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Poor Charlie's Almanack | The Wit and Wisdom of Charles T. Munger by Peter D Kaufman

04 December, 2021 - 10 min read


I. Brief Summary

Charlie Munger is a brilliant individual I have come across. He is a Vice Chairman of Berkshire Hathaway and a business partner of Warren Buffett. This text is filled with Munger's wisdom on life, business and psychology. It is not an autobiography and neither an investment guide. There is a lot of cliche advice from Munger about honesty, working hard and being reliable. But there are a lot of core ideas on how to live which also translates into investment management. An accomplished man who is very intelligent and humble who is thriving in his 90s is worth listening to. The book does have its flaws and could be written in a way to synthesize the lessons more easily.

II. Big Ideas

  • Always be weighing opportunities. Be wise with your spending. Then, when a huge opportunity comes knocking, be ready to bet on 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.
  • Find out what you’re best at, and keep pounding away at it.
  • Sound principles for entrepreneurship: concentrate on the task immediately in front of you, and control spending.
  • A partner, ideally, is capable of working alone.
  • Charlie is a huge fan of Benjamin Franklin. Like Franklin, Charlie has made himself into a grandmaster of preparation, patience, discipline, and objectivity.
  • Despite being largely self-taught, 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.
  • 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”.
  • Learn from your mistakes. Look at your ideas and approaches as “tools”, and when a better approach comes along, swap it. All models are wrong, but some are useful.
  • History is the best teacher and indicator of future outcomes.
  • 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.
  • 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.
  • Use margin of safety. 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.
  • 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.
  • On risk: avoid dealing with people of questionable character, shun permanent capital loss & insist upon proper compensation for risk assumed.
  • On independence: 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.
  • On preparation: develop into a lifelong learner, become wiser every day, to get smart, keep asking “why?” and develop fluency in mental models from major academic disciplines.
  • On intellectual humanity: stay within a well-defined circle of competence, never fool yourself and remember that you are the easiest person to fool.
  • On analytic rigor: it is better to remember the obvious than to grasp the esoteric, determine progress apart from activity, determine value apart from price and think forwards and backwards—invert, always invert.
  • On allocation: remember opportunity cost, when the odds are greatly in your favor, allocate heavily and don’t fall in love with an investment (be situation-dependent and opportunity-driven).
  • On patience: 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 and be alert for the arrival of luck.
  • On decisiveness: be fearful when others are greedy, and greedy when others are fearful, opportunity doesn’t come often, so seize it when it does and opportunity meeting the prepared mind—that’s the game.
  • On change: recognize reality even when you don’t like it—especially when you don’t like it and continually challenge and amend your best loved ideas.
  • On focus: 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 and a small leak can sink a great ship.
  • 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 all kinds of wonderful inventions that give you as owners nothing except the opportunity to spend a lot more money on business that’s still lousy. Often, all the savings from a new technology will flow through to consumers because of industry dynamics.
  • 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.
  • There’s a lot wrong 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!
  • 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.
  • If your new behavior earns you a little temporary unpopularity with your peer group, then the hell with them.
  • On envy: 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).
  • 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.
  • On 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.
  • 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.
  • 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.
  • Eighty or ninety important models will carry about ninety percent of the freight in making you a worldly-wise person.
  • 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.
  • If you want to persuade—appeal to interest and not to reason ... You can cause enormous offense by being right in way that causes somebody else to lose face in his own discipline or hierarchy.

III. Quotes

  • 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. You'd be amazed at how much Warren reads—and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.
  • 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
  • Take a simple idea and take it seriously.
  • 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.
  • The big money is not in the buying and selling, but in the waiting.
  • Never fool yourself, and remember that you are the easiest person to fool. — Richard Feynman
  • While poor outcomes are excusable in the world of investing, sloppy preparation and decision making are never excusable because they are controllable.
  • … '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
  • A thing not worth doing is not worth doing well.
  • 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.
  • It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones. – Keynes
  • If your new behavior earns you a little temporary unpopularity with your peer group, then the hell with them.
  • Deserve a good spouse.