Marshmallows, Munger, and the Benefits of Delayed Gratification

marshmallows munger

Warren Buffett and Bill Gates were interviewed recently to discuss why they are both so optimistic about the future of America as well as other issues. Naturally, one of the topics covered was philanthropy as Gates and Buffett are leading the charge with regard to the Giving Pledge and the two have given more money away than other people in the world. Buffett was asked what the best thing Bill Gates has done with his money since he pledged over $30 billion to the Melinda and Bill Gates foundation. Buffett said the following:

“Well, the best thing I’ve done is turn money that has little marginal utility to me that has maximum utility for other people.”

I took microeconomics in college but admit that I didn’t really take to it until I was able to see how it worked in the business world. Buffett’s statement above is probably the most relevant and impactful application of one of the key principles of microeconomics that I have read. Utility is at the heart of microeconomics. What has value (utility) to one person almost always has a different value to another.  Buffett is so clear about what’s important to him. He has had very little need for much money personally but a high need to compound capital so that it can be of use to others. He truly has put his money where his mouth is.

A dollar tomorrow is worth more than a dollar today. Warren BuffettClick To Tweet

Another way of saying what Buffett said is that a dollar tomorrow is worth more than a dollar today because he has very little use or need for money. He is not a big spender so he has preferred to defer consumption and invest the money he earns and keep compounding the money he has invested so that it can grow and then channel it to others who value it more highly. This is a long-winded way of saying that Buffett is very big into delayed gratification. And when going into business with someone this is vitally important to determine if both parties share the same philosophy. A big spending, high need for cash type of person will not blend well with someone who prefers delayed gratification. While this is preferable to two or more people who are big spenders now, the chances of the partnership working out well are quite small. The best partnerships from my experience are those in which both parties have a long-term perspective and buy into the benefits of delayed gratification. This has worked brilliantly at Berkshire Hathaway as Charlie Munger is a huge proponent of delayed gratification.

Stanford Experiment with Children and Marshmallows

Before I talk about Munger and how important delayed gratification has been in his life, I want to reference ground breaking research about this very topic. In the 1960s a Stanford professor did experiments with 4 and 5-year-olds using marshmallows. The researcher put marshmallows on a table and told the kids that he was going to leave the room and when he came back those children who did not eat a marshmallow would get a second one and those who ate them would not. He left the room for 15 minutes. The children were followed up on over 40 years and here were the key findings:

The children who were willing to delay gratification and waited to receive the second marshmallow ended up having higher SAT scores, lower levels of substance abuse, lower likelihood of obesity, better responses to stress, better social skills as reported by their parents, and generally better scores in a range of other life measures. (You can see the follow up studies here, here, and here.)

The researchers followed each child for more than 40 years and over and over again, the group who waited patiently for the second marshmallow succeed in whatever capacity they were measuring. In other words, this series of experiments proved that the ability to delay gratification was critical for success in life.

In a follow-up study other researchers replicated the experiment but before carrying it out they created two groups of kids. The first group was promised something if they followed through on a commitment but they were misled and not rewarded while the second group was not misled and rewarded. Not surprisingly, the second group was much more inclined to delay gratification than the first since they had been conditioned that waiting would translate into a reward whereas the first group had no trust this would be the case. This shows the importance of following through on commitments made to kids when they are promised something for successful outcomes so they can learn at a young age the benefits of delayed gratification – doing what is hard now at the expense of doing what is easy. Over time this will build up the muscle of discipline and strengthen one’s skills and capabilities and will compound into a much greater level of success and satisfaction than those who take the easier path.

More Delayed Gratification – Munger Style

So what does Charlie Munger have to say about delayed gratification? Not surprisingly, a lot as he usually has quite a bit to say about anything that interests him. He tends to refer to it as deferred gratification so that is how I will refer to it as well.

In addition to being Vice Chairman of Berkshire Hathaway, Charlie Munger is also Chairman of the Daily Journal and each year he holds an annual shareholders’ meeting which, not surprisingly, has a great turnout for a small company. The transcript of the meeting is eagerly read worldwide. Munger affectionately refers to the attendees and shareholders as cultists. While I’m not a shareholder I could easily fall into the cultist camp. The only deprogramming I need is of my own blind spots, ego, and fallibilities. If I keep getting programmed with Munger’s philosophy I cannot help but benefit from it.

I hungrily read the 33-page transcript and was not disappointed in having invested the time in doing so. There is so much wisdom conveyed that it is something I will return to periodically in the future. Rather than excerpting all of the highlights here, I thought I would do so over the course of the next few blogs. For this week I wanted to focus on delayed gratification and how important it has been to Munger and, paradoxically, how much current gratification he gets from deferring monetary gratification. Munger often likes to say he passes on opportunities because it’s just too difficult to make money. When it comes to running a business, however, he seems to like doing difficult work such as transforming the Daily Journal into a very capable software provider because if they can slog through it and get through to the other side then they can have a very sticky customer base and profitable business.

“But this is pretty extreme here.  The little Daily Journal building going into the computer software business.  It’s a long slow kind of business.  RFPs.  The first time we contact a customer until we start making money maybe 5 years.  So it’s like deciding to start prospecting for oil in Borneo or something.  And they just keep doing that over and over again, and the money goes out and the effort goes out, and it starts coming in five years from now.  I love that kind of stuff, not when I think we’re taking territory, it doesn’t look good when we write it off and we don’t report wonderful numbers or anything.  But if it makes sense in the long-term, we just don’t give a damn what it looks like over the short term.  And we know we’ve collected a bunch of shareholders that share our ideas.  After all, we’re running a cult, not a normal company.  And I think most of you feel that you’re willing to wait.

One good thing about what we’re doing is it’s slow and it’s agony in the delays between the first customer contact and finally getting into a decent revenue stream.  But once you succeed, it’s very sticky business.  Very sticky business.  And the fact that it’s difficult to do means it’s difficult for people to change much.  So if you go slog through all this tough territory where it’s (slogging through), there’s a reward out there somewhere, and we’re not in a small business.  It has way more potential than the original print business we had giving information about the (cases).  It’s a big market.  And the people have no option but to charge ahead.  These courts and district attorneys, public defenders, all these people we’re serving…they’re overwhelmed with options…better systems and more software.  So it’s a huge market.  And the fact that it’s so awful to grind through.  It means that the people who want easy gratification don’t come in.  If it seems slow and painful to you, we kind of like it that way.

Munger then goes on to discuss the centrality of deferred gratification in his life and those in his world.

I lived all my life with people who were into deferred gratification.  In fact, most of them will never have any fun.  They just defer gratification all the way to end, that’s what we do.  And it does cause you to get rich.  So we’re going to have a lot of rich dead people. (laughter)  We can excite a lot of envy.  A lot of you when the people walk by your grave and there will be this nice grave with this nice monument and they’ll say, “God what a great grave, I wish I were under.”  But at any rate, deferred gratification really does work if what you’re doing is growing a business that gets better and better and getting yourself so that your grave can look nice to outsiders.  Guerin and I have never taken any money out of this company in all these years.  We don’t take salaries, we don’t take directors’ fees.  We’re a peculiar example.  I wish our example spread more, because I think if you’re wealthy and own a big share of a company, and you get to decide what it does and whether it liquidates or whether it keeps going, that’s a nice position to be in, and maybe you shouldn’t try and grab all the money in addition.  That’s my theory of executive compensation.  And some of the old-fashioned guys like Carnegie never took any salary to speak of.  Cornelius Vanderbilt didn’t take any, of course, he owned the whole place, practically, and he would have considered it beneath him, he lived on the dividends like the shareholders did.  So there’s a lot of that old-fashioned ideas here in the Daily Journal Company.

He was asked about what business opportunities he would recommend for his grandchildren and he redirected his answer.

Well I don’t spend any time telling my grandchildren what business opportunities to look for.  I don’t have that much hope. (laughter)  I’m going to have trouble getting my grandchildren to work at all!  Anyway, I don’t think there’s an easy way to handle a problem of doing better and better with finances.  Obviously if you’re glued together and honorable and get up every morning and keep learning every day and you’re willing to go in for a lot of deferred gratification all your life, you’re going to succeed.  It may not be as much as you want.  But you’re going to success.  And so the main thing is to just keep in there, and be glued together, and get rid of your stupidities as fast as you can.  And avoid the bad people as much as you can.  And you’ll do reasonably well.  But try teaching that to your grandchildren.  I think the only way you’ve got a chance is sort of by example.  If you want to improve your grandchildren the best way is to fix yourself.

I have been at CWS for almost 30 years. The company was founded in 1969 and we’re still going strong. I have seen first hand the benefits of deferred gratification. We have nearly 1,000 investors, many of whom have been with us for over 30 years as well as many children and grandchildren of some of our original investors. We have never touted what we do as a way of getting rich quick but a very solid wealth building tool over the long-term. Our investors have come to appreciate this. I like to say that at CWS we help save people from themselves. By outsourcing the investment decisions and emotional roller coaster to us and having us deploy their capital in illiquid, dividend generating, long-term investments, they are truly playing the game of deferred gratification and benefitting nicely from it.

CWS is very deferred-gratification oriented as well. We are always reinvesting back into our organization to support our people and properties. We do this to make sure we are fielding the highest caliber and well-trained teams to manage our investments with sufficient capital to ensure we are doing our best to remain competitive so that we can maximize value. And after enough years go by and one has patiently deferred current consumption for future benefits, the benefits will often accrue in the form of higher dividends that may often be a multiple of the original investment. This is possible through the growth in investment value amplified by the prudent use of leverage, refinance proceeds that can be reinvested without immediate tax consequences, and reinvesting sale proceeds on a tax-deferred basis by utilizing 1031 exchanges. It is a highly effective mechanism for building long-term wealth and growing cash flow provided one is willing to be patient and live below one’s means.

I have seen how this has worked well for our investors as well as my family and I. Every time we sell a property I have the option of taking the cash and paying taxes and having those funds available for immediate gratification or rolling the funds over on a tax-deferred basis into a new investment and delaying my gratification for immediate consumption. Almost always I have made the decision to keep some or all of the capital invested and compounding to provide for a larger dividend stream in the future as well as appreciation potential. This is the game I have come to know and love. And like Munger, if there is one thing I would recommend to my kids and other young people, it would be that huge life advantages can accrue to those who not only learn how to defer gratification but come to enjoy doing so as well.

So hopefully the next time you see a marshmallow you will never think of it as just a marshmallow!

Over to you:

Do you understand why the Stanford experiment with 4 and 5-year-olds using marshmallows is the perfect predictor for future great investors? What is your investment style? Are you a fan of the CWS version of delayed gratification? Tell me below:


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