"...you may think, my foundation, at least, will be above average. It is well endowed, hires the best, and considers all investment issues at length and with objective professionalism. And to this I respond that an excess of what seems like professionalism will often hurt you horribly --- precisely because the careful procedures themselves often lead to overconfidence in their outcome.
General Motors recently made just such a mistake, and it was a lollapalooza. Using fancy consumer surveys, its excess of professionalism, it concluded not to put a fourth door in a truck designed to serve also as the equivalent of a comfortable five-passenger car. Its competitors, more basic, had actually seen five people enter and exit cars. Moreover they had noticed that people were used to four doors in a comfortable five-passenger car and that biological creatures ordinarily prefer effort minimization in routine activities and don't like removals of long-enjoyed benefits."
A costly mistake for GM, but nothing compared to LTCM. Munger goes on to say the following:
"Similarly, the hedge fund known as 'Long-Term Capital Management' recently collapsed, through overconfidence in its highly leveraged methods, despite I.Q's of its principals that must have averaged 160. Smart, hard-working people aren't exempted from professional disasters from overconfidence. Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods."
After a few years of great returns I'm sure investors in LTCM were feeling pretty good not understanding the risks being taken and the cliff their money was about to fall off. The fund lasted all of four years before it collapsed so it's hard not to chuckle at the name they chose: Long-Term Capital Management.
The value of $1,000 invested in LTCM, the Dow Jones Industrial Average, and invested monthly in U.S. Treasuries at constant maturity.
Deciding to use "Long-Term" in the name of a highly leveraged*, speculative, $ 100 billion fund that used complex mathematical models in what ended up being a failed attempt to profit from fixed income arbitrage is pretty awesome.
Munger's Speech to Foundation Financial Officers - 1998
When Genius Failed...Again
* Prior to the collapse LTCM had ~ $ 400 million of capital. With more than $ 100 billion of assets that meant the leverage ratio was ~250 to 1. The Federal Reserve Bank of New York organized a bailout to avoid a wider collapse in the financial markets. The partners had $1.9 billion of their own money invested in LTCM. They lost all of it.