My views on the market, tech, and everything else

A Dozen Things I’ve Learned from Charlie Munger about Ethics

It is important to consider a post like this in the context of the other posts in this series, like the post on mistakes. No one is perfect. Everyone makes mistakes.


  1. “Ben Franklin said: ‘I’m not moral because it’s the right thing to do – but because it’s the best policy.’” “We  knew early how advantageous it would be to get a reputation for doing the right thing and it’s worked out well for us. My friend Peter Kaufman, said ‘if the rascals really knew how well honor worked they would come to it.’ People make contracts with Berkshire all the time because they trust us to behave well where we have the power and they don’t. There is an old expression on this subject, which is really an expression on moral theory: ‘How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.’ It’s such a simple idea, but it’s a correct idea.”  Thinking about this sentence raises the question about difference between ethics and morality. Opinions on the distinction between these two words vary. For purposes of this post I refer to “morality” as relating to shared communal or societal norms about right and wrong.  For the companion term this post will use this definition from US Supreme Court Justice Potter Stewart: “Ethics is knowing the difference between what you have a right to do and what is right to do.” Returning to the ideas in the quotations, what Ben Franklin and Charlie Munger are saying is that not only is unethical and immoral behavior wrong, it is a bad business practice.


  1. “You’ll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich–who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich–in money–not just in reputation.” Being ethical is just good business. As an example, I have a close friend who owns and leases commercial office building space and when he walks the streets of Seattle everyone seems to know him and they wave and smile. He is vastly better known than the mayor and certainly more popular. He is ethical to the core and people love to do business with him. The quality of his life is excellent and he is a multi-millionaire. He is wealthy both in terms of assets and friends.  Buffett has said: “You have certain things you want to achieve, but if you don’t have the love and respect of people, you are always a failure. That is the one thing you must earn, it can never be bought. No one that has the love and respect of others is ever a failure.”


  1.  “We believe there should be a huge area between everything you should do and everything you can do without getting into legal trouble.  I don’t think you should come anywhere near that line.” This is the application of a margin of safety principle to ethics. Why risk coming anywhere near a legal problem when there are so many other actions to be taken and opportunities to pursue that do not have the same risk? It is truly amazing when someone with massive wealth ends up disgraced over some minor incremental crime, especially when the person involved already has massive wealth. Munger said once: “Last night, referring to some of our modern business tycoons – specifically, Armand Hammer – I said that when they’re talking, they’re lying, and when they’re quiet, they’re stealing. This wasn’t my witticism; it was used [long ago] to describe the robber barons.”



  1. “Firms should have the ethical gumption to police themselves: Every company ought to have a long list of things that are beneath it even though they are perfectly legal.” “We don’t claim to have perfect morals, but at least we have a huge area of things that, while legal, are beneath us.  We won’t do them.  Currently, there’s a culture in America that says that anything that won’t send you to prison is OK.”  There is a big difference between what is legal and what is ethical.  Knowing the difference is critically important. Character and sound ethics means not doing what is unethical even if it may be legal. There is also the gray area of what business do you avoid. Buffett has said: “Charlie’s favorite company, Costco. They are the #3 distributor in the US of cigarettes, but you wouldn’t avoid buying it because of that. You’ll drive yourself crazy trying to keep track of these things. Our philosophy is … we just won’t be in certain businesses.” Munger puts it this way: “Warren told the story of the opportunity to buy Conwood, the #2 maker of chewing tobacco. I never saw a better deal, and chewing tobacco doesn’t create the same health risks as smoking. All of the managers chewed tobacco – it was admirable of them to eat their own cooking. Warren and I sat down and said we’re never going to see a better deal; it’s a legal product; and we can buy it at a wonderful price; but we’re not going to do it. Another fellow did and made a couple of billion easy dollars. But I don’t have an ounce of regret. I think there are a lot of things you shouldn’t do because it’s beneath you.”


  1. “Once you start doing something bad, then it’s easy to take the next step – and in the end, you’re a moral sewer.” I have seen this set of issues play out multiple times in my life. As an example, the caretaker or trustee decides that they will “borrow” from funds entrusted for a beneficiary. They may say: “I will just borrow a small amount for a short time and I pay it back with interest.” Another example is an investment manager hiding a loss from clients.  From this small seed a massive fraud can grow and often does grow. Creeping incrementalism is a huge source of ethical problems. Once unethical behavior starts you have a very slippery slope to deal with.


  1. “If your ethics slip and people are rewarded, it cascades downward.” “Terrible behavior spreads.” “Sometimes you have to resist sinking to the level of your competitors. But fomenting bad practices often becomes its own punishment. “If you do things that are immoral and stupid, there’s likely to be a whirlwind” that sweeps you away.” If people see other people cheating, particularly if they are viewed by the public as leaders, the ethical lapses can start to spread like the flu.


  1. “You’re never going to have perfect behavior in a miasma of easy money.” “When the financial scene starts reminding you of Sodom and  Gomorrah, you should fear practical consequences even if you would like to participate in what is going on.” “Investment banking at the height of this last folly was a disgrace to the surrounding civilization.”  “You do not want your first-grade school teacher to be fornicating on the floor or drinking alcohol in the closet and, similarly, you do not want your stock exchange to be setting the wrong moral example.” “The SEC is pretty good at going after some little scumbag whom everybody regards as a scumbag. But once a person becomes respectable and has a high position in life, there’s a great reticence to act. Madoff was such a person.” “You should have personal standards that are way better than the criminal law requires. Why should the criminal law determine your behavior? It would be crazy. Who would behave that way in marriage, or in partnership, or anything else? Why should you do it in your general dealing? I think this mess, and, of course, it’s a little dispiriting to find that many of the people who are the worst miscreants don’t have much sense of shame and are trying to go back as much as they can to the old behavior.  The truth of the matter is, once you’ve shouted into the phone, “I’ll take x and y,” and three days later, you have an extra 5 million, once that has happened, the people just become hopeless addicts, and they lose their bearings.” There will always be some measure of ethical problems. But during times like the Internet bubble or the run up to the credit crisis the presence of easy money can make things worse.


  1. “With so much money riding on reported numbers, human nature is to manipulate them. And with so many doing it, you get Serpico effects, where everyone rationalizes that it’s okay because everyone else is doing it. It is always thus.” These sentences describe an ancient problem. For example Augustine of Hippo once said: “Right is right even if no one is doing it; wrong is wrong even if everyone is doing it.” The problems that can be created by social proof can go beyond ethics. Warren Buffett has said that: “The five most dangerous words in business are: ‘Everybody else is doing it’.” Munger puts it this way: “Once some banker has apparently (but not really) solved his cost-pressure problem by unwise lending, a considerable amount of imitative ‘crowd folly,’ relying on the ‘social proof,’ is the natural consequence.”


  1. “If we mix only a moderate minority share of turds with the raisins each year, probably no one will recognize what will ultimately become a very large collection of turds.” A manager must be careful about the negative impact of a few bad apples on the quality of the other apples in the barrel. Hire slow, and in the case of a turd, fire fast.


  1. “I talked to one accountant, a very nice fellow who I would have been glad to have his family marry into mine.  He said, ‘What these other accounting firms have done is very unethical.  The [tax avoidance scheme] works best if it’s not found out [by the IRS], so we only give it to our best clients, not the rest, so it’s unlikely to be discovered.  So my firm is better than the others.’  I’m not kidding.  And he was a perfectly nice man.  People just follow the crowd. Their mind just drifts off in a ghastly way.” What Charlie Munger is talking about in these sentences is the power of the psychology of human misjudgment. A lollapalooza of biases kicks in to cause this accountant to fall into unethical behavior. There is self-interest bias and social proof and psychological denial and other heuristics at work in a case like this.


  1. “It’s hard to judge the combination of character and intelligence and other things. It’s not at all simple, which explains why we have so many divorces. Think about how much people know about the person they marry, yet so many break up.” “Avoid dealing with people of questionable character.” “One of the reasons the original Ponzi scheme was thrown into the case repertoire of every law school is that the outcome happens again and again. So we shouldn’t be surprised that we have constant repetition of Ponzi schemes.” Judging the ethical nature of anyone is not simple. One clue is how they treat people generally.  I has an assistant for many years who would let me know how job applicants treated the receptionist and others they met. People who are rude and condescending to anyone reveals much about who they are as people. Munger has said: “I think track records are very important. If you start early trying to have a perfect one in some simple thing like honesty, you’re well on your way to success in this world.”


  1. “The best single way to teach ethics is by example.” “Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.” It is far easier to preach about ethical standards than to live up to them. And living up to ethical standards is the best possible teaching method anyway. Children especially know when someone is walking the talk. Both Munger and Buffett have said that it is wise to “take the high road, since it is less crowded.”



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