In the vast ecosystem of investment and finance, few voices resonate with the clarity and depth of Charlie Munger, Warren Buffett's respected partner at Berkshire Hathaway Inc. One topic he has been vocal about is the pervasive influence of denial in decision-making processes, especially in investment management.
"If I had to name one factor that dominates human bad decisions, it would be what I call denial," Munger said. "If the truth is unpleasant enough, people kind of — their mind plays tricks on them, and they think it isn't really happening."
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These words cut to the heart of many failed ventures and investments. The human tendency to avoid facing unpleasant truths, especially when significant financial stakes are involved, is prevalent. At this year's Daily Journal annual shareholders meeting, this lesson on denial is something every investor, novice or expert, should internalize and guard against.
Munger's prime exhibit of this trend is the investment management sector.
"How many managers are going to beat the indexes? All costs considered, I would say maybe 5% could consistently meet the averages," Munger said.
This statistic paints a rather bleak picture of the industry, suggesting that a vast majority might be operating under a veil of "extreme denial."
Perhaps the most damning indictment from Munger centers on the prevalent practice of charging substantial fees for subpar advice.
"Everybody else is living in a state of extreme denial," Munger said. "They're used to charging big fees and so forth for stuff that isn't doing their clients any good."
Munger elaborates on this moral quandary, illustrating with the example of a widow being charged exorbitantly for advice that might not be in her best interest.
Echoing age-old wisdom, Munger invokes Greek statesman and orator Demosthenes, highlighting that this tendency to believe what one wishes is not a modern affliction but a timeless human trait.
"What people wish is what they believe," Munger said. This observation underscores the universality of denial, making it crucial to recognize and address it.
Munger's perspective is not uniformly grim. He cites companies and practices that stand as exceptions to this trend of denial-driven decision-making, like Berkshire Hathaway and the Daily Journal. At the same time, he underscores the importance of integrity in business dealings, referencing personal experiences where profit wasn't the sole driving factor.
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