending academic psychology with other departments change that? Like how will that information disseminate *through/permeate society?

csa2• 3 years ago

This is the money quote, imho:

“This brings me, at last, to the main purpose of my talk. Large educational implications exist, if my answer to Glotz’s problem is roughly right and you make one more assumption I believe true – that most Ph.D. educators, even psychology professors and business school deans, would not have given the same simple answer I did. And, if I am right in these two ways, this would indicate that our civilization now keeps in place a great many educators who can’t satisfactorily explain Coca-Cola, even in retrospect, and even after watching it closely all their lives. This is not a satisfactory state of affairs.”

ferfumarma• 3 years ago

This paragraph left me with the impression that Charlie Munger has a chip on his shoulder about academia.

csa2• 3 years ago

This paragraph left me with the impression that Charlie Munger has a chip on his shoulder about academia.

Yep.

As a former academic (left precisely due to this sort of absurdity), I largely agree with his view.

FarMcKon• 3 years ago

Folks, a) every town had a soda fountain, and a local favorite in 1880's. b) Every town has 3 social media apps, but smart college students in 1999. c) every town has 5 new LLM model companies, in 2023

Charles Munger is such a smart man in many ways, and it is sad to see his thinking get muddy in his old age. I am surprised he falls for 'Survivorship Bias` in his own thinking.

motoboi• 3 years ago

Yeah, also thinking that coca-cola behaved legally outside the US.

darth_avocado• 3 years ago

Turning $2M Into $2T

Be born when opportunities were big and $2M only buys a 2 bedroom house that needs fixing

bern4444• 3 years ago

Maybe the years and amounts were chosen this way but at 7% you double your money every 10 years (for those who don't know too, percentages are reversible so at 10% you double your money every 7 years...)

You have 15 doubles between 1884 and 2034.

So you get 2^10 * 2,000,000 or 2,048,000,000 - just over 2 trillion dollars.

I read through parts of the article - I have no idea what point is attempting to be made. It all rambles quite a bit.

jodrellblank3• 3 years ago

"I read through parts of the article - I have no idea what point is attempting to be made. It all rambles quite a bit."

"""This brings me, at last, to the main purpose of my talk. Large educational implications exist, if my answer to Glotz’s problem is roughly right and you make one more assumption I believe true – that most Ph.D. educators, even psychology professors and business school deans, would not have given the same simple answer I did. And, if I am right in these two ways, this would indicate that our civilization now keeps in place a great many educators who can’t satisfactorily explain Coca-Cola, even in retrospect, and even after watching it closely all their lives. This is not a satisfactory state of affairs.

Moreover – and this result is even more extreme – the brilliant and effect executives who, surrounded by business school and law school graduates, have run the Coca-Cola company with glorious success in recent years, also did not understand elementary psychology well enough to predict and avoid the “New Coke” fiasco, which dangerously threatened their company. That people so talented, surrounded by professional advisers from the best universities, should thus demonstrate a huge gap in their education is also not a satisfactory state of affairs."""

BeetleB• 3 years ago

7% is adjusted for inflation, BTW. So you should look at what $2M is worth in today's dollars.

feoren2• 3 years ago

(for those who don't know too, percentages are reversible so at 10% you double your money every 7 years...)

That is not true at all. "Percentages are reversible" means that 30% of 50 is the same as 50% of 30, so 15. It does not mean that anywhere you see a percent related to another number, you can just switch them around.

Easy counterexamples:

At 100% annual interest, you double your money every 1 year. At 1% annual interest, you double your money every 70 years.

At 41% annual interest, you double your money every 2 years. At 2% annual interest, you double your money every 35 years.

jessetemp• 3 years ago

It's not perfect, but pretty close if you compound monthly. It works with your examples too.

100% interest (compounded monthly) doubles at about 0.75 years, and 0.75 interest doubles at around 100 years.

41% interest doubles at around 1.75 years, and 1.75 interest doubles at around 41 years

webel0• 3 years ago

I’m bad at reading zeros but isn’t that a bit over 2 billion with a b?

groby_b2• 3 years ago

"If you can know the future while pretending to not know the future, you will be reach"

There's so much in the article that fundamentally knows what the future is. The most egregious point for me was disussing Pavlov in an 1884 context. (His discovery of classical conditionings dates to 1890 and later)

Assuming a four cent profit requires assuming large inflation over the intervening time span. (It's been ~3000%). Inflation in 1884 was barely understood, and mostly treated as a devaluation of currency, not an increase in price.

Population growth to 8 billion people required modern medicine and modern agriculture at the least. (World population less than doubled over the 19th century - assuming it'd quadruple again, especially given that the Malthusian trap was a prevailing thought concept, would be an extremely bold assumption)

And so the entire pretext that you could've predicted this path kind of falls apart. We can retcon an explanation, but we can retcon an explanation for any success easily. So easily, we have a picture of a bullet-riddled plane to handily explain it.

groby_b2• 3 years ago

rich. Rich, damn it. You will be rich. I hate my brain :)

Nevermark• 3 years ago

Several times in my life, years of difficult and inexplicable behavior by someone important to me (or myself), has benefited from an awareness of a neurotype, learning style, thinking practice, personality disorder, trauma pattern, etc.

It's important not to "diagnose" people. But these patterns are real and shed light on logics we operate with.

A little understanding goes a long way.

It makes sense that our brain, like any device class, has common patterns of high/low performance and failure.

I don't know where in education exposure to practical psychology makes sense. But a formal psychology class is too late, too narrow, too short, and too segregated a context: as the article points out.

We don't want to interrupt children's development with psychological concepts they are not ready for. But it would be nice to understand each other better, earlier.

That is an interesting education problem.

A related thought. There are so many areas of vitally useful knowledge, but turning each area into a formal subject isn't possible or necessary.

All that is needed for many great ideas is exposure.

Many geniuses' benefited as children from frequent informal discussions with knowledgable curious persons.

Perhaps a daily open discussion lunch hour could provide that exposure. Where all manner of subjects are discussed, and all kinds of questions are welcome.

It could be the easiest most impactful class of the day.

michael19992• 3 years ago

I love Munger, but I guess his freshman survey courses didn't cover pharmacology.

    Glotz wants to use a name that has somehow charmed him: Coca-Cola.

Just why was Glotz charmed by that name?

    Ctrl-F "cocaine" - 0 hits

Oh. Charlie is telling a just so story that doesn't comport with the facts.

michael19992• 3 years ago

All of this is retcon. The whole thing is just fantasy. Like, that's just not how it happened. From wiki:

    Confederate Colonel John Pemberton, wounded in the American Civil War
    and addicted to morphine, also had a medical degree and began a quest 
    to find a substitute for the problematic drug.

Like sure - a cocaine tonic sounds just the thing to help an alcoholic doctor kick a heroin habit.

    Pemberton claiming it a cure for many diseases,
    including morphine addiction, indigestion, nerve disorders, headaches,
    and impotence.

Oh yeah, baby! Dude was selling coca-wine, and then temperance kicked in and he had to de-wine the wine. Here's Munger talking about adding colour:

    For similar Pavlovian reasons, it will be wise to have 
    our beverage look pretty much like wine, instead of sugared water. 
    And so we will artificially color our beverage if it comes out clear.

Lol, no. The color needed to emulate wine because his current users were used to a wine cocaine tonic. Got the bring the exiting user-base along.

The technical term for Munger's story is bullshit. He doesn't consider it a lie, because the facts are unimportant to his story.

Honestly, reading this diminished my opinion of him. To talk the whole time about pavlovian and operant conditioning without once mentioning drug tolerance and withdrawal discomfort is just beyond. He can't be that stupid, so I must suspect dishonest motive. Or even worse: obscurantic Straussianism.

https://en.wikipedia.org/wiki/Coca-Cola#19th_century_histori...

rhtgrg• 3 years ago

It is refreshingly rare to see anyone who's made it rich tell their actual story rather than some revisionist hit piece.

Sadly, more often than not, someone else has to do it for them.

divbzero• 3 years ago

This analysis, like many from Charlie Munger, is worth considering carefully but misses two curious aspects of the Coca-Cola story.

First, the price of a 6.5 fl. oz. bottle of Coca-Cola was set at 5¢ in the 1880s and remained 5¢ through the 1890s, the 1900s, the 1910s, the 1920s … all the way until the 1950s when the price was finally raised. The dynamics that led to this remarkable phenomenon is described in a Planet Money podcast [1] and on Wikipedia [2].

Second, “starting in Atlanta, then succeeding in the rest of the United States, then rapidly succeeding with our new beverage all over the world” is much easier said than done. Coca-Cola somehow hit this jackpot, but Munger himself would cite See’s Candies as a counterexample of a brand that, for whatever reason, does not travel as successfully from its place of origin.

[1] https://www.npr.org/transcripts/456410327

[2] https://en.wikipedia.org/wiki/Fixed_price_of_Coca-Cola_from_...

shalmanese• 3 years ago

First, the price of a 6.5 fl. oz. bottle of Coca-Cola was set at 5¢ in the 1880s and remained 5¢ through the 1890s, the 1900s, the 1910s, the 1920s … all the way until the 1950s when the price was finally raised.

No, that's explicitly mentioned in the story:

And thereafter the real Coca-Cola company did lose half its trademark and did grant perpetual bottling franchises at fixed syrup prices. And some of the bottlers were not very effective and couldn’t easily be changed. And the real Coca-Cola company, with this system, did lose much pricing control that would have improved results, had it been retained.

Charlie Munger: Turning $2M Into $2T

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