Wisdom of Charlie Munger

From Poor Charlie! by Charlie Munger

5 helpful notions in problem-solving

1. It is usually best to simplify problems by deciding big “no-brainer” question first.
(What is it that you want to achieve?)

2. Reality is often revealed in mathematics.
(See if the numbers check out)

3. It is not enough to think problems through forward. You must also think in reverse. Invert, always invert!
(Work backwards with conclusion in mind)

4. The best and most practical wisdom is elementary academic wisdom. However, you must think in a multidisciplinary manner. And you have to do the thinking yourself!
(To a man with a hammer, every problem seems to be a nail. Open you mind and THINK)

5. Big effects, or lollapalooza effect, will often come only from large combinations of factors.
(This is when you get Super insights)



On Investing

1. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you.
Read more, company reports, books, anything.

2. I think that one should recognize reality even when one doesn't like it -- indeed, especially when one doesn't like it.
Get unstuck.

3. It is obvious that the winner has to be very selective. It's been obvious to me since very early in life. I don't know why it's not obvious to very many other people.
Good opportunity is hard to come by. Be prepared and grab it.

4. Mankind invented a system to cope with the fact that we are so intrinsically lousy at manipulating numbers. It's called the graph.
Charting does not work.

5. Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. I would want to address the problem right now.
It is okay to be early.


10-step Investment checklist

1. Measure riskAll investment evaluations should begin by measuring risk, especially reputational.
It's crucially important to understand that from time to time, your investments won't turn out the way you wanted. To protect your portfolio, don't set yourself up for complete failure in the first place. Giving yourself a large margin of safety, avoiding people of questionable character, and only taking on risk when you can be sure you'll be satisfactorily rewarded are all steps in the right direction. Companies like Chipotle (NYSE: CMG) might have perfectly bright futures, but when their shares are priced for perfection, they might nonetheless prove too risky for savvy investors.

2. Be independentOnly in fairy tales are emperors told they're naked.
With stockbrokers often rewarded for activity, not successful investments, it's critically important to make sure you believe that what you're doing is right. Chasing others' opinions may seem logical, but investors like Munger and Buffett often succeed by going against the grain. Big Berkshire investments such as Coca-Cola (NYSE: KO), and more recently Petrochina (NYSE: PTR), were largely ignored by the masses when they were first made.

3. Prepare aheadThe only way to win is to work, work, work, and hope to have a few insights.
It shouldn't surprise you that the best investments aren't the ones we typically read about in the paper. The diamonds in the rough are out there, but finding them requires effort. Buffett reads thousands of annual reports to cultivate ideas -- even if he only comes up with a few candidates each year. Munger advocates a constant curiosity for nearly everything in life. If you never stop asking the "whys" in what you do, you won't have trouble staying motivated.

4. Have intellectual humilityAcknowledging what you don't know is the dawning of wisdom.
Perhaps most crucially to Berkshire's success, its leaders never stray away from their comfort zones. In investing, a clear idea of what the business will look like in the future counts most. If you struggle to comprehend what the business does today, you might as well be throwing darts. While companies like Google (Nasdaq: GOOG) and Boston Scientific (NYSE: BSX) are certainly titans in their own right today, they might look drastically different in five to 10 years.

5. Analyze rigorouslyUse effective checklists to minimize errors and omissions.
The numbers don't lie. When researching investments, Buffett and Munger like to try to estimate the security's worth before they even look at its price. They are businessmen, not stock-market junkies. They focus their brainpower on the value of businesses, not convoluted economic forecasts or intricate market-timing techniques. Munger is incredibly brilliant, but the analytical rigor of his investment decisions is based around simplicity, not complexity.

6. Allocate assets wiselyProper allocation of capital is an investor's No. 1 job.
In the early days of Munger's investment partnership, he held very few securities. When good ideas came, he poured significant capital into them; otherwise, he simply enjoyed the California sun. The amount of money employed in each of your investments should relate directly to its attractiveness. When you find a great investment, don't be afraid to bet big on it.

7. Have patienceResist the natural human bias to act.
Munger said it best himself: "Half of Warren's time is sitting on his ass and reading; the other half is spent talking on the phone or in person to a highly gifted person that he trusts and trust him." While it can be tempting to jump in and out of the market, true fortunes are made from big commitments in quality companies, held indefinitely. When you're done with that, find a hobby. Spending all day watching stock tickers won't do you much good.

8. Be decisiveWhen proper circumstances present themselves, act with decisiveness and conviction.
This also goes back to not following the herd. When others are jubilant, you should be scared, and vice versa. Don't let others' emotions sway you; the market masses should help you find opportunities in their absence, not guide you down their own path to mediocrity.

9. Be ready for changeAccept unremovable complexity.
Investing success requires us to accept inevitable changes. Munger and Buffett hated railroads for decades, but as the times changed, they threw their old thoughts out the door and invested billions. The world around us won't always conform to our preferences and prejudices, and sometimes our best ideas will prove incorrect. If you aren't willing to roll with a changing market, you may find yourself fighting a lost cause.

10. Stay focusedKeep it simple and remember what you set out to do.
In chasing little, unimportant things, we often overlook huge and critical factors. But by keeping it simple, we can fixate on what really matters: buying good companies at a good price, and holding them until they're fully priced.


On Cheating

“A very significant fraction of the people in the world will steal if (A) it’s very easy to do and (B) there’s practically no chance of being caught. And once they start stealing, the consistency principle – which is a big part of human psychology – will soon combine with operant conditioning to make stealing habitual. It’s very important to create human systems that are hard to cheat. Otherwise, you’re ruining your civilization because these big incentives will create incentive-caused bias and people will rationalize that bad behaviour is OK. Then, if somebody else does it, now you’ve got at least two psychological principles: incentive-caused bias plus social proof. Not only that, but you get Serpico effects: If enough people are profiting in a general social climate of doing wrong, then they’ll turn on you and become dangerous enemies if you try and blow the whistle.”


On Career

· Don’t sell anything you wouldn’t buy yourself
· Don’t work for anyone you don’t respect and admire.
· Work only with people you enjoy.


On spending

One of the great defenses if you’re worried about inflation is not to have a lot of silly needs in your life


On relationship

What’s the best way to get a good spouse? The best single way is to deserve a good spouse because a good spouse is by definition not nuts