Saturday, October 31, 2009

Charlie Munger on hedging your bets

More from Charlie Munger:

One of the greatest economists of the world is a substantial shareholder in Berkshire Hathaway and has been for a long time. His textbook always taught that the stock market was perfectly efficient and that nobody could beat it. But his own money went into Berkshire and made him wealthy. So, like Pascal in his famous wager, he hedged his bet.

For those of you who like me don't remember Pascal's Wager, it's this:

If you erroneously believe in God, you lose nothing (assuming that death is the absolute end), whereas if you correctly believe in God, you gain everything (eternal bliss). But if you correctly disbelieve in God, you gain nothing (death ends all), whereas if you erroneously disbelieve in God, you lose everything (eternal damnation).

But of course Munger's famous economist won't lose nothing if his hedge doesn't pay off.

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