11 ms·

Charlie Munger: Turning $2M Into $2T

92 points by vikrum 3y ago

ragestorm 3y ago
Step 1: Have $2M in 1880s Step 2: Wait 150 years
- jjtheblunt 3y ago
  that only gets you to the 10 billion mark roughly, if i calculated right with wolframalpha curated data
- deleted 3y ago
  [deleted]
- downrightmike 3y 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-from-benjamin-franklin-to-boston-and-philadelphia https://www.mentalfloss.com/article/627475/200-year-old-gift...
  - missedthecue 3y ago
    He had some fairly guarded rules on how to manage it though, it wasn't thrown into Apple and Exxon shares.
    - downrightmike 3y ago
      Corporations were really different back then and were only created strictly for their purpose and rarely allowed to be created. Like the NYC water system is one of those old corporations. Now we can create a corp in another state for practically no money.
  - jshprentz 3y 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-last-bet-michael-meyer https://www.harpercollins.com/products/benjamin-franklins-la...
- tcgv 3y 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=2000000 https://www.in2013dollars.com/us/inflation/1880?amount=20000...]
- amelius 3y 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.
hiddencost 3y 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 3y ago
  Problem is flipping the coin 20 times. I don’t think even 1 in 100 million would do that.
  - sdfghswe 3y 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.
    - EddTheSDET 3y ago
      I believe OP is talking about the human emotion of flipping that coin the 19th time (or indeed the 18th, or 17th...). While the math might be as simple as doubling x times it's very different to actually do it!
      - sdfghswe 3y ago
        Are you forced to bet everything on every flip?
        sokoloff 3y ago
        If your goal is to double your money on each successful flip (as implied in [0]), then yes. [0] https://news.ycombinator.com/item?id=37586995 https://news.ycombinator.com/item?id=37586995
        AdamN 3y ago
        I think that's the implication: https://en.wikipedia.org/wiki/St._Petersburg_paradox https://en.wikipedia.org/wiki/St._Petersburg_paradox https://en.wikipedia.org/wiki/Martingale_(betting_system) https://en.wikipedia.org/wiki/Martingale_(betting_system)
deleted 3y ago
[deleted]
wenc 3y 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 3y ago
  Yep, which is why investing (life?) is really about risk management.
  - User23 3y 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.
    - lifeisstillgood 3y ago
      Are you saying that risk management is (mostly) buying suitable options to balance your trade ? I have often wondered why the price of the option does not naturally find a level that exactly cancels out the trade? Edit: Sounds too challenging - I am interested in your take on risk management, please expand. Esp with red to why options are priced at a level where they make a profit? (my perhaps limited understanding of options is I am betting A will go up 10% but if A goes down 5% I can buy an option to purchase A at the lower price. My instinct is at some point there is always a losing side. Why enter?
      - User23 3y ago
        > Are you saying that risk management is (mostly) buying suitable options to balance your trade ? Kind of. Fundamentally risk management comes down to bankroll management. And one workable general approach is the Kelly criterion[1] or something like it. However, unlike casino games, with options we don't know the true odds and have to estimate them in most cases. And there are other risks like theta, which is how all else being equal an option loses premium value as expiration approaches. Therefore we can't just use Kelly directly. A trivially simple strategy that is suboptimal, but is good enough for learning is to never risk more than 1% of your trading bankroll[2]. The end result is that as you make winning bets your bet size increases and as you make losing bets your bet size decreases. Remember your goal at this level of knowledge is hands on learning with some skin in the game to sharpen your attention. In the prior paragraph the trivial basic risk management strategy is "never risk" more than 1%. The reason I say never risk rather than never bet is because when trading options you can lose more than you bet! In fact you can potentially go to zero. A simple example is selling an uncovered call, that is to say selling someone the right to buy some multiple of 100 shares of a stock at a fixed price while not actually owning the stock to sell to them if they exercise the contract. Therefore, if the contract is exercised you have to go and buy however many shares are needed to cover the call. Since there is no limit to how much higher the market price can be than the call's strike price, you can lose an unbounded amount of money from a bet that actually increased your cash on hand when you entered it. Most (all?) trading platforms have some notion of options levels. I highly advise not requesting the level that lets you make such bets. I personally don't see any good point to them[3] and for a slightly increase in premium you can make very similar bets without the unlimited downside by using spreads. If you are unspeakably unfortunate or otherwise consistently make losing bets, then even solid risk management can result in your ruin. However, it will be a slow process and hopefully somewhere before disaster you will conclude that trading derivatives isn't where your gifts lie and preserve what remains of your capital. > I have often wondered why the price of the option does not naturally find a level that exactly cancels out the trade? Options markets aren't perfectly efficient. Furthermore, the typical leverage is 100:1, which magnifies even small pricing inefficiencies. In fact, there isn't even agreement on how to price options at all. The Black-Scholes model[4] is just one popular model and many traders think it has problems. > My instinct is at some point there is always a losing side. Why enter? Yes, derivatives trading isn't investment, and there is always (usually?) a winner and a loser for every trade. However, there are market participants that make trades that set out to make a loss. For example, A trader may need to execute a hedging strategy and one leg of it will lose money if his primary trade goes as he hopes. Nevertheless, the opportunity remains to potentially be the counterparty on hedging leg. This is a pretty complicated area and I don't pretend to have a deep understanding of it, but if you dig in you'll find plenty of discussion. There are also market participants who are just making bad trades. When you start you'll probably be one of them, which is why I emphasize risk management. Their counterparties also have a good opportunity to profit. [1] https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion [2] And that bankroll itself should be less than your total financial net worth (IE paper assets like cash and stocks and so on, not real estate). Don't bet your emergency fund and so on. How much less depend on your own circumstances and is more a general matter of savings allocation than anything derivatives trading specific. [3] But as I said I'm not an expert, just a dabbler who did OK. Perhaps some sufficiently advanced trader can come up with a good reason to make such a bet that isn't just based on hubris and wishful thinking. [4] https://www.investopedia.com/terms/b/blackscholes.asp https://www.investopedia.com/terms/b/blackscholes.asp
lvl102 3y ago
There can only be x amount of dollar that can return y return.
neogodless 3y 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.
- bmitc 3y 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.
  - robertlagrant 3y ago
    How do you know he got lucky?
    - jodrellblank 3y ago
      Were Buffet and Munger were the only people trying to make money from the stock market in the last hundred years and nobody else was trying? Or were they the smartest and they didn't luck into being born smart, but self-generated their smarts too?
      - fnordpiglet 3y ago
        Smart is neither necessary nor sufficient to do well in trading, as well as luck. It mostly requires being rigorous, disciplined, rational, and obsessively focused on the pursuit. “Smart” and “luck” are lazy thinking ways of explaining why they do well and others didn’t. In my 30 years or so in the industry working in quant and traditional trading spaces as well as high tech startups that did very well, I’ve not seen smart beat discipline, or luck replace rational obsession. The fact is they’ve all faced enormous bad luck at some point or another, but kept plugging away. I’ve seen that almost anyone if they have a strong self discipline and a clear rational mind can do very well in trading, but it also requires obsessive focus - to the extent that most people can’t match it. I’d note this isn’t unique to trading though. I’ve seen in tech the smartest people languish around ivory towers, but the most mediocre of intellects develop the most useful systems and software that’s widely used. Again, discipline, rigor, rationality, and obsessive focus are the key factors.
marcinzm 3y 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=2000000&endYear=2023 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.
- xyzelement 3y 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)
  - esotericimpl 3y ago
    [dead]
- robertlagrant 3y ago
  The market only grows because of corporate planning in some way or another.
  - kjkjadksj 3y 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.
    - robertlagrant 3y ago
      Well, lots of crypto grows on the same way that any pyramid scheme grows: they hope there will be many greater fools who will buy in so they can cash out. I don't think that's equivalent to the S&P500's growth over the last 100 years.
sdfghswe 3y ago
Are these numbers right? Is 1/4th of all water ingestion a coca-cola product?
- antonvs 3y 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 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 3y 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.
- lostcolony 3y ago
  Also a missed opportunity for an obvious pun, 'plane educational failure'
riazrizvi 3y 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.
- jodrellblank 3y 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.
- danielmarkbruce 3y 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.
  - riazrizvi 3y 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.
csa 3y 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 3y ago
  This paragraph left me with the impression that Charlie Munger has a chip on his shoulder about academia.
  - csa 3y 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.
1B05H1N 3y 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?
FarMcKon 3y 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 3y ago
  Yeah, also thinking that coca-cola behaved legally outside the US.
darth_avocado 3y ago
> Turning $2M Into $2T Be born when opportunities were big and $2M only buys a 2 bedroom house that needs fixing
bern4444 3y 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.
- jodrellblank 3y 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 3y ago
  7% is adjusted for inflation, BTW. So you should look at what $2M is worth in today's dollars.
- feoren 3y 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.
groby_b 3y 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_b 3y ago
  rich. Rich, damn it. You will be rich. I hate my brain :)
Nevermark 3y 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.
michael1999 3y 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.
- michael1999 3y 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_historical_origins https://en.wikipedia.org/wiki/Coca-Cola#19th_century_histori...
  - rhtgrg 3y 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 3y 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 https://www.npr.org/transcripts/456410327 [2]: https://en.wikipedia.org/wiki/Fixed_price_of_Coca-Cola_from_1886_to_1959 https://en.wikipedia.org/wiki/Fixed_price_of_Coca-Cola_from_...
- shalmanese 3y 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.

92 points by vikrum 3y ago

ragestorm 3y ago

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

jjtheblunt 3y ago
that only gets you to the 10 billion mark roughly, if i calculated right with wolframalpha curated data
deleted 3y ago
[deleted]
downrightmike 3y 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-from-benjamin-franklin-to-boston-and-philadelphia https://www.mentalfloss.com/article/627475/200-year-old-gift...
- missedthecue 3y ago
  He had some fairly guarded rules on how to manage it though, it wasn't thrown into Apple and Exxon shares.
  - downrightmike 3y ago
    Corporations were really different back then and were only created strictly for their purpose and rarely allowed to be created. Like the NYC water system is one of those old corporations. Now we can create a corp in another state for practically no money.
- jshprentz 3y 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-last-bet-michael-meyer https://www.harpercollins.com/products/benjamin-franklins-la...
tcgv 3y 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=2000000 https://www.in2013dollars.com/us/inflation/1880?amount=20000...]
amelius 3y 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.

hiddencost 3y 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 3y ago
Problem is flipping the coin 20 times. I don’t think even 1 in 100 million would do that.
- sdfghswe 3y 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.
  - EddTheSDET 3y ago
    I believe OP is talking about the human emotion of flipping that coin the 19th time (or indeed the 18th, or 17th...). While the math might be as simple as doubling x times it's very different to actually do it!
    - sdfghswe 3y ago
      Are you forced to bet everything on every flip?
      - sokoloff 3y ago
        If your goal is to double your money on each successful flip (as implied in [0]), then yes. [0] https://news.ycombinator.com/item?id=37586995 https://news.ycombinator.com/item?id=37586995
      - AdamN 3y ago
        I think that's the implication: https://en.wikipedia.org/wiki/St._Petersburg_paradox https://en.wikipedia.org/wiki/St._Petersburg_paradox https://en.wikipedia.org/wiki/Martingale_(betting_system) https://en.wikipedia.org/wiki/Martingale_(betting_system)

deleted 3y ago

[deleted]

wenc 3y 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 3y ago
Yep, which is why investing (life?) is really about risk management.
- User23 3y 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.
  - lifeisstillgood 3y ago
    Are you saying that risk management is (mostly) buying suitable options to balance your trade ? I have often wondered why the price of the option does not naturally find a level that exactly cancels out the trade? Edit: Sounds too challenging - I am interested in your take on risk management, please expand. Esp with red to why options are priced at a level where they make a profit? (my perhaps limited understanding of options is I am betting A will go up 10% but if A goes down 5% I can buy an option to purchase A at the lower price. My instinct is at some point there is always a losing side. Why enter?
    - User23 3y ago
      > Are you saying that risk management is (mostly) buying suitable options to balance your trade ? Kind of. Fundamentally risk management comes down to bankroll management. And one workable general approach is the Kelly criterion[1] or something like it. However, unlike casino games, with options we don't know the true odds and have to estimate them in most cases. And there are other risks like theta, which is how all else being equal an option loses premium value as expiration approaches. Therefore we can't just use Kelly directly. A trivially simple strategy that is suboptimal, but is good enough for learning is to never risk more than 1% of your trading bankroll[2]. The end result is that as you make winning bets your bet size increases and as you make losing bets your bet size decreases. Remember your goal at this level of knowledge is hands on learning with some skin in the game to sharpen your attention. In the prior paragraph the trivial basic risk management strategy is "never risk" more than 1%. The reason I say never risk rather than never bet is because when trading options you can lose more than you bet! In fact you can potentially go to zero. A simple example is selling an uncovered call, that is to say selling someone the right to buy some multiple of 100 shares of a stock at a fixed price while not actually owning the stock to sell to them if they exercise the contract. Therefore, if the contract is exercised you have to go and buy however many shares are needed to cover the call. Since there is no limit to how much higher the market price can be than the call's strike price, you can lose an unbounded amount of money from a bet that actually increased your cash on hand when you entered it. Most (all?) trading platforms have some notion of options levels. I highly advise not requesting the level that lets you make such bets. I personally don't see any good point to them[3] and for a slightly increase in premium you can make very similar bets without the unlimited downside by using spreads. If you are unspeakably unfortunate or otherwise consistently make losing bets, then even solid risk management can result in your ruin. However, it will be a slow process and hopefully somewhere before disaster you will conclude that trading derivatives isn't where your gifts lie and preserve what remains of your capital. > I have often wondered why the price of the option does not naturally find a level that exactly cancels out the trade? Options markets aren't perfectly efficient. Furthermore, the typical leverage is 100:1, which magnifies even small pricing inefficiencies. In fact, there isn't even agreement on how to price options at all. The Black-Scholes model[4] is just one popular model and many traders think it has problems. > My instinct is at some point there is always a losing side. Why enter? Yes, derivatives trading isn't investment, and there is always (usually?) a winner and a loser for every trade. However, there are market participants that make trades that set out to make a loss. For example, A trader may need to execute a hedging strategy and one leg of it will lose money if his primary trade goes as he hopes. Nevertheless, the opportunity remains to potentially be the counterparty on hedging leg. This is a pretty complicated area and I don't pretend to have a deep understanding of it, but if you dig in you'll find plenty of discussion. There are also market participants who are just making bad trades. When you start you'll probably be one of them, which is why I emphasize risk management. Their counterparties also have a good opportunity to profit. [1] https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion [2] And that bankroll itself should be less than your total financial net worth (IE paper assets like cash and stocks and so on, not real estate). Don't bet your emergency fund and so on. How much less depend on your own circumstances and is more a general matter of savings allocation than anything derivatives trading specific. [3] But as I said I'm not an expert, just a dabbler who did OK. Perhaps some sufficiently advanced trader can come up with a good reason to make such a bet that isn't just based on hubris and wishful thinking. [4] https://www.investopedia.com/terms/b/blackscholes.asp https://www.investopedia.com/terms/b/blackscholes.asp

lvl102 3y ago

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

neogodless 3y 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.

bmitc 3y 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.
- robertlagrant 3y ago
  How do you know he got lucky?
  - jodrellblank 3y ago
    Were Buffet and Munger were the only people trying to make money from the stock market in the last hundred years and nobody else was trying? Or were they the smartest and they didn't luck into being born smart, but self-generated their smarts too?
    - fnordpiglet 3y ago
      Smart is neither necessary nor sufficient to do well in trading, as well as luck. It mostly requires being rigorous, disciplined, rational, and obsessively focused on the pursuit. “Smart” and “luck” are lazy thinking ways of explaining why they do well and others didn’t. In my 30 years or so in the industry working in quant and traditional trading spaces as well as high tech startups that did very well, I’ve not seen smart beat discipline, or luck replace rational obsession. The fact is they’ve all faced enormous bad luck at some point or another, but kept plugging away. I’ve seen that almost anyone if they have a strong self discipline and a clear rational mind can do very well in trading, but it also requires obsessive focus - to the extent that most people can’t match it. I’d note this isn’t unique to trading though. I’ve seen in tech the smartest people languish around ivory towers, but the most mediocre of intellects develop the most useful systems and software that’s widely used. Again, discipline, rigor, rationality, and obsessive focus are the key factors.

marcinzm 3y 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=2000000&endYear=2023 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.

xyzelement 3y 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)
- esotericimpl 3y ago
  [dead]
robertlagrant 3y ago
The market only grows because of corporate planning in some way or another.
- kjkjadksj 3y 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.
  - robertlagrant 3y ago
    Well, lots of crypto grows on the same way that any pyramid scheme grows: they hope there will be many greater fools who will buy in so they can cash out. I don't think that's equivalent to the S&P500's growth over the last 100 years.

sdfghswe 3y ago

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

antonvs 3y 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 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 3y 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.

lostcolony 3y ago
Also a missed opportunity for an obvious pun, 'plane educational failure'

riazrizvi 3y 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.

jodrellblank 3y 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.
danielmarkbruce 3y 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.
- riazrizvi 3y 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.

csa 3y 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 3y ago
This paragraph left me with the impression that Charlie Munger has a chip on his shoulder about academia.
- csa 3y 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.

1B05H1N 3y 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?

FarMcKon 3y 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 3y ago
Yeah, also thinking that coca-cola behaved legally outside the US.

darth_avocado 3y ago

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

bern4444 3y 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.

jodrellblank 3y 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 3y ago
7% is adjusted for inflation, BTW. So you should look at what $2M is worth in today's dollars.
feoren 3y 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.

groby_b 3y 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_b 3y ago
rich. Rich, damn it. You will be rich. I hate my brain :)

Nevermark 3y 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.

michael1999 3y 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.

michael1999 3y 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_historical_origins https://en.wikipedia.org/wiki/Coca-Cola#19th_century_histori...
- rhtgrg 3y 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 3y 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 https://www.npr.org/transcripts/456410327 [2]: https://en.wikipedia.org/wiki/Fixed_price_of_Coca-Cola_from_1886_to_1959 https://en.wikipedia.org/wiki/Fixed_price_of_Coca-Cola_from_...

shalmanese 3y 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.