Charlie Munger on Cost of Capital - 31/01/16 - 20:39

From Damn Right: Extract from Behind the Scenes with Berkshire Hathaway
Billionaire Charlie Munger

In 1996, Charlie Munger was invited by Cardozo School of Law in New York City, to
moderate a debate on research of one Professor William Bratton of the Rutgers-
Newark School of Law.

Munger: What is the breakpoint when a business becomes suboptimal in an

ordinary corporation or when an investment becomes suboptimal?

Bratton: When the return on the investment is lower than the cost of capital?

Munger: And what is the cost of capital?

Bratton: Well, thats a nice one [Laughter] and I would

Munger: Well, its only fair, if youre going to use the cost of capital, to say what it is?

Bratton: I would be interested in knowing, were talking theoretically.

Munger: No, I want to know what is the cost of capital in the model.

Bratton: In the model? It would just be stated.

Munger: Where? Out of the forehead of Joe or something?

Bratton: That is correct. [Laughter]

Munger: Well, some of us dont find this too satisfactory. [Laughter]

Bratton: I said, youd be a fool to use it as a template for real world investment
decision making. [Laughter]

Theyre only trying to use a particular perspective on human behavior to try to

explain things.

Munger: But if you explain things in terms of unexplainable subconcepts, what kind
of an explanation is that [Laughter]

Bratton: Its a social science explanation. You take it for whats it worth.

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 Charlie Munger on Cost of Capital - 31/01/16 - 20:39

Munger: Do you consider it understandable for some people to regard this as

gibberish? [Laughter]

Bratton: Perfectly understandable, although I do my best to teach it. [Laughter]

Munger: Why? Why do you do this? [Laughter]

Bratton: Its in my job description. [Laughter]

Munger: Because other people are teaching it, is what youre telling me. [Laughter]