Charlie Munger, Poor Charlie's Almanack
Notes from the book. There is a free web version of the book.
Chapter 0: Foreword
Thinking across disciplines. Taking your work very seriously, but never yourself.
The best armor of old age is a well-spent life preceding it.
—Cicero
Poor Richard's Almanack by Ben Franklin: thrift, duty, hard work, and simplicity. The joy of extended bus trips. "I have nothing to add."
As for myself, I’d like to offer some “Advice on the Choice of a Partner.” Pay attention.
Look first for someone both smarter and wiser than you are. After locating him (or her), ask him not to flaunt his superiority so that you may enjoy acclaim for the many accomplishments that sprang from his thoughts and advice. Seek a partner who will never second-guess you nor sulk when you make expensive mistakes. Look also for a generous soul who will put up his own money and work for peanuts. Finally, join with someone who will constantly add to the fun as you travel a long road together.
All of the above is splendid advice. (I’ve never scored less than an A in self-graded exams.) In fact, it’s so splendid that I set out in 1959 to follow it slavishly. And there was only one partner who fit my bill of particulars in every way—Charlie.
Getting better with each passing year. Purposeful repetition is the heart of instruction. Enormously curious.
Chapter 1: A Portrait of Charles T. Munger
Munger working at Buffett's grandfather Ernest's upscale grocery store Buffett & Son in Omaha. Voracious reading. Admiration for Ben Franklin. Physics-like problem-solving.
Charlie never forgot the sound principles taught by his grandfather: to concentrate on the task immediately in front of him and to control spending.
Acquiring equity in client's businesses. Property development, building condominiums. Law firm MTO. Meeting Buffett at a dinner party in Omaha. "You don't need to take the last dollar." "Choose clients as you would friends." Holding major investments for the long term.
I am a biography nut myself. 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. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the “eminent dead,” but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education. It’s way better than just giving the basic concepts.
Chapter 2: Remembering: The Children on Charlie
Always returning a borrowed car with a full tank of gas. The Morality Tale and the Downward Spiral Tale. His favorite chair. Balance sheets. Rise early. Hands (told by Emilie Ogden). Durability. Brooks.
Chapter 3: The Munger Approach to Life, Learning, and Decision-Making
Ben Franklin his greatest hero.
Like Franklin, Charlie has made himself into a grandmaster of preparation, patience, discipline, and objectivity.
Successful investing a by-product of his carefully organized and focused approach to life. Multiple mental models (about 100 in number). Important examples: redundancy and backup system from engineering, compound interest from mathematics, breakpoint, tipping moment, and autocatalysis from physics and chemistry, modern Darwinian synthesis from biology, cognitive misjudgment from psychology. His own largely self-taught system. Simplicity and intuition at the end of a long journey toward understanding. "sit-on-your-ass investing." A portfolio of three companies plenty of diversification. What not to do. Physics envy: wanting to reduce enormously complex systems to one-size-fits-all Newtonian formulas → Einstein: “A scientific theory should be as simple as possible, but no simpler.” Mr. Market (concept from Benjamin Graham). Evaluate psychological subconscious conclusions which are often wrong. Three baskets for investing: yes, no, and too tough to understand. Identifying companies with a deep moat. Calculate the intrinsic value of business, determine approximate value per share and compare to market price. “A great business at a fair price is superior to a fair business at a great price.” Exhaustive screening process.
This habit of committing far more time to learning and thinking than to doing is no accident. It is the blend of discipline and patience exhibited by true masters of a craft: an uncompromising commitment to “properly playing the hand.”
The value and importance of checklists. "The only way to win is to work, work, work, work, and hope to have a few insights." Develop into a lifelong self-learner through voracious reading.
More important than the will to win is the will to prepare.
Think forward and backward: Invert, always invert. Opportunity cost. Decisiveness. "Constant search for better methods of thought."
Chapter 4: Eleven Talks
Talk One: Harvard School Commencement Speech
June 13, 1986. Harvard School, Los Angeles.
On the shoulders of giants. How to create non-X. Invert, always invert. "Many hard problems are best solved only when they are addressed backward." Einstein: successful theories came from curiosity, concentration, perseverance, and self-criticism. Reliability.
It is fitting that a backward sort of speech end with a backward sort of toast, inspired by Elihu Root’s repeated accounts of how the dog went to Dover, “leg over leg.” To the class of 1986: Gentlemen, may each of you rise by spending each day of a long life aiming low.
Talk Two: A Lesson on Elementary, Worldly Wisdom as It Relates to Investment Management and Business
April 14, 1994. USC Marshall School of Business.
The art of stock picking as a subdivision of the art of worldly wisdom. Latticework of theory. Decision tree theory in Harvard Business School: take high school algebra and apply to real-life problems.
If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest. You’re giving a huge advantage to everybody else. One of the advantages of a fellow like Buffett, whom I’ve worked with all these years, is that he automatically thinks in terms of decision trees and the elementary math of permutations and combinations.
The five Ws at Braun Company: tell who is going to do what, where, when, and why. Deming Chain Reaction. Improve quality. The psychology of misjudgment.
The mind of man at one and the same time is both the glory and the shame of the universe.
—Blaise Pascal
Just as animals flourish in niches, 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. Cost reductions along the experience curve. The worldwide distribution setup of Coca-Cola.
The big people don’t always win—as you get big, you get the bureaucracy.
Pavlovian association. The everlasting battle between advantages and dangers of scale. Chain store. Airlines vs. cereals. Surfing as an early bird.
So you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.
The pari-mutuel system at the racetrack. A ticket with only 20 slots so you have 20 investments that you got to make in a lifetime. Getting the incentives right. FedEx paying per shift and not per hour. Value to a private owner, margin of safety.
We realized that some company that was selling at two or three times book value could still be a hell of a bargain because of momentums implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other or some system or other.
The great businesses. Load up on the very few good insights you have. Finding them [the great companies] small. Get into a business that has a great manager. Frank Wells: "Humility is the essence of life." Simon Marks. John Henry Patterson. Sam Walton. Income taxes:
If you sit on your ass for long, long stretches in great companies, you can get a huge edge from nothing but the way income taxes work.
Finding underpricing. King C. Gillette. The discipline of calling your shots and loading up.
Talk Two, Revisited. Investment success of Harvard and Yale. Thales of Miletus. Unconventional widsom.
Harvard and Yale may now need new displays of unconventional wisdom that are different from their last displays. It is quite counterintuitive to decrease that part of one’s activity that has recently worked best, but this is often a good idea. And so also with reducing one’s perception of one’s needs instead of increasing risks in an attempt to satisfy perceived needs.
The lollapalooza investment record of Claude Shannon.
Talk Two, Q&A. Lots of subjective criteria:
- Can we trust management?
- Can it harm our reputation?
- What can go wrong?
- Do we understand the business?
- Does it require capital infusions to keep it going?
- What is the expected cash flow?
Cyclicality is fine as long as the price is appropriate. Three basic rules:
- 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.
Overall life advice for young people.
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. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day, and at the end of the day—if you live long enough—like most people, you will get out of life what you deserve.
Life and its various passages can be hard, brutally hard. The three things I have found helpful in coping with its challenges are:
· Have low expectations.
· Have a sense of humor.
· Surround yourself with the love of friends and family.Above all, live with change and adapt to it. If the world didn’t change, I’d still have a 12 handicap.
Talk Three: A Lesson on Elementary, Worldly Wisdom as It Relates to Investment Management and Business, Revisited
April 19, 1996. Stanford Law School.
The best academic values. Develop a mind that can jump jurisdictional boundaries. Contract bridge. Think forward and backward: How can I take the necessary winners? What could possibly go wrong that could cause me to have too many losers?
Since your academic structure, by and large, doesn’t encourage minds jumping jurisdictional boundaries, you’re at a disadvantage because, in that one sense, even though academia’s very useful to you, you’ve been mistaught. My solution for you is one that I got at a very early age, from the nursery: the story of the Little Red Hen. The punch line, of course, is: “‘Then I’ll do it myself,’ said the Little Red Hen.”
You can reach out and grasp the model that better solves the overall problem. All you have to do is know it and develop the right mental habits. And it’s kind of fun to sit there and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and multidisciplinary. Furthermore, there’s a lot of money in it—as I can testify from my own personal experience.
Value Line graphs. Trademark protection. Mental models in psychology. Ideology distorts cognition terribly. Checklists. Lollapalooza effects when many forces from important models come together and operate in the same direction.
There’s only one right way to do it: You have to get the main doctrines together and use them as a checklist. And, to repeat for emphasis, you have to pay special attention to combinatorial effects that create lollapalooza consequences.
Captain [James] Cook serving sauerkraut one day a week. Serpico.
So you were trying to help your civilization, but what you did was create enormous damage, net. So it’s much better to let some things go uncompensated—to let life be hard—than to create systems that are easy to cheat.
Being agnostic about the market.
What I’m against is being very confident and feeling that you know, for sure, that your particular intervention will do more good than harm, given that you’re dealing with highly complex systems wherein everything is interacting with everything else.
Good literature makes the reader reach a little for understanding. Dreaming up little vivid examples. A little humorous example. Appealing to their interest. No-fault rules.
I like the Navy system. If you’re a captain in the Navy and you’ve been up for 24 hours straight and have to go to sleep, and you turn the ship over to a competent first mate in tough conditions and he takes the ship aground, clearly through no fault of yours, they don’t court-martial you, but your naval career is over.
Take obviously important and right mental models from psychology textbooks and the ones that are not in the books to get a system.
I’m afraid that’s the way it is. If there are 20 factors and they interact some, you’ll just have to learn to handle it, because that’s the way the world is. But you won’t find it that hard if you go at it Darwin-like, step-by-step, with curious persistence. You’ll be amazed at how good you can get.
Figure it out and outline the ideas yourself. Modern Darwinian synthesis. Course Remedial Worldly Wisdom.
Talk Three, Revisited. Making human systems as cheating-proof as practicable.
Talk Four: Practical Thought about Practical Thought?
July 20, 1996. An Informal Talk.
"Without numerical fluency... you are like a one-legged man in an ass-kicking contest." You must also think problems through in reverse. Carl Jacobi: "Invert, always invert." Elementary academic wisdom.
Coca-Cola case study. The power of a trademark. Bottom-up. Numerical fluency. The Roman drachma. A powerful combination of factors → lollapalooza results.
We must attack our problem by causing every favorable factor we can think of to work for us. Plainly, only a powerful combination of many factors is likely to cause the lollapalooza consequences we desire. Fortunately, the solution to these intertwined problems turns out to be fairly easy if one has stayed awake in all the freshman courses.
Rely on strong trademark → going into the business of creating and maintaining conditioned reflexes. Operant conditioning and classical (Pavlovian) conditioning → for lollapalooza we must use both techniques. Multifactor-triggered lollapalooza effect.
With so much success coming, we must avoid bad effects from envy, which is given a prominent place in the Ten Commandments because envy is so much a part of human nature. The best way to avoid envy, as recognized by Aristotle, is to plainly deserve the success we get. We will be fanatic about product quality, quality of product presentation, and reasonableness of prices, considering the harmless pleasure we will provide.
Richard Thaler. Thinking in reverse. The power of self-criticism. “Hic depositum est, quod mortale fuit Isaaci Newtoni”
Talk Five: The Need for More Multidisciplinary Skills from Professionals: Educational Implications
April 24, 1998. 50th Reunion of Harvard Law School Class of 1948.
Look where incentives for effective practices are strongest and results most closely measured. Pilot training. Most important subjects get most training coverage. Checklist routines. Regular use of the aircraft simulator to prevent atrophy through long disuse of skills. Thinking by inversion.
In elite education, we have available the large amounts of talent and time that we need. After all, we are educating the top 1 percent in aptitude, using teachers who, on average, have more aptitude than the students. And we have roughly 13 long years in which to turn our most promising 12-year-olds into starting professionals.
Psychology mastery and accounting mastery should be required in legal education. "You must both rank and use disciplines in order of fundamentalness." Give intense attention to disciplines more fundamental than your own.
Like pilot training, the ethos of hard science does not say “Take what you wish” but “Learn it all to fluency, like it or not.” And rational organization of multidisciplinary knowledge is forced by making mandatory 1) full attribution for cross-disciplinary takings and 2) mandatory preference for the most fundamental explanation.
There is an old two-part rule that often works wonders in business, science, and elsewhere: 1) Take a simple, basic idea and 2) take it very seriously.
Talk Six: Investment Practices of Leading Charitable Foundations
October 14, 1998. Speech to the Foundation Financial Officers Group at Miramar Sheraton Hotel.
Most good things have undesired side effects, thinking is no exception.
The first principle is that you must not fool yourself, and you’re the easiest person to fool.
—Richard Feynman
Robert W. Woodruff: "There is no limit to what a man can do or where he can go if he doesn't mind who gets the credit." Greatly concentrated investment practice for a foundation. Early Charlie Munger as a horrible career model for the young. Ben Franklin very effective in doing public good and a good investor, too.
Talk Seven: Breakfast Meeting of the Philanthropy Roundtable
November 10, 2000. Breakfast Meeting of the Philantropy Roundtable.
Pension effects. Keynesian multiplier effect. Febezzle. Foolexures. Enduring paradox.
Have to come back to this and look up a few terms and concepts I don't know yet.
Talk Eight: The Great Financial Scandal of 2003
Summer 2000. An Account by Charles T. Munger.
Quant Tech. Sophocles. Modern financial engineering. "Whose bread I eat, his song I sing." Japan in the 1990s following a long period of false accounting.
With Congress and the SEC so heavily peopled by lawyers, and with lawyers having been so heavily involved in drafting financial disclosure documents now seen as bogus, there was a new lawyer joke every week. One such was: “The butcher says, ‘The reputation of lawyers has fallen dramatically,’ and the checkout clerk replies, ‘How do you fall dramatically off a pancake?’”
The traitors who adopted the false accounting convention for employee stock options. Standard accounting treatment for stock options was functionally equivalent to simpler types of promotional fraud.
What this accounting saga constitutes is one more sad example of evil rewarded dying hard, as a great many people conclude that something can’t be evil if they are profiting from it.
Talk Nine: Academic Economics: Strengths and Faults after Considering Interdisciplinary Needs
October 3, 2003. Herb Kay Undergraduate Lecture, University of California, Santa Barbara Economics Department.
Grand Unified Theory of the Munger approach. Checklist-style as a coherent philosophy.
Economics better multidisciplinary-wise than the rest of soft science but still lousy. A black belt in chutzpah. Ben Franklin: “If you would persuade, appeal to interest and not to reason.” Naivety to believe in the tooth fairy.
For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldn’t stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else’s discipline. So I just grabbed in all directions for the big ideas that would really work. Nobody taught me to do that; I was just born with that yen.
A huge craving for synthesis. The more fundamental way.
You can wash the discoverer right out of history when somebody else handles his discovery in a more fundamental way.
The thinking game. N. Gregory Mankiw's new textbook. Adam Smith. John Maynard Keynes. Paul Krugman's essays. Man-with-a-hammer syndrome. Fatal unconnectedness of academic disciplines. Using tools checklist-style. Important factors without precise numbering you can use to measure them: "practically everybody 1) overweighs the stuff that can be numbered because it yields to the statistical techniques they’re taught in academia and 2) doesn’t mix in the hard-to-measure stuff that may be more important." Thomas Hunt Morgan. The danger of overcounting what can be measured and undercounting what can't be.
It’s amazing what you can do in life without the placer mining if you’ve got a few good mental tricks and just keep ragging the problems.
Hard-science ethos. Grabbing with full attribution and full discipline, using all knowledge plus extreme reductionism where feasable. Physics envy -> craving for an unattainable precision. Hard-form efficient-market theory as a wrong foundation. “Washington Post stock was selling at a fifth of what an orangutan could figure was the plain value per share by just counting up the values and dividing.” Some economist: “If a thing can’t go on forever, it will eventually stop.”