If you know Berkshire Hathaway (NYSE: BRK-B ) , then you probably know its vice chairman, Charlie Munger -- Warren Buffett's right-hand man. Munger's book, Poor Charlie's Almanack, collects his speeches and musings, including his intriguing thoughts on the 25 tendencies that lead us humans to make really bad decisions. For your benefit and mine, this series will review each of those ill-fated impulses, the errors they create, and the antidotes that can help make us better investors.
Today, we're on to tendency No. 8: Envy/Jealousy Tendency.
I've been getting a lot of questions lately from my daughters about jealousy. They're only 6 and 5, so it’s a relatively new concept to them. But explaining it isn't as easy as I thought it would be. Munger makes the observation that envy has a lot to do with food -- specifically when one person has some when another doesn't. With food being a necessity for life, this makes sense. From there, the evolution of man and just progress in general has given us more to be envious of.
Envy and jealousy can also weasel their way into many of the companies we research. Look through the DEF 14A forms, and often we see that compensation is geared around sector averages so that companies can all keep it in the same ballpark, making all managements' exorbitant pay seem reasonable. If accusations of envy and jealousy start flying around, the end result could get nasty.
Oh, the disparity!
But is it fair when executives are paid multiples upon multiples more than the daily workers in a particular company? Do you think this creates an envy or jealousy factor? I think it has to on some level. The worker making $50,000 a year may look at the CEO who makes $25 million a year and say that he or she could do the same thing. Does executive management really warrant that kind of disparity in compensation? Certainly not always. In fact, I bet that more than one company on the Dow Jones Industrial Average (INDEX: ^DJI) has had this problem.
All's fair in love and … cars?
Look at the recent contract negotiations between Ford (NYSE: F ) and the UAW. Thanks in part to management's efforts to cut costs along with the fact that the company is producing cars that people want to buy, Ford has now realized nine straight profitable quarters. But it appears now that this very success could in fact jeopardize the company's future if it's unable to renegotiate a contract with union workers. At issue is of course, compensation.
Let's forget for a moment that fellow competitors General Motors (NYSE: GM ) and Chrysler had to rely on government bailouts and bankruptcy to stay in business. (Sounds weird, doesn't it?) There's no doubt that this created a stigma for the two that they're still trying to overcome. It also created a situation where Ford was able to call more of its own shots, including paying its executives for turning the company around. Ford's CEO and chairman each took home $26 million in 2010. Consequently, today we have a situation where Ford's workers are demanding to see their share of the company's good fortune as well.
Part of this is a matter of fairness. Workers gave up a lot and now want what they consider to be their fair share. And part of this no doubt is also attributable to envy and/or jealousy. Why should executives make so much more than the folks who are putting the product together?
A little give and take is the bottom line
I'm certain that if Ford wants to keep on the same upward trajectory and its workers want to continue to remain employed, then they'll all come to an agreement that will keep everyone in business. Munger makes a good reference to a Buffett quote at the end of this particular passage: "It is not greed that drives the world, but envy." Words worth remembering.
Read the other installments so far in this series:
- Charlie Munger and the Psychology of Human Misjudgment
- Charlie Munger and the Psychology of Human Misjudgment, Continued
- Why Charlie Munger Thinks Hate Creates Opportunity
- Another Lesson Courtesy of Charlie Munger
- Charlie Munger and Bad Habits
- Charlie Munger and the Case for Curiosity
- The Psychology of Charlie Munger: For Investors, Fairness Pays