Charlie Munger might be one of my favorite people in history, right up there with Marcus Aurelius.
He’s the vice chairman of Berkshire Hathaway and his mental models approach to learning is something I’ve started to take an interest in and learn a lot more about.
I picked up a copy of his book Poor Charlie’s Almanack last year and it’s something I keep coming back to.
The six principles below are excerpts from and some of my most important takeaways from this book:
- Munger’s “Multiple Mental Models” Approach to Business Analysis and Assessment
“You must know the big ideas in the big disciplines and use them routinely-all of them, not just a few. Most people are trained in one model-economics, for example-and try to solve all problems in one way. You know the old saying: ‘To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.
“Charlie’s approach to investing is quite different from the more rudimentary systems used by most investors. Instead of making a superficial stand-alone assessment of a company’s financial information, Charlie conducts a comprehensive analysis of both the internal workings of the investment candidate as well as the larger, integrated “ecosystem” in which it operates. He calls the tools he uses to conduct this review “Multiple Mental Models.”
These models, discussed at length in several of the Talks (especially numbers Two, Three, and Four), serve as a framework for gathering, processing, and acting on information. They borrow from and neatly stitch together the analytical tools, methods, and formulas from such traditional disciplines as history, psychology, physiology, mathematics, engineering. biology, physics, chemistry, statistics, economics, and so on. The unassailable logic of Charlie’s “ecosystem” approach to investment analysis: Just as multiple factors shape almost every ecosystem, multiple models from a variety of disciplines, applied with fluency, are needed to understand that system. As John Muir observed about the interconnectedness of nature , “When we try to pick out anything by itself, we find it hitched to everything else in the universe.”
- A Willingness To Change His Mind
“Faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof.” -John Kenneth Galbraith
Charlie has developed an unusual additional attribute – a willingness, even an eagerness, to identify and acknowledge his own mistakes and learn from them. As he once said, “If Berkshire has made a modest progress, a good deal of it is because Warren and I are very good at destroying our own best-loved ideas. Any year that you don’t destroy one of your best-loved ideas is probably a wasted year. Charlie likes the analogy of looking at one’s ideas and approaches as “tools.” “When a better tool (idea or approach) comes along, what could be better than to swap it for your old, less useful tool? ‘Warren and I routinely do this, but most people, as Galbraith says, forever cling to their old, less useful tools.”
“Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do, when it ought to be done, whether you like it or not. It is the first lesson that ought to be learned and however early a man’s training begins, it is probably the last lesson that he learns thoroughly.” -Thomas Henry Huxley; Darwin’s self-appointed advocate or “bulldog”
Charlie counts preparation, patience, discipline, and objectivity among his most fundamental guiding principles. He will not deviate from these principles, regardless of group dynamics, emotional itches, or popular wisdom that “this time around it’s different”
When faithfully adhered to, these traits result in one of the best-known Munger characteristics: not buying or selling very often. Munger, like Buffett, believes a successful investment career boils down to only a handful of decisions. So when Charlie likes a business, he makes a very large bet and typically holds the position for a long period.
- Discipline and Patience – Ted Williams 77 Cell Strike Zone
“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” -Munger
In making investments, I have always believed that you must act with discipline whenever you see something you truly like. To explain this philosophy, Buffett/Munger like to use a baseball analogy that I find particularly illuminating, though I myself am not at all a baseball expert.
Ted Williams is the only baseball player who had a .400 single-season hitting record in the last seven decades. In the Science of Hitting he explained his technique. He divided the strike zone into seventy-seven cells, each representing the size of a baseball. He would insist on swinging only at balls in his ‘best’ cells, even at the risk of striking out, because reaching for the ‘worst’ spots would seriously reduce his chances of success. As a securities investor, you can watch all sorts of business propositions in the form of security prices thrown at you all the time. For the most part, you don’t have to do a thing other than be amused. Once in a while, you will find a ‘fat pitch that is slow, straight, and right in the middle of your sweet spot. Then you swing hard. This way, no matter what natural ability you start with, you will substantially increase your hitting average.One common problem for investors is that they tend to swing too often. This is true for both individuals and for professional investors operating under institutional imperatives, one version of which drove me out of the conventional long/short hedge fund operation. However, the opposite problem is equally harmful to long-term results: You discover a ‘fat pitch’ but are unable to swing with the full weight of your capital.” -Li Lu of LL Investment Partners
“When Warren lectures at business schools, he says, ‘I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches representing all the investments that you get to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”
- Focus on What To Avoid
Often, as in this case, Charlie generally focuses first on what to avoid-that is, on what NOT to do-before he considers the affirmative steps he will take in a given situation. “All I want to know is where I’m going to die, so I’ll never go there” is one of his favorite quips. In business as in life, Charlie gains enormous advantage by summarily eliminating the unpromising portions of “the chess board,” freeing his time and attention for the more productive regions. Charlie serves to reduce complex situations to their most basic, unemotional fundamentals.
Yet, within this pursuit of rationality and simplicity, he is careful to avoid what he calls “physics envy,” the common human craving to reduce enormously complex systems (such as those in economics) to one-size-fits-all Newtonian formulas. Instead, he faithfully honors Albert Einstein’s admonition, “A scientific theory should be as simple as possible, but no simpler.” Or in his own words, “What I’m against is being very confident and feeling that you know, for sure, that your particular action will do more good than harm. You’re dealing with highly complex systems wherein everything is interacting with everything else.”Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things—which by and large are useful, but which often misfunction.
- Circles of Competence
“If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter.” – Warren Buffett
“If you have competence, you pretty much know its boundaries already. To ask the question [of whether you are past the boundary] is to answer it.” – Charlie Munger
There are a lot of things we pass on. We have three baskets: in, out, and too tough. We have to have a special insight, or we’ll put it in the “too tough” basket. All you have to look for is a special area of competency and focus on that. If you have competence, you know the edge. It wouldn’t be a competence if you didn’t know where the boundaries lie. Asking whether you’ve passed the boundary is a question that almost answers itself.
- How to Be Happy, Get Rich, and Other Advice
A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc.Just avoid things like AIDS situations, racing trains to the crossing, and doing cocaine. Develop good mental habits.
If your new behavior earns you a little temporary unpopularity with your peer group, then the hell with them.
- Be satisfied with what you have: Someone will always be getting richer faster than you. This is not a tragedy.
- Beware of envy: The idea of caring that someone is making money faster [than you are] is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?
- How to get rich: Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts…. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough- most people get what they deserve.
- The importance of reading: In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.
- Becoming friends with emminent dead: I am a biography nut myself. And I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better in life and work better in education. It’s way better than just being given the basic concepts.
I highly recommend picking up a copy of Poor Charlie’s Almanack. You will be less dumb after reading it.
Seeking Wisdom is another great book (which I’ll be doing a write-up of soon) which also discusses Munger in detail.