The Ever-Advancing Frontier: Why Charlie Munger Underestimates the Next Wave of Innovation
Charlie Munger is a living legend. He’s best known as Warren Buffet’s trusted sidekick, right-hand man, and partner in building Berkshire Hathaway into the monstrous entity it is today. But he’s an icon in his own right. Together they’re regarded as two of the brightest, most disciplined investors in the world, always sticking to value investing principles in the mold of the great Benjamin Graham. Buffet and Munger have been right very often during their 40-year partnership, and the proof is in the pudding. Together they have grown Berkshire’s valuation to a whopping $550M. I have followed both men closely since I became interested in investing as a teenager and look up to them as role models both in business and life. But Mr. Munger got it wrong the other day…way wrong. In a recent interview with CNBC, Mr. Munger commented,
“I do think that my generation had the best of all this technological change…I don’t think we’re going to get as much improvement in the future because we’ve gotten so much already.”
Sorry kids! Forget about innovation and don’t even think about trying to change the world. The 96-year-old Munger and his generation handled all that’s to be done. OK, that was a bit too far, but can we take a minute to think about how absurdly narrow-minded this comment is from one of the sharpest minds in business? Sure, Mr. Munger has witnessed unimaginable improvements during his 96 years on earth. The world shrank as transportation evolved from horse and buggy to supersonic jets and spacecraft. Mass adoption of indoor plumbing and air conditioning helped people worldwide live more comfortably, and the internet has completely redefined everyday life, but let’s not be blinded by the limitless possibilities for future generations.
I can imagine elders gathered around fires throughout history, boasting about inventions like the wheel (3500 BC), the calendar (45 BC), the printing press (1450), and the computer (1822), patting themselves on the back for changing the course of human history. And that praise, while well-deserved for their impact on humankind at large, didn’t mark the slowing of innovation but another step towards future discoveries by future generations of scientists, intellectuals, philosophers, and innovators. Is Mr. Munger so proud to think that of over 200,000 years of human existence, his lifetime marks the peak of human innovation?
I recently read a piece from Ark Innovation, a fund company that focuses on disruptive technologies, in which they highlighted some of the advancements they are closely observing, like genomic sequencing, robotics, automation, artificial intelligence, cloud computing, energy storage, and crypto-currencies. About genomic sequencing, Ark points out,
“Genomic sequencing is revolutionizing the way biological information is collected, processed, and applied; restructuring health care, agriculture, pharmaceuticals, and enhancing our quality of life.”
Their white paper on thematic investing looks at the rapidly improving rate of the development of general-purpose technologies (innovations on which future innovations depend). In a chart, they highlight that general-purpose technology took about 250 years to develop in the 10,000 years before 900 A.D. but take just four years today. If Mr. Munger is correct, this trend dating several thousand years is about to reverse, a hypothesis I find improbable to materialize.
Munger and Buffet have been criticized in the past for not being quick to identify and invest in new technologies, although I find that criticism unfair, as that is not their business model. Berkshire has stated repeatedly that when looking for new businesses, they are looking for ones they can understand. Of course, this rules out many innovative businesses, as they couldn’t possibly learn enough to become experts on these businesses' underlying technologies. In fact, Buffet and Munger select investments “that we can understand, with favorable long-term prospects; operated by honest and competent people; available at an attractive price.” While quite simple in theory, finding companies that meet those criteria has grown more difficult as of late.
It’s one thing not to understand certain technologies or be willing to invest in them but calling for the slowing of innovation seems rash. Perhaps I took Charlie Munger’s comments out of context, or maybe he didn’t think them through. His words are often dissected, perhaps unveiling a point he didn’t intend to make. At any rate, I’m declaring innovation alive and well and suspect the young students out there, and those who are not yet born, will take innovations from Mr. Munger’s generation and build on them in ways we can’t begin to fathom. So, let’s get out there and prove Charlie wrong!
Oh, and the highly anticipated Berkshire Hathaway annual letter to shareholders was released on Saturday, February 22nd. I’ll soon be writing a recap of the always insightful and entertaining letter and hope you’ll give it a read.
*Opinions expressed here are those of the author. This is not intended to provide recipients with information or advice upon which to base an investment decision. Past performance is no guarantee of future results.*
