Charlie Munger is the Vice Chairman of Berkshire Hathaway. He’s a self-taught intellectual who, in his long life, has collected wisdom across engineering, psychology, economics, the sciences, history, and more. This book attempts to condense that wisdom.
Chapter One: A Portrait of Charles T. Munger
The storyteller is the best purveyor of complex information.
Anyone who wants to become successful should study physics. Its concepts and formulas demonstrate the powers of sound theory.
Sound principles for entrepreneurialism: concentrate on the task immediately in front of you, and control spending.
On attracting clients: “It’s the work on your desk. Do well with what you already have, and more will come in.” When working with clients, he also says, “You don’t need to take the last dollar,” and, “Choose clients as you would friends.”
A partner, ideally, is capable of working alone.
Benjamin Franklin used his self-made wealth to achieve financial independence so he could concentrate on societal improvement.
It is a grand mistake to think of being great without goodness, and I pronounce it as certain that there was never a great man that was not at the same time truly virtuous. – Benjamin Franklin
If you live right, the inferior part of life is the early part.
Find out what you’re best at, and keep pounding away at it.
Be prepared. There will be a few occasions in your lifetime when you can act promptly, and in scale. Use an analytical mind and multiple variables to find them, and bet on the ones with extremely favorable odds. Use the resources you’ve cultivated from your prudence and patience in the past.
Chapter Two: The Munger Approach to Life, Learning, and Decision Making
Take a simple idea and take it seriously. – Charlie
Despite being largely self-taught, Ben Franklin was spectacularly successful in such diverse fields as journalism, publishing, printing, philanthropy, public service, science, diplomacy, and inventing. Much of Franklin’s success was due to the essential nature of the man – most especially his appetite for hard work but also his insatiable curiosity and patient demeanor. Above all, he possessed a quick and willing mind that enabled him to easily master each new field of endeavor he chose to undertake. Like Franklin, Charlie has made himself into a grandmaster of preparation, patience, discipline, and objectivity.
Munger’s “Multiple Mental Models” Approach to Business Analysis
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
Charlie’s approach accepts the reality that investment problems are inherently complex. “Everything is interacting with everything else.” To deal with these complexities, you must look at things with multiple models from varying disciplines (from economics to engineering to psychology). Then, you’ll begin to realize that the upswing of one model may cancel the downswing of another; many downswings may cripple a business, or many upswings may multiply each others’ effects to create “The Lollapalooza Effect”. For instance, Costco’s success is an example of specialization, which can be a disproportionately important model.
Charlie developed a willingness, even an eagerness, to identify and acknowledge his own mistakes and learn from them. Look at your ideas and approaches as “tools”, and when a better approach comes along, swap it.
Any year that you don’t destroy one of your best-loved ideas is probably a wasted year.
There is no better teacher than history in determining the future… There are answers worth billions of dollars in a $30 history book.
A successful investment career boils down to only a handful of decisions. “I didn’t get to where I am by going after mediocre opportunities.” The big money is not in the buying and selling, but in the waiting.
Eliminate the unpromising areas of your life so you can free your time and attention for the things that matter. So a successful life can merely be achieved by avoidance. The strategy:
Quickly eliminate the big universe of what not to do. Then, follow up with a fluent, multidisciplinary attack on what remains. Then, act decisively when the right circumstances appear.
Operate within your circle of competence. Would you be able to answer a difficult question in that field? If you need to ask yourself if you’re competent, you might need more practice.
Never fool yourself, and remember that you are the easiest person to fool. – Richard Feynman
Bridges are designed with backup systems and extra capacity to prevent failures – so too should your investing strategies.
A great business at a fair price is superior to a fair business at a great price. – Charlie Munger
While poor outcomes are excusable in the world of investing, sloppy preparation and decision making are never excusable because they ARE controllable.
Competitive destruction is a recurring theme throughout business. Businesses rarely survive for very long – so how do you pick the ones that do? Look for those that have wide moats, those that can outcompete, and those that can out cooperate.
… ’tis the stone that will turn all your lead into gold… Money is of a prolific generating nature. Money can beget money, and its offspring can beget more. – Benjamin Franklin
Investing principles checklist
There’s a large list from Pages 73 to 76 on investing principles. Here are a few:
- avoid dealing with people of questionable character
- shun permanent capital loss
- insist upon proper compensation for risk assumed
- mimicking the herd means you’ll have average results
- other people agreeing or disagreeing with you doesn’t make you right or wrong
- making good decisions requires that you think through problems yourself, not just accepting others’ answers
- develop into a lifelong learner; become wiser every day
- to get smart, keep asking “why?”
- develop fluency in mental models from major academic disciplines
- stay within a well-defined circle of competence
- never fool yourself, and remember that you are the easiest person to fool (Feynman)
- it is better to remember the obvious than to grasp the esoteric
- determine progress apart from activity (sounds like the Tao te Ching!)
- determine value apart from price
- think forwards and backwards – invert, always invert
- remember opportunity cost
- when the odds are greatly in your favor, allocate heavily
- don’t fall in love with an investment; be situation-dependent and opportunity-driven
- never take action for its own sake
- never interrupt compound interest unnecessarily
- enjoy the process along with the proceeds, because the process is where you live
- be alert for the arrival of luck
- be fearful when others are greedy, and greedy when others are fearful
- opportunity doesn’t come often, so seize it when it does
- opportunity meeting the prepared mind: that’s the game
- recognize reality even when you don’t like it – especially when you don’t like it
- continually challenge and amend your best loved ideas
- remember what you set out to do
- keep things simple
- don’t overlook the obvious by drowning in minutiae
- face your big troubles: don’t sweep them under the rug
- a small leak can sink a great ship
The “Munger System of Avoiding Dumb Stuff” will alone, strictly adhered to, allow you to prevail over your “betters”, no matter how smart they are.
Honesty is the best policy
Charlie goes out of his way to not take advantage of anyone. He was in a venture with Rick Guerin; Rick offered to sell Charlie his half for $130,000. Charlie countered with $230,000, saying “I’m right, and you’re smart, and sooner or later you’ll see I’m right.” (He was.)
Another time, Charlie had to buy a business. Some old ladies still held notes in the business. While they could have been redeemed at much less, Charlie still (over)paid them at face value.
A cheap price on the stock exchange is one thing, but taking advantage of partners or old ladies is something Charlie just doesn’t do.
Chapter Three: Mungerisms: Charlie Unscripted
Highlights from recent Berkshire Hathaway and Wesco Financial Annual Meetings.
What matters most: passion or competence? I would argue passion is more important than brainpower.
What happens when Buffett’s gone?
Charlie Munger is quoted as saying, “The key is having good businesses. There’s a lot of momentum here. [However,] I don’t think our successors will be as good as Warren at capital allocation. Berkshire is drowning in money – we have great businesses pounding out money. If the stock went down, Berkshire could buy it back. There’s no reason to think it will go to hell in a bucket, and I think there’s reason to believe it could go on quite well. I’d be horrified if it isn’t bigger and better over time, even after Warren dies.” He says that the acquisition side of Berkshire will not do as well, but it will still be fine. And the rest of the company will do well.
A thing not worth doing is not worth doing well. - Munger
Success means being very patient, but very aggressive when it’s time. And the more hard lessons you can learn vicariously rather than through your own hard experience, the better.
Excessive diversification is madness. Stick to your principles, and when opportunities come along, pounce on them with vigor. Bet on sure things.
Invest in businesses that have liquid profits at the end of the year, not ones that must be reinvested.
There are two types of mistakes in investing:
- doing nothing
- buying with an eyedropper things you should be buying a lot of
Know your circle of competence, and only make investments in that area. If you have competence, you know the edge – it wouldn’t be a competence if you didn’t know where the boundaries lie.
Look at the most intelligent thing you can do with the capital you have – intelligent people make decisions based on opportunity costs. In other words, it’s your alternatives that matter.
Once you start doing something bad, it becomes easier to take the next step.
It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones. – Keynes, on idea generation
Read a lot; grab sensible ideas and do things with them. The more basic knowledge you have, the less new knowledge you have to get.
There’s a lot wrong [with American universities]. I’d remove three-fourths of the faculty – everything but the hard sciences. But nobody’s going to do that, so we’ll have to live with the defects. It’s amazing how wrongheaded [the teaching is]. There is fatal disconnectedness. You have these squirrelly people in each department who don’t see the big picture. I think liberal arts faculties at major universities have views that are not very sound, at least on public policy issues. [However,] they may know a lot of French!
How to be happy
Life is more than being shrewd in wealth accumulation. Success 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. Avoid evil, particularly if they’re attractive members of the opposite sex.
But what if I change
If your new behavior earns you a little temporary unpopularity with your peer group, then the hell with them.
It’s a really stupid sin because it’s the only one you could never have any fun with. The idea of caring that someone is making money faster than you is one of the deadly sins (like Berkshire vs. the tech entrepreneurs).
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… 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.
How to find a good spouse
Deserve a good spouse.
In my whole life, I have known no wise people who didn’t read all the time – none, zero. 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. You learn economics better if you make Adam Smith your friend.
Reduce material needs
You don’t need a lot of material goods.
Chapter Four: Eleven Talks
Talk One: Munger’s Harvard Commencement Speech
If at first you don’t succeed, well, so much for hang gliding.
Johnny Carson said he couldn’t tell the graduating class how to be happy, but he could tell them from personal experience how to guarantee misery. After Carson’s original three, Charlie adds four more:
- Ingest chemicals in an effort to alter mood or perception. Alcohol was the downfall of many of Charlie’s friends. Substance abuse kills so many.
- Envy. It’s the only cardinal sin you could never have any fun with.
- Be unreliable. Do not faithfully do what you have set out to do. This outweighs everything – you could do everything else right, and this will ruin it. This is Charlie’s most important rule.
- Don’t learn from others. This is a sure-shot producer of second-rate achievement. The failure and success of others can teach many lessons. Isaac Newton said he got to where he did because he stood on the shoulders of giants.
- Give up. There’s always going to be adversity, even for the wise and lucky.
- Ignore problem-solving wisdom. Many hard problems are best solved when they are addressed backward – for instance, you can’t prescribe happiness, but you can prescribe misery. Learn how to create X by turning the question backward and studying how to create non-X. Invert, always invert. (For instance, when almost everyone else was trying to revise the electromagnetic laws of Maxwell to be consistent with the motion laws of Newton, Einstein discovered special relativity as he made a 180-degree turn and revised Newton’s laws to fit Maxwell’s.)
Charles Darwin would’ve ranked near the middle of his graduating class, yet he is now famous in the history of science. This is because he gave priority to evidence that contrasted his theories. He was extremely objective, which helped him end up like the only player without a blindfold in a game of Pin the Tail on the Donkey.
Similarly, Einstein said that his successful theories came from “Curiosity, concentration, perserverance, and self-criticism.” Test and destroy your own well-loved ideas.
Talk Two: A lesson on elementary, worldly wisdom as it relates to investment management and business
Instead of memorizing and repeating facts, learn models. And learn multiple models, because if you only know one or two, you’ll torture reality so that it fits your models, or at least you’ll think it does.
Your models should come from multiple disciplines – because all the wisdom in the world is not to be found in one little academic department. That’s why poetry professors, by and large, are so unwise in a worldly sense. They don’t have enough models in their heads.
Eighty or ninety important models will carry about ninety percent of the freight in making you a worldly-wise person…
- basic arithmetic
- compound interest
- permutations and combinations (attributed to Buffett’s success)
- decision trees (also attributed to Buffett’s success)
- Fermat and Pascal’s probability (people don’t naturally think in terms of elementary probability, but without it, you’ll go through life like a one-legged man in an ass-kicking contest)
- accounting (while standard accounting was asinine, many of the better parts are designed by engineers)
- the five W’s: when communicating, tell who is going to do what, where, when, and why; always make sure to tell why, because they’ll understand it better, consider it more important, and be more likely to comply
- engineering’s backup systems
- engineering’s breakpoints
- physics’ notion of a critical mass
- understanding the brain’s limitations (allows you to control and motivate yourself and others, and protect against being manipulated) – can be taught to any intelligent person in a week
- elementary psychological principles (outlined some paragraphs below)
The most reliable models are the ones that come from hard science and engineering. For instance, engineering quality control is very much based on probability: it costs x to produce this product, and you get y less chance of breaking if you spend z. The next most reliable are from biology/physiology. After that, psychology – which is complex, but it’s ungodly important for worldly wisdom.
The elementary part of psychology (which he calls the psychology of misjudgment) is a terribly important thing to learn. There are about twenty little principles, and they interact, so it gets slightly complicated.
Just as animals flourish in niches, similarly, people who specialize in the business world – and get very good because they specialize – frequently find good economics that they wouldn’t get any other way.
Advantages of scale: if you get more volume through your operation, you get better at processing that volume. If you make yourself seen more than your competitors, you’ll have an informational advantage [because they’ll trust your brand more].