Poor Charlie's Almanac by Charlie Munger

The Wit and Wisdom of Charles T. Munger
by Charles T. Munger, Peter D. Kaufman, Ed Wexler, Warren E. Buffett

Mental Models

  • You can't really know anything if you just remember isolated facts and try and bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form.
  • You can't learn those one hundred big ideas you really need the way many students do-where you learn 'em well enough to bang 'em back to the professor and get your grade, and then you empty them out as though you were emptying a bathtub so you can take in more water next time.
  • 80 to 90 important models will carry about 90% of the freight in making you a worldly wise person and of those, only a mere handful really carry very heavy freight.

Some Useful Mental Models to Learn:

  • the redundancy/backup system model from engineering
  • the compound interest model from mathematics
  • the breakpoint / tipping-moment /autocatalysis models from physics and chemistry
  • the modern Darwinian synthesis model from biology
  • cognitive misjudgment models from psychology

Multiple Mental Models

  • You must think in a multidisciplinary manner. You must routinely use all the easy-to learn concepts from the freshman course in every basic subject.
  • Know the big ideas in the big disciplines and use them routinely.
  • If you have a vast set of skills over multiple disciplines, you will carry multiple tools… and you’ll limit bad cognitive effects from man-with-a-hammer tendency.
  • Most soft-science professional schools should increase use of the best business periodicals, like the Wall Street Journal, Forbes, Fortune, etc.
  • You’ve got to know all the big ideas in all the disciplines, and always take with full attribution. When you're using physics, you say you're using physics. When you're using biology, you say you're using biology.
  • When several models combine, you get lollapalooza effects; this is when two, three, or four forces are all operating in the same direction. And, frequently, you don't get simple addition. Its often like a critical mass in physics where you get a nuclear explosion.

Don’t be afraid of growing old

  • According to Cicero, the best a young person can hope for is to get old before he dies. Never complain of getting old.
  • "The best Armour of Old Age is a well spent life preceding it — de Sertare

Make friends with the eminent dead

  • There is no better teacher than history in determining the future.... There are answers worth billions of dollars in a $30 history book.
  • Read biographies. Make friends with the eminent dead. It's way better than just learning the basic concepts.

On Investing

Be Patient But Decisive
  • Practice extreme patience combined with extreme decisiveness.
  • The idea that it is hard to find good investments, so concentrate in a few. Ninety-eight percent of the investment world doesn't think this way.
  • "It takes character to sit there with all that cash and do nothing.
  • Buy high quality companies and hold them. You’re paying less to brokers, you're listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum."
  • Warren Buffet famously said: ‘I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches representing all the investments that you get to make in a lifetime’
  • In Munger’s view, a portfolio of three companies is plenty of diversification.
  • If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it.
Wait for Fat Pitches
  • Swing only at balls in your 'best' cells. Even at the risk of striking out, because reaching for the 'worst' spots will seriously reduce your chances of success.
  • Opportunity comes to the prepared mind. Our game is to recognize a great idea when it comes along. And they don’t come along very often.
  • One big mistake is buying with an eyedropper things we should be buying a lot of.
  • As Buffett and I say over and over again, we don't leap seven-foot fences. Instead, we look for one-foot fences with big rewards on the other side.
  • Just think of it as a heavy odds against game full of bullshit and craziness with an occasional mispriced something or other. And when you get a few, you really load up. It's just that simple.

Invest in high quality businesses
  • Munger’s philosophy was different from Benjamin Graham’s. Instead of buying fair businesses at great prices, Munger told Buffet to buy great businesses at fair prices.
  • If you buy something because it's undervalued then you have to think about selling it when it approaches your calculation of its intrinsic value. That's hard. But if you buy a few great companies then you can sit on your ass.
  • Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns.
  • If you have to choose one, bet on the business momentum, not the brilliance of the manager.
  • Over many decades, our usual practice is that if [the stock of something we like goes down, we buy more and more. Sometimes something happens, you realize you're wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices.

Understand Your Circle of Competence

  • It’s critical to distinguish when you are "Max Planck," and when you are the "chauffeur." If You cannot respond legitimately to the next question, you lack true mastery.
  • 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.
  • It's going to be very hard to enlarge that circle.
  • You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don't, you're going to lose.

Don’t Underestimate the Power of Incentives

  • What determines the behavior are incentives for the decision maker. Getting the incentives right is a very very important lesson.
  • At FedEx, there were constant delays until somebody got the idea to pay all these people not by the hour, but by the shift-and when it's all done, they can all go home. Well, their problems cleared up overnight.
  • Widespread incentive-caused bias requires that one  should often distrust, or take with a grain of salt, the advice of one's professional advisor, even if he is an  engineer.

Don’t Blindly Trust Experts

  • Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts.
  • You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present.

How to Get Rich

  • Spend each day trying to be a little wiser than you were when you woke up.
  • 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.
  • 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.
  • If you watch Warren Buffet with a time clock, you'd find that about half of his waking time is spent reading.
  • The safest way to try to get what you want is to try to deserve what you want.
  • Charlie scores himself not on whether he won the hand, but rather on how well he played it. Watch the playing  field, not the scoreboard.

Invert, Always Invert

  • You can solve a lot of problems by figuring out what not to do. Avoiding mistakes is often more important than finding the right answers.
  • Jacobi knew, that many hard problems are best solved only when they are addressed backward.
  • Surefire formula for a life of misery: 1. Ingesting chemicals in an effort to alter mood or perception;  2. Envy and  3. Resentment.

The psychology of misjudgement

  • One trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.
  • If ideology can screw up the head of Noam Chomsky, imagine what it does to people like you and me.
  • Don’t ignore the incredible power of rewards. Think of the Soviet joke: "They pretend to pay us and we pretend to work."
  • Doubt avoidance tendency: The brain of man is programmed with a tendency to quickly remove doubt by reaching  some decision.
  • Don't let employees accept any favors from vendors. Sam Walton wouldn't let purchasing agents  accept so much as a hot dog from a vendor.
  • In lotteries, the play is much lower when  numbers are distributed randomly than it is when  the player picks his own number. This is quite irrational.
  • When a father saw his child taking candy  from the stock of his employer with the excuse that  he intended to replace it later, the father said, "Son, it would be better for you to simply take all you want  and call yourself a thief every time you do it".
  • Deprival-Super Reaction Tendency:  man frequently incurs disadvantage by misframing his problems. He will often compare what is near  instead of what really matters. For instance, a man with $10 million in his brokerage account will often be extremely irritated by the accidental loss of $100 out of the $300 in his wallet.
  • It’s easy to buy an overpriced  $1,000 leather dashboard merely because the price is so low compared to his concurrent purchase of  a $65,000 car.
  • Availability-Mis Weighing Tendency: Man's imperfect, limited-capacity  brain easily drifts into working with what's easily available to it.
  • The main antidote to miscues from Availability  Misweighing Tendency often involve procedures, including use of checklists, which are almost always helpful.
  • The great algorithm to remember in dealing with  this tendency is simple: An idea or a fact is not worth more merely because it is easily available to you.

© 2023 Mike Fiorillo
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