“Simple psychological denial. This first really hit me between the eyes when a friend of our family had a super-athlete, super-student son who flew off a carrier in the North Atlantic and never came back. And his mother, who was a very sane woman, just never believed that he was dead…that’s simple psychological denial. The reality is too painful to bear, so you just distort it until it’s bearable. We all do that to some extent and it’s a common psychological misjudgment that causes terrible problems.” - Charlie Munger
Charlie Munger had little patience with the psychological defense mechanism of denial.
He did not tolerate it in others and refused to practice it himself.
Admitted to hospital in the final hours of his life, a nurse asked Charlie how he was doing.
His reply: “I’m dying. How are you?”
To Charlie psychological denial was just a stumbling block on the high road to rationality.
And Charlie knew well the hostility provoked when denial is punctured: tell a drunk they’ve had enough and brace for impact.
“If people tell you what you don’t want to hear, what’s unpleasant, there’s an almost automatic reaction of antipathy. You have to train yourself out of it.” - Charlie Munger
Likewise, in matters of the heart, denial goes right to the heart of the matter.
“Love is blind.” - William Shakespeare
“Never fall in love with a stock.” - Wall Street maxim attributed to Peter Lynch
“The self-deception that believes the lie.” - Richard Rodgers and Lorenz Hart
Here’s Judy Garland and Mickey Rooney singing of denial in romance, “I Wish I Were In Love Again,” from “Words and Music” (1948):
Charlie Munger on Sigmund Freud
Charlie Munger read Sigmund Freud in high school, at the behest of his Latin teacher, a Freud devotee, and “realized he was a goddamn lunatic.”
Looney or not, Charlie shared with Freud a profound awareness of the power of psychological denial and defined it identically as a defense against intolerable reality.
“One should recognize reality even when one doesn’t like it. Especially when one doesn’t like it.” - Charlie Munger
It was Freud who first proposed denial (Verneinung) as a defense mechanism of what he termed the ego, shielding us from anxiety and fear.
At various times, before Freud and after, wise minds have identified denial in different settings:
“A man is his own easiest dupe, for what he wishes to be true he generally believes to be true.” - Demosthenes
“The first principle is that you must not fool yourself - and you are the easiest person to fool.” - Richard Feynman
Charlie fought denial to perceive the world more rationally.
Freud fought denial to perceive our selves more rationally.
Similarly both Charlie and Freud employed Charlie’s favorite thinking tool: mathematical inversion.
To a colleague complaining of overwhelming animus Freud wrote: “It will bring out the best of which you are capable.”
See Charlie Munger on the Power of Inversion
Denial in “The Emperor’s New Clothes”
We all learned “The Emperor’s New Clothes” as children.
But we weren’t taught “The Emperor’s New Clothes” as a lesson in mass delusion, the madness of crowds and the marketing of illusory expertise.
Here’s Hans Christian Anderson’s story in a delightful children’s video:
Interestingly, a key element of the plot is the power of denial to extract exorbitant fees from clients while, in the words of Warren Buffett, “delivering them nothing---or, as in our bet, less than nothing---of added value.”
Beating the S&P
If there were a Mt. Rushmore of finance, three faces would assuredly emerge from sculpted granite:
Jack Bogle, Warren Buffett and Charlie Munger
And if a single principle of investment unites all three in solemn agreement it would be that beating the market is a singularly difficult task, rarely accomplished by the armies of brokers and money managers spread across the globe.
Charlie once frankly admitted, at a Daily Journal meeting, he did not believe, in the present environment, using large sums of money, that he himself could do it.
What a bold and candid admission for a man who once referred to diversification as “deworsification,” because it dashed any hope of outperforming the market.
To be sure, putting all one’s chips on Berkshire, Costco, Google or Amazon over the past decades would have soundly beaten the market.
But only great research, advice, insight or luck will early identify such wonderful companies.
And how many in the know would dare focus-invest so intensely they could then beat the averages.
“In business the rear-view mirror is always clearer than the windshield.” - Warren E. Buffett
See also, “The One True Lead Pipe Cinch”
Denial and Money Management
So if the vast majority of investors, brokers and money managers never beat the S&P, what is their investment advice actually worth?
Here’s Charlie at the 2023 Daily Journal meeting, his final appearance, responding to Becky Quick’s query on mental bias in investment.
Without hesitation Charlie named simple denial as the pre-eminent problem in the investment world with clear and precise reason, unfailing morality and uncommon sense:
At age 99 Charlie never lost his child’s wonder at the world.
Will we ever know his like again?
RIP great teacher.
See also, “Charlie Munger’s Uncommon Sense”
