Worldly Wisdom, Sit-On-Your-Ass Investing, and more from Poor Charlie’s Almanack

Authors note: Anything you see in any of my blog posts that is underlined is either a cool external link to help you learn more or internal links to my own related content.

 

A detailed review by John Leven

Question: Who is Charlie Munger? Why should you care? Why should you take the time to read this really long blog post about him?

Answer: Charlie Munger is a 94 year old self-made billionaire and investing legend who is known for his polymath-like ability to translate mental models from non-business academic disciplines into extreme business success. (And for being a business hero of mine) Whether you're a serious investor, or don't care about investing at all, literally everyone can learn a lot from the way Mr. Munger thinks and operates. For the past 40 years, Munger has been the Vice Chairman of Berkshire Hathaway, the "right-hand-man" of Warren Buffett, and one of least acknowledged factors behind Buffett's wildly successful 53 year run as CEO of Berkshire Hathaway. 

By Nick - Charlie Munger, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=10343010

By Nick - Charlie Munger, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=10343010

This blog post is a review of the expanded 3rd addition of Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger. The 532 page biography and collection of Munger's writings is a bit pricey ($55 used on Amazon, and up to $150 new) so hopefully this blog post will save you both time and money.

My review is organized by topic as follows:

1.       The Early Years

2.       A Multidisciplinary Approach to Business Analysis

3.       Keys to Investing Success

4.       Sit-On-Your-Ass Investing

5.       The Willingness to Change Your Own Mind

6.       On Life

7.       More Investing Advice

8.       Examples of Mental Models

9.       Charlie Munger’s suggested Reading List

Poor Charlie’s Almanack : The Wit and Wisdom of Charles T. Munger

“Success is obtained via a combination of concentration, curiosity, perseverance, and self-criticism, applied through a prism of multidisciplinary mental models.”
“Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group…then to hell with them!”

1. The Early Years:

As a boy, in Omaha, Charles Munger got his first job working at the Buffett & Son Grocery store, owned by Ernest Buffett, Warren’s grandfather. Charlie, like the other Buffett & Son employees, worked 12 hr shifts with no meals or breaks. Warren, six year younger than Charlie would later go to work at that same store a few years after Charlie had moved on.

Young Charlie was very smart, but didn’t work very hard. He used a family connection to get into Harvard Law without a bachelors degree. However, he actually did very well at Harvard Law and afterward got a decent job at a reputable law firm. (keep in mind that lawyers today, make A LOT more money, relative to other career paths, than they did in the 1960s when Charlie started out.)

Despite a good start, Charlie faced significant emotional challenges. By age 29 he had already married, divorced, and lost his young son to leukemia. During this time of his life, people recall often seeing Munger walking through the streets of Pasadena, CA, crying his eyes out, for hours at a time.

Munger eventually remarried and had A LOT of kids. (some acquired by marriage) Though a successful lawyer, Munger wanted much more money than a 1960s lawyer was bringing in. His quest for wealth was fueled, not by a desire for material possessions, but (Like his hero Ben Franklin) by a desire for independence. He turned to outside ventures and real estate investments to generate more income. In the mid-1950s and 60s, Munger started buying stocks, as well as equity in the private businesses of some of his clients. In 1961, he got into property development and developed condominiums and turned a large profit. From there, he took on other construction projects in the Pasadena area. Next, he started his own law firm, Munger, Tolles & Hills. Still not satisfied, Munger then opened a small investment partnership soon thereafter. By 1964, Munger's various ventures had swelled into a nest egg of about $1.4 million. (Equivalent to about $11 million in 2018 dollars)

While returning to Omaha, to visit family, Munger attended a dinner that included a fellow named Warren Buffett. Charlie, remembering the surname from his boyhood job at the Buffett & Son grocery store, hit it off with Warren right away. Warren tried to persuade Charlie to quit his Law Firm as soon as possible to focus on investing full time. Munger eventually took young Buffett's advice and did just that.

Over the next 14 years, the Munger Investment Partnership returned an astonishing compounded annual rate of return of 19.8% vs the Dow Jone’s return of just 5%. Though Munger and Buffett were partners in some investments, and traded ideas by phone almost daily, they both had distinctly separate partnerships. Eventually, their investments became so ridiculously intertwined that it made more sense for them to formally merge. Munger was chairman of Wesco and when Buffett’s Berkshire Hathaway bought 80% of Wesco Charlie became Vice-Chairman of Berkshire. The rest, as they say, is history.

2. A Multidisciplinary Approach to Business Analysis:

According to Munger, many people suffer from “man with a hammer syndrome.” “To the man with only a hammer, every problem looks like a nail.” To avoid this common problem, Munger says we must develop a diverse mental “tool box”, by utilizing a multidisciplinary approach to investing (and life.)

“If you want to go through life like a one legged man in an ass-kicking contest, be my guest. But if you want to succeed like a strong man with two legs, you have to pick up these methods.”
“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 was of handling problems.”

True to his words, Munger built his career on incorporating history, psychology, mathematics, biology, and other academic disciplines into his mental toolbox for evaluating businesses and investment ideas. He refers this combined latticework of knowledge as “worldly wisdom.”

“Worldly wisdom is mostly very, very simple. And what I’m urging you to do is not that hard if you have the will to plow through and do it. And the rewards are awesome – absolutely awesome.” Munger says.
“I consistently see people rise in life who are not the smartest, and sometimes not even the most diligent. But they are learning machines. They go to bed at night a little wiser than they were that morning. And boy, does that habit help, particularly when you have a long run ahead of you.”

3. Keys to Investing Success:

“The number one idea”, Munger claims, “is to view a stock as an ownership of the business, and to judge the staying power of the business in terms of its durable competitive advantage. Look for more value in terms of discounted free cash flow than you are paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor. “

He also stresses the importance of staying within your “circle of competence.” "Knowing what you don't know is more useful than being brilliant", is an oft-cited Munger quote.

When it comes to competitive advantage, Munger stresses that what matters is not how strong the advantage is today, but how strong it will be in 5, 10, even 20 or more year from now. Munger asserts:

“Anything less [than a long-term competitive advantage] is too risky.”

Competitive destruction results in few businesses being able to survive over multiple generations. Munger cites a 1911 Buffalo Evening News clipping showing the 50 most important stocks on the NYSE. Of those 50, only GE survives to this day as a large independent business. He suggests that the best business to own would be “a simple, easy to understand, dominant business franchise, that can succeed in all types of economies.” He asserts that people overestimate the importance of quantitative methods of analysis and valuation, because they are easy to understand, and conversely, underestimates the importance of the durable competitive advantage and other qualitative aspects of a business, which are more difficult to understand.

4. Sit-On-Your-Ass Investing:

"If you buy a business just because it's undervalued, than you have to worry about selling it when it reaches its intrinsic value. That's hard. But if you can buy a few great companies, then you can sit on your ass. That's a good thing.”
“When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so you had twenty punches – representing all the investments that you get to make in a lifetime. And once you’ve 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 much better.”

He advises, “You’re paying less to brokers, listening to less nonsense, and if it works, the tax system gives you an extra 1, 2 or 3 percentage points per annum.” In his view, a portfolio of three companies is plenty of diversification.

“The idea of excessive diversification is madness.” “Our experience tends to confirm a long held notion that being prepared, on a few occasions in a lifetime, [and] to act promptly in scale,…will often dramatically improve the financial results of that lifetime.”  “…All that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available, as a result of prudence and patience in the past.”
“It takes character to sit there with cash and do nothing. I didn’t get where I am today, by going after mediocre opportunities. "If you say no to 90% of investing ideas, you're not missing much.

He echos a famous Buffett quote, “Few people ever get rich on their 7th best idea.”

5. The Willingness to Change Your Own Mind:

Charlie hates dogma. He bears not only a willingness, but an eagerness to find his own mistakes and learn from them.

“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.”
"Keynes said “It’s not bringing in the new ideas that’d hard. It’s getting rid of the old ones.” And Einstein said it better, attributing his mental success to “curiosity, concentration, perseverance, and self-criticism.” By self- criticism he meant becoming good at destroying your own best loved and hardest-won ideas. If you can get really good at destroying your own wrong idea, that is a great gift."

Ask yourself, how am I fooling myself? Why is this company cheap? Is it for a good reason or for a superficial reason? Play devil’s advocate with yourself. Constant self-criticism is key to success in investing as well as life.

“The best defense is that of the best physicists, who systematically criticize themselves to an extreme degree.” Munger says. Then he quotes Nobel laureate Richard Feynman, “The first principle is not to fool yourself, and you are the easiest person to fool.

6. On Life:

“Get out of debt, and have a want for very few material possessions. Also, be a very reliable person, learn from your experiences, don’t envy or resent others, and NEVER give up.”
“The way to win is to work, work, work, and hope to have a few insights.”
“The safest way to get what you want is to try and 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 at the other end.”

7. More Investing Advice:

“I should concede, at the outset, that I have never taken a single course in economics, nor tried to make a single dollar, ever, from foreseeing macroeconomic changes.” Be a business analyst, not a market analyst or macroeconomic analyst.

Munger believes that aggressive accounting is rampant in corporate America. "I think that, every time you see the word EBITDA, you should substitute the words, "bulls*** earnings."

“It's 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."

Munger advocates create your own investing checklist and utilizing it every time you consider making an investment. "How can smart people so often be wrong? They don't do what I’m telling you to do: use a checklist to be sure you get all the main models and use them together in a multi-modular way." Guru investor Monish Pabrai, a Buffett/Munger fanboy in his own right, takes this advice literally.

8. Examples of Mental Models Mentioned in the Book:

Invert, always invert (Trying to solve problems backwards)

Redundancy/backup system model (engineering)

Compound interest (math)

Combinations/permutations (math)

Decision Tree Theory

Accounting

Gaussian distribution (aka Normal Distribution)

Break point/tipping point/auto-catalysis models (physics/chemistry)

Darwinian Evolution (biology)  and specifically how it relates to competitive destruction in capitalism.

Cognitive misjudgment (psychology)

Cost benefit analysis (economics)

Advantages of scale (economics) 

Social Proof (psychology)

Classical conditioning and Operant conditioning (biology)

Pari-mutuel betting (horse racing)

The power of incentives (psychology) 

Incentive-caused bias (Psychology)

Agency problems

Diminishing Marginal Utility

Consistency/Commitment

Per Munger, when multiple mental models combine in your favor, the “lollapalooza effect” kicks in, and the power of each individual model increases exponentially

9. Munger's Reading Recommendations:

Charlie quotes his famous partner,

“In my whole life, I have known no wise people who didn’t read all the time – none, zero.” "I read everything. 10-K's and 10-Q's, biographies, histories, and 5 newspapers a day. Reading is key. Reading has made me rich over time."

I've personally read about 1/3 of the books Munger has recommended below, and 3 of them (Guns, Influence, and Selfish Gene) are among the very BEST books i've ever read, and so I bumped them from the top of the list. 

Here is the full list of Munger's reading recommendations from the book:

Guns, Germs, and Steel: The Fates of Human Societies by Jared M. Diamond

Influence: The Psychology of Persuasion by Robert B. Cialdini

The Selfish Gene by Richard Dawkins

Autobiography by Benjamin Franklin

Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow

Deep Simplicity: Bringing Order to Chaos and Complexity by John Gribbin

F.I.A.S.C.O.: The Inside Story of a Wall Street Trader by Frank Partnoy

Ice Age by John and Mary Gribbn

How the Scots Invested the Modern World: The True Story of How Western Europe’s Poorest Nation Created Our World and Everything in It by Arthur Herman

Models of My Life by Herbert A. Simon

A Matter of Degrees: What Temperature Reveals About the Past and Future of Our Species, Planet, and Universe by Gino Segre

Andrew Carnegie by Joseph Frazier Wall

Living Within Limits: Ecology, Economics, and Population Taboos by Garrett Hardin

The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David S. Landes

The Wealth of Nations by Adam Smith

The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy by Robert G. Hagstrom

Genome: The Autobiography of a Species in 23 Chapters by Matt Ridley

Getting to Yes: Negotiating Agreement Without Giving In by Roger Fisher, William Ury, and Bruce Patton

Three Scientists and Their Gods: Looking for Meaning in an Age of Information by Roger Wright

Only the Paranoid Survive by Andy Grove

Also Munger suggests your read: The Wall Street Journal, Forbes, Fortune, and Value Line.

The End.

If you've made it this far, thanks for reading this long blog post. I know you're time is valuable and I hope you found it worthwhile.

Please leave some comments, questions, or general feedback. But most importantly please SHARE this, if you enjoyed it.

Thanks for reading,

-John

p.s. If you like these mental models, there's a truly amazing blog you should check out that has 113 of them, also inspired by Charlie Munger.