Luck, Value Investing And Charlie Munger
by valueplaysJanuary 17, 2014
This has been making the rounds so I thought I’d comment on it. Aside from making Dorsey look like an ass (of course he may have just said that to be provocative), it makes some very good points but I think leaves some other out that are just as important. Here is the opening of Mark’s latest memo (full text linked below).
The Role of Luck
The first inspiration for this memo came in early November, when I picked up a copy of the Four Seasons Magazine in my hotel room in Riyadh, Saudi Arabia. I happened to turn to an article entitled “In Defence of Luck” by Ed Smith. It’s been in my Oaktree bag ever since. In his two opening paragraphs, Smith presents a thesis for dismantling:
“Success is never accidental,” Twitter founder Jack Dorsey recently tweeted. No accidents, just planning; no luck, only strategy; no randomness, just perfect logic.
It is a tempting executive summary for a seductive speech or article. If there are no accidents, then winners are seen in an even better light. Denying the existence of luck appeals to a fundamental human urge: to understand, and ultimately control, everything in our path. Hence the popularity of the statement “You make your own luck.”
That’s all it took to get my juices flowing. I – along with Smith – believe a great many things contribute to success. Some are our own doing, while many others are beyond our control. There’s no doubt that hard work, planning and persistence are essential for repeated success. These are among the contributors that Twitter’s Dorsey is talking about. But even the hardest workers and best decision makers among us will fail to succeed consistently without luck.
What are the components of luck? They range from accidents of birth and genetics, to chance meetings and fortuitous choices, and even to perhaps-random but certainly unforeseeable events that cause decisions to turn out right.
In discussing the existence and importance of luck, Smith cites the popular book Outliers by Malcolm Gladwell:
Attacking luck has never been more fashionable. No matter how flimsy the science behind the theory, popularized by author Malcolm Gladwell, that success must follow from 10,000 hours of dedicated practice, it has hardened into folklore.
Outliers is best known for Gladwell’s observation that it’s this magic number of hours of practice that makes the difference for those who are most successful. But that’s only part of Gladwell’s message, and people who think his book is all about hard work and practice miss the point. Having set out the “10,000- hours” thesis, Gladwell largely stops talking about it and turns to spend much more time on something he calls “demographic luck.” This is actually the antithesis of an insistence that hours of effort suffice.
Getting Lucky (pdf)
I had a High School football coach, Frank Ruggiero who had this on the wall of our locker room “Luck is when preparation and determination meet opportunity”.
I believe that wholeheartedly. Step back and look at most really successful people. By successful I don’t mean heirs of the Walton’s, Warren Buffett, Bill Gates or any other heir. I mean the folks who started it all. Look at them and look at their lives. A stunning number of them overcame difficulties before they were successful. Yes, 1955 and 1956 were seemingly prime years to be born in to be at the epicenter of the computer revolution. Yet, there were millions of births that year and only a handful made the big splash. Yes, to have Ben Graham as your teacher at Columbia in the 1950?s was to learn from the master of value investing yet Graham taught hundreds (thousands?) of students, yet there is only one Warren Buffett who basically went door to door in Omaha seeking funds for his partnership.
I am by no means saying “luck” for lack of a better word plays no role (being born in the US vs Somalia for example). What I am saying is that determination plays a far greater one. There are countless people who had the same “opportunities” as Gates, Buffett, Jobs etc did but never ascended the heights the way they did. Why? Lack of skill? Lack of determination? They quit at the first setback? Anyone who know the stories of Gates and Jobs know there were countless setbacks for them yet they never quit. Luck? No.
We can even take this same line of thinking and make it relative. Let’s talk about those “unlucky” and born into poverty. There is no doubt they have started behind the curve vs those born even to the middle class. Yet, every year millions of them get themselves out of poverty and break the cycle. Why? Were they “lucky” to get a job, find a mentor, actually complete high school, go to college, refuse to join a gang or start doing drugs? I would say virtually all have had the opportunity and some made the right choices and others, did not. I think we denigrate the success of those who made the right choices by calling them “lucky”.
Take a look at Buffett’s right hand man Munger. Most people have no idea where he was when he was 31 and now one of the richest men in the world.
In 1949, Charlie Munger was 25 years old. He was hired at the law firm of Wright & Garrett for $3,300 per year, or $29,851 in inflation-adjusted dollars as of 2010. He had $1,500 in savings, equal to $13,570 now.
A few years later, in 1953, Charlie was 29 years old when he and his wife divorced. He had been married since he was 21. Charlie lost everything in the divorce, his wife keeping the family home in South Pasadena. Munger moved into “dreadful” conditions at the University Club and drove a terrible yellow Pontiac, which his children said had a horrible paint job. According to the biography written by Janet Lowe, Molly Munger asked her father, “Daddy, this car is just awful, a mess. Why do you drive it?” The broke Munger replied: “To discourage gold diggers.”
Shortly after the divorce, Charlie learned that his son, Teddy, had leukemia. In those days, there was no health insurance, you just paid everything out of pocket and the death rate was near 100% since there was nothing doctors could do. Rick Guerin, Charlie’s friend, said Munger would go into the hospital, hold his young son, and then walk the streets of Pasadena crying.
One year after the diagnosis, in 1955, Teddy Munger died. Charlie was 31 years old, divorced, broke, and burying his 9 year old son. Later in life, he faced a horrific operation that left him blind in one eye with pain so terrible that he eventually had his eye removed.
Any one of those events would have been many peoples excuse for giving up and for their life not turning out how they wanted it to. Not Munger. Some will try to negate that by saying “well, knowing Buffett helped”. I would note here that by the time Munger met Buffett he was well on his way to his millions (billions) and had he just quit on his dreams he would have never partnered with Buffett later in life.
I think it is the connotation the word “luck” has that I dislike. It implies one is successful through no effort of their own. Sure, if my last name was Walton (WMT) then, yes, being born as Sam’s grandson would in fact be “luck”. Hitting Powerball for 300M is in fact luck. Walking onto a plane that is destined to crash, is in fact “bad luck”. Does anyone wonder why successful teams always seem to have the ball bounce their way while lousy teams never do? It is statistically impossible for it to be purely chance. No, good teams makes good decisions that stop the ball from bouncing in the first place and when it does happen to bounce, they are prepared for it and react without hesitation increasing their odds of success.
But working hard your whole life and ending up a success isn’t “luck”. Anyone who is approaching 50 understands there are more than a few times in those years you could have quit, given up on a dream and settled for far less. But, you didn’t. You kept on, worked harder and one day an opportunity came to your door, and because you continued to work hard and because you never gave up, your were ready to take advantage of it. How many times could Steve Jobs have just walked away from it all? He had set back after very public set back (was fired from the company he founded) yet never gave up. Luck?
I think if we all look back on our lives we will find times that we were stuck in a rut and things were not going as we’d like them to have been going. I also feel if we are honest, we can also say of those time “I wish I’d done this” or lament a squandered opportunity. We can probably also find those times we blamed “bad luck” for our lack of success wasn’t really bad luck, but a missed opportunity.
I college I worked briefly for an large insurance company selling life insurance one summer. On Sat mornings we would go into the office from 9-12 and do cold call blitzes. We would get a book of names and just cold call them. You can imagine a bunch of 21 yr olds really wanting to do this on a Sat morning. Well one Friday night a bunch of us were out having drinks. As it got late a few of us decided to go home and a few stayed out to finish the evening. The next morning the few who stayed out stumbled into the office around 11 while those who went home early were hitting the calls sheets at 9. One co-worker (we’ll call him Tom) ran out of names so he grabbed Larry’s (also fictional) call list while Larry slept off his hangover in his cubicle. Larry was happy to give up the list so he could tell the boss the names were contacted.
Wouldn’t you know one of those names ended up being a business owner who just had a friend in a partnership (different business) whose partner died. They had no insurance to cover such an event and because of that things were a mess for his friend. Also being in a partnership, this person was determined not to see the same thing happen to him. He requested an appointment (was impressed a young kid was working Sat am) that day and Tom made not only that sale but a series of other sales to other acquaintances of this person over the next couple weeks. Those sales made Tom’s quarter (and probably year frankly).
During his performance review Larry, who was being called to the carpet for low sales numbers vs Tom lamented, “he just got lucky with that one call!!”. Did he? Was it really luck? Didn’t Larry have to same opportunity as Tom and in fact he had a better one because it was his call list the name came from. Had he come to work that day prepared to work vs vomiting in a waster paper basket in the men’s room he would have made that sale. This man wanted insurance, it was a sale for someone, no special skills needed.
Larry was soon out of that job while heard Tom was the highest performing agent in that office. Was it luck or was the work ethic exhibited that Saturday indicative of how Tom worked and thus his success was inevitable?
Now, in no way do I feel the way Dorsey does in that there is no luck and that there are “No accidents, just planning; no luck, only strategy; no randomness, just perfect logic” . Plenty of people do all the right things and are on their way only to be killed in an accident through no fault of their own or sticken by disease. That is shitty luck. But I also wish successful people would stop apologizing for their success as if it could just as easily be any random person where they are. That simply isn’t the case.
I think we’ve gotten to the point now that people are implying “there is no success, just a series of fortunate events in which someone, anyone, could have done what you did given the exact same circumstances”. The problem with that is we can never have the exact same circumstances. We can have the same opportunity (as Larry and Tom did) but how one reacts to it determines its outcome. Different reaction, different outcome.
Some may claim some get more of those coveted opportunities than others. This is true but it is also true that once you get in the habit of letting opportunity pass you by, it comes by far less often, in fact, you get to the point where you no longer even recognize it. Yet, the converse is also true. Once you start grabbing opportunity, it seems to come at you from everywhere and in fact you begin to see it where most others don’t. Look back at your own life and be honest, this is true. In your darkest moments, whatever that might have been, you let countless chances go by. Once you decided enough was enough and got your act together, opportunity was everywhere. Opportunity is often there, you just have to be looking for it.
Never confuse success with luck. Millions of us get the same opportunities and yet far too many are unsuccessful (however you define that). That success can be relative, the first in your family to break the cycle of poverty, finish high school, go to college, graduate etc . It doesn’t have to be measured in millions. It can be measured in simple accomplishments. Luck isn’t the difference, it is determination and perseverance that is.
Everyone gets opportunities in life of varying degrees…….those who are successful take advantage of them…stop apologizing for and denigrating that success….you earned it.
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