Charlie Munger

Insight: Warren Buffet met Charlie Munger in Omaha in 1959 where they both grew up, and were introduced by Buffet's neighbours, the Davis'.

Insight: Warren Buffet convinced Charlie Munger to quit practicing law and concentrate on investing.

Insight: Munger and Buffet had the same view toward investing - purchasing assets discounted to their underlying value, and owning investments long term.

Insight: Buffet credits Charlie Munger for helping him to understand the value of studying our mistakes, not just concentrating on success.

"We like to keep things simple, so the chairman can sit around and read annual reports."

- Charlie Munger

Insight: Munger believed in the value of simplicity, and focus on a few high value actions.

"I knew I could handle the bumps psychologically, because I was raised by people who believe in handling bumps."

- Charlie Munger

Insight: Munger saw the value of time and compounding, and that owning as few as three stocks is plenty.

"For an ordinary individual, the best thing you already have should be your measuring stick... If the new thing you are considering purchasing is not better than what you already know is available, then it hasn’t met your threshold. This screens out 99 percent of what you see."

- Charlie Munger

Insight: Munger's understanding of how human psychology impacts investors greatly influenced the operations of Berkshire Hathaway.

Insight: Munger believed that a key problem is that our brain takes shortcuts in analysis and conclusion making, making us prone to manipulation and being misled.

"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."

- Charlie Munger

"I came to the psychology of misjudgment almost against my will; I rejected it until I realised my attitude was costing me a lot of money."

- Charlie Munger

Insight: Munger influenced behavioural finance. He noticed predictable patterns of extreme irrationality in people.

Insight: Charlie Munger believed in building a latticework of theory to connect facts and make sense of them, rather than remembering isolated facts.

Insight: We should try to hold multiple mental models, so not to get trapped in a specific way of thinking.

Insight: Charlie Munger likened the mind to a sperm and egg - once the first idea sets in, the mind closes off - but the tendency to settle of first conclusions leads to many biases us to stop asking questions.

Principle: Look at the world whilst holding multiple, potentially competing, viewpoints.

Insight: Charlie Munger discusses the importance of "inversion" - learning to think through problems backwards as well as forward.

"All I want to know is where I’m going to die so I’ll never go there!"

- Charlie Munger

"If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average."

- Charlie Munger

Insight: Returns tend to come from a small proportion of investments.

"The best way to achieve felicity is to aim low."

- Charlie Munger

Insight: Happiness can be derived from lowering expectations.

Principle: Use a room for error when estimating future returns.

Principle: Estimate with a wide margin of safety.

"I did not intend to get rich. I just wanted to get independent."

- Charlie Munger

Insight: Money is a tool to buy pieces of your future time.

"The first rule of compounding is to never interrupt it unnecessarily."

- Charlie Munger

Insight: Time is the exponent of interest in compounding.

"I think it’s undeniably true that the human brain works in models. The trick is to have your brain work better than the other person’s brain because it understands the most fundamental models—the ones that do the most work."

- Charlie Munger

Biography: Born in Omaha, Nebraska 1924. Worked in family-owned grocery store. Graduated high school in 1941, and studied mathematics and physics and University of Michigan. Enlisted in the Army Air Corps and trained as a meteorologist. In 1946 he entered Harvard Law School, graduated in 1948, and spent 17 years practicing as an attorney. In 1965 he created an investment partnership. Purchased Berkshire Hathaway, textile manufacturer, in 1975 with Warren Buffet.

"Charlie can analyse and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in sixty seconds. He’s the perfect partner."

- Warren Buffet

Insight: Munger never formally studied business but was relentless in self-education, in a variety of subjects, building what he called a "latticework of mental models".

"I’ve long believed that a certain system—which almost any intelligent person can learn—works way better than the systems most people use [to understand the world]. What you need is a latticework of mental models in your head. And, with that system, things gradually fit together in a way that enhances cognition. Just as multiple factors shape every system, multiple mental models from a variety of disciplines are necessary to understand that system... You have to realise the truth of biologist Julian Huxley’s idea that, “Life is just one damn relatedness after another.” So you must have all the models, and you must see the relatedness and the effects from the relatedness... It’s kind of fun to sit here and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience."

- Charlie Munger

"Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world."

- Charlie Munger

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

- Charlie Munger

Insight: Great investors like Charlie Munger never flip coins, they wait patiently until the odds are stacked so far in their favour, it would be foolish not to take action. Mistakes are made, but steps are taken to minimise the damage.

"Invert. Always invert."

- Charlie Munger

Principle: Think critically. Think differently, from the opposite point of view.

"We tend to buy things ... where we don’t know exactly what will happen, but the outcome will be decent."

- Charlie Munger

Principle: Accept that investments (and life) is uncertain, remain humble, do your best to ensure your decisions leave you in a decent spot.

"The first rule of compounding: Never interrupt it unnecessarily."

- Charlie Munger

Insight: Compounding applies to the good (wealth, exercise, healthy lifestyle) and the bad (debt, poor habits) - time will have an exponential impact.

Insight: According to Charlie Munger there are two types of knowledge - real knowledge and chauffeur knowledge. Real knowledge is genuine understanding, chauffeur knowledge is from people that have learned to put on a show.

Insight: Charlie Munger is credited with the term "incentive super-response tendency" to describe the fact that people respond to incentives by doing what is in their best interests. People quickly change behaviour when incentives are introduced or changes; and people respond to the incentives themselves, not the intentions behind them.

"We’ve got . . . discipline in avoiding just doing any damn thing just because you can’t stand inactivity."

- Charlie Munger

Principle: Do not fall prey to action bias in investing.

Insight: You must have multiple tools in your toolkit to deal with a variety of problems, otherwise, as Mark Twain noted - "If your only tool is a hammer, all your problems will be nails" - Charlie Munger termed this effect the "Man with the Hammer Tendency".

"But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models. And the models have to come from multiple disciplines — because all the wisdom of the world is not to be found in one little academic department."

- Charlie Munger

"An idea or a fact is not worth more merely because it is easily available to you."

- Charlie Munger

Principle: Do not fall prey to availability bias in making decisions or thinking critically.

Insight: Charlie Munger noted that the world is not driven by greed, but by envy - social comparison bias.

"The first rule of a happy life is low expectations. If you have unrealistic expectations you’re going to be miserable your whole life. You want to have reasonable expectations and take life’s results, good and bad, as they happen with a certain amount of stoicism."

- Charlie Munger

Insight: Happiness is the difference between our expectations and reality.

Principle: Lower your expectations.

Insight: Charlie Munger gave a talk in the 1990s called "The Psychology of Human Misjudgment" where his listed 25 biases that lead to poor decision making. He described the "Doubt-Avoidance Tendency":

"The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do."

- Charlie Munger

"The safest way to try to get what you want is to try to deserve what you want. It’s such a simple idea. It’s the golden rule. You want to deliver to the world what you would buy if you were on the other end."

- Charlie Munger

Charlie Munger on his approach to investment:

"Like Warren and me, he was comfortable with concentration and bought only a few things that he understood well."

- Charlie Munger

Insight: Charlie Munger said that the secret to the longterm success of Berkshire Hathaway was the ability to "generate funds at 3 percent and invest at 13". Virtually all of Berkshire's investment capital has been generated internally.

Insight: Charlie Munger said on Berkshire: "Unlike operations (which are very decentralised), capital allocation at Berkshire is highly centralised.". Berkshire had a mix of very tight and very loose controls.

"We don’t try to do acquisitions, we wait for no-brainers."

- Charlie Munger

Principle: Be patient until the odds are stacked highly in your favour.

Insight: Charlie Munger describes someone as world-wise when they have a broad set of thinking tools and know how to apply them.

Insight: Charlie Munger stresses the importance of having a broad theoretical toolbox - mental models - and good grip on reality.

Insight: Charlie Munger advocates looking for the most powerful ceoncepts from all disciplines and understanding them deeply so that they become part of our models of thinking.

Insight: We gain what Munger calls "worldly wisdom" when we start to attach our experiences to mental models.

Insight: A wide set of mental models is, according to Munger, the cure to the proverbial man with a hammer who sees nails everywhere.

Insight: Charlie Munger's approach to investing and life is the pursuit of "worldly wisdom". Combining learnings from a wide range of disciplines to produce something greater than the sum of its parts.

Insight: Charlie Munger believes that isolated facts and information is useless unless they are combined in the "latticework of theory".

Principle: Learn the best of what others have already figured out.

"You’re not entitled to take a view, unless and until you can argue better against that view than the smartest guy who holds that opposite view."

- Charlie Munger

Insight: Charlie Munger is a proponent of the steel man rather than straw man tactic - finding and articulating the strongest, not weakest, form of the opponent's argument.

"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

- Charlie Munger

"invert, always invert."

- Charlie Munger

Principle: Consider the other side. What might you be wrong? Examine your own ideas critically.

"The human mind is a lot like the human egg, in that the human egg has a shut-off device. One sperm gets in, and it shuts down so that the next one can’t get in. The human mind has a big tendency of the same sort."

- Charlie Munger

Insight: Humans face confirmation bias. Once we form negative opinions it is hard to overturn them.

Insight: Rejecters are difficult to convince as they have a pre-existing judgement.

"Many times it is more important to know what not to do than what to do."

- Charlie Munger

Principle: Focus on what is most important. Remove everything else.

Insight: Charlie Munger says that the most common trap we fall prey to when making change is not knowing when to readjust, or "loss aversion".

Insight: Charlie Munger has fantastic mental models.

Principle: Fill your head with mental models.

"As long as I have a book in my hand, I don’t feel like I’m wasting time."

- Charlie Munger

"To find a worthy mate, be worthy of a worthy mate."

- Charlie Munger

"If economics isn’t behavioral, I don't know what the hell is."

- Charlie Munger

Insight: In a more sensible world, economics would be a subdiscipline of psychology, but it has been long detatched from how people behave in he real world.

To be, or to seem?

"Look it. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?"

- Charlie Munger

Reference: Cicero, Sallust, Machiavelli each were proponents of "show rather than be."

Insight: Charlie Munger recommends the Selfish Gene by Richard Dawkins as one of his favourite books.

Insight: Charlie Munger was able to spot a number of dishonest business practices by Valeant, and that it's debt fueled acquisiation spree was a recipe for disaster. Many smart people were fooled by Mike Pearson's sales skills to invest in Valeant. Charlie Munger turned down a face-to-face meeting as he knew that any face-to-face meeting is a dishonest signal (people are putting on a show).

Insight: Derek Sivers is a fan of Charlie Munger and recommends the book Seeking Wisdom: From Darwin to Munger, by Peter Bevelin.

"How could economics not be behavioral? If it isn’t behavioral, what the hell is it?"

- Charlie Munger

"The first rule of compounding: Never interrupt it unnecessarily."

- Charlie Munger