Never forget your moral responsibility to the individuals and families who entrust you with their life’s hard-earned savings. When the perma-bull inside you urges you to engage in risky strategies or to eke out the final few points of a rampant bull market where there could be a quick 20 percent upside along with a potential 50 percent downside, think about the man or lady who worked on the checkout line at Walmart for years to put something aside for his or her retirement. How would it affect their retirement dreams and life aspirations if you lost half their money? How would they feel if they knew what you were doing? How would you feel if you were fully aware about what you were doing?
An outer scorecard, which many people have, asks, “What will people think of me? Will they judge me by the way I dress or the way I look or the car I drive?”
But the inner scorecard, which is much more important, asks, “Am I doing the right things? Am I treating people correctly? Is this working for me as an individual?”
It’s what Rose Blumkin, the Nebraska Furniture Mart founder, stood for, and she lived her life under one single motto: “Sell cheap and tell the truth.”8
The inner scorecard is the inner set of criteria and standards by which a person judges her- or himself. In contrast, the outer scorecard is an external, comparative picture of self-worth predicated on the judgments of others. There is a clear parallel here between the inner scorecard and the concept of intrinsic value and between the outer scorecard and the concept of market value. Benjamin Graham had talked about this very parallel in The Intelligent Investor:
Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it—even though others may hesitate or differ. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right [emphasis added].9
Focusing on his inner scorecard and living life in a principled manner has worked for Buffett. He has always believed in the dictum “Honesty is the best policy.” Buffett has always taken the high road, and it has paid off very well. For instance, he could have saved billions by moving his reinsurance operations’ tax domicile to a tax-advantaged jurisdiction, as many of his competitors did, but he didn’t. His independent spirit infuses every aspect of his life. This includes his diet, which mostly revolves around burgers and Cherry Coke.
In the late 1980s, when the U.S. savings and loan (S&L) companies were using accounting tricks to create capital out of thin air, they were heading toward a crisis of widespread bankruptcies that would destroy depositor savings, require a taxpayer bailout, and result in a furious public backlash. Munger, who was chairman and CEO of Berkshire’s S&L operation, Wesco Financial, foresaw that Wesco’s better behavior wouldn’t prevent it from being tainted by association. He not only cut back Wesco’s lending but also took an extreme stand to distance Wesco from the other S&Ls by resigning from the U.S. League of Savings Institutions, in a letter in which he likened the trade association to metastasizing cancer cells and called its lobbying practices “flawed, indeed disgraceful.”10 It was a step that only a person who was willing to be detested by an entire industry could take. The move paid off when the S&L crisis erupted and Wesco’s reputation was left completely unscathed. It was Munger’s action of high integrity during the 1980s’ S&L crisis that set Berkshire on its path to being held up as the moral exemplar of corporate America.
What Buffett, Munger, and a lot of other people who have been successful in life (true success, not measured by money) have in common is that they strive for a happy and fulfilling life. Not just getting rich. Not just trying to get famous. But living a truly satisfying existence with full integrity and helping others around them achieve the same.
Bernie Madoff achieved great admiration and wealth over the duration of his Ponzi scheme, but was he happy? He made it clear, after he had been caught, that he wasn’t. Here was a guy who had all the admiration in the world, an external scorecard showing an A+. But what happened when he lost it all? He heaved a sigh of relief. According to New York magazine, “For Bernie Madoff, living a lie had once been a full-time job, which carried with it a constant, nagging anxiety. ‘It was a nightmare for me,’ he told investigators, using the word over and over, as if he were the real victim. ‘I wish they caught me six years ago, eight years ago,’ he said in a little-noticed interview with them.”11
Shane Parrish writes, “The little mental trick is to remember that success, money, fame, and beauty, all the things we pursue, are merely the numerator! If the denominator—shame, regret, unhappiness, loneliness—is too large, our ‘Life Satisfaction Score’ ends up being tiny, worthless. Even if we have all that good stuff!…It’s so simple. This is why you see people that ‘should be happy’ who are not. Big denominators destroy self-worth.”12
Adam Smith addressed this issue more than two centuries ago in his book The Theory of Moral Sentiments. He said that even though we desire to be loved by others, at the end of the day, we experience happiness only when we are successful according to our inner scorecard. We derive true joy from our achievements only when we feel we truly deserve it. We can’t just receive praise. We must be praiseworthy. We can’t just be loved. We must be loveable.
To get what you want, deserve what you want. Trust, respect, and admiration need to be earned. As Munger says:
It’s such a simple idea. It’s the golden rule so to speak. You want to deliver to the world what you would buy if you were on the other end. There is no ethos, in my opinion, that is better for any lawyer or any other person to have. By and large the people who have this ethos win in life, and they don’t win just money, not just honors. They win the respect, the deserved trust of the people they deal with, and there is huge pleasure in life to be obtained from getting deserved trust [emphasis added].13
The idea of living one’s life according to the inner scorecard is closely linked to the concept of the “Kantian fairness tendency,” discussed by Munger in his essay The Psychology of Human Misjudgment: “Kant was famous for his ‘categorical imperative,’ a sort of a ‘golden rule’ that required humans to follow those behavior patterns that, if followed by all others, would make the surrounding human system work best for everybody.”14
I look at this as the law of the higher good, of treading the high moral ground, of taking the road less traveled, of being the better people. Buffett and Munger have exemplified this behavior in their daily dealings for the past many decades, and their goodwill has compounded in an exponential manner over the years.
We must look at individual situations from our civilization’s point of view rather than the viewpoint of any single individual, including ourselves. If we behave in a way that encourages lies and deceit, or if we tolerate such systems, we will ruin our civilization. If we don’t punish the concerned individual, even if that person is us, the idea that it is okay to do minor unethical deeds once in a while will spread because of incentive effects and social proof (“Everyone is doing it, so it’s okay.”). It is our duty to act as moral exemplars and to inspire others to do the same.
When I was an officer in the military, we had a rule called Conduct Unbecoming an Officer. It was not specific, but it said there were certain ways to behave as an example for others…. If you rise high in a corporation or elsewhere in life, you have a duty to be an exemplar—you have a duty to take less than you deserve, to set an example [emphasis added].
—Charlie Munger
Ultimately, you want to be at peace with yourself, able to face the mirror every day. As the saying goes, “There is no pillow so soft as a clear conscience.” We should not pay mere lip service to our role models in life; we should embody them in words, action, and spirit. Over the course of our lives, we will face difficult situations in which being truthful is painful up front. Following the path of righteousness during such times delivers enormous rewards in the long run. Our goodwill compounds exponentially over time when we live life according to the inner scorecard.
Again, Munger shares some great thoughts: