Friends hi-fi system not very good, what do you do or say?

I'd do the same thing when someone brings a bottle of agonizingly bad wine over.  I'd open a better bottle and let him see the difference.  If he couldn't tell the difference, c'est la vie - end of discussion.

In the case of the audio end of things, I'd invite him to bring over the same record/CD he played and play it on each one of my three systems (which have slightly different strengths and weaknesses) and see what he hears.  

He might turn out to be unable to detect differences (in which case, end of discussion), or they might jump out at him immediately and could start a discussion of why it was different.  Either way, I'd avoid offending him.  Telling someone that their system sucks is like saying his wife is ugly - no coming back from that!

I would say I really like your system and that I have been really stupid to spend so much money on my system and here you have a really nice system. I just wanna listen to music and enjoy that after all.  I wish I was smart as you.

And then they ask you what you have in your system, and of course that’s really what I wanted to express anyway but I did it in a cute sort of way. And then he’ll be complementing me on my system saying I bet it really does sound pretty good you shouldn’t be critical of yourself. Can I come listen to it?

Then I would say if I had to do it all over again I would just buy an integrated receiver with basic speakers and call it a day and be just as happy. Now I drive myself nuts trying to learn more and more and recognizing I really haven’t learned much at all. Truly frustrating experience to pursue this and never get to a point where you’re satisfied with anything. and Looking at my car and saying wow I could’ve done a lot better.

And then the guy is basically providing me comfort for my awesome system and he hasn’t taken offense while we mutually have a common understanding at this point that his system probably isn’t as good as my system. And now he’s envious of me and that’s just fine.

Yeah, I suppose this makes sense if his envy is your goal.

Really though, this seems like grade school playground logic. 

Say nothing. This is not a contest akin to “my bike is better than your bike.” We’re grown ups now. Be happy with your bike. That’s all that matters. 

I am not at my friend's house to review his stereo system.  If it works for him that is all that matters.

Interesting quote from Mark Twain!  Makes you think!

I've been in this situation many times over the years.  I will find something about their system and its sound quality that you can honestly say is good.  It could be that the overall sound quality is terrible, but it probably does something (perhaps only one thing) ok.  That way you are speaking honestly while at the same time appealing to their sense of joy and pride.  In the end, the delivery of music brings joy.