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

One sentence summary

Author: Charles T. Munger
Topic: Investment and risk management
Print | Ebook

Key Notes

Circle of Competence

  • Focus on what to avoid
    • Focus on what not to do, before considering affirmative steps.
    • Pay attention to mistakes of omission.
    • Pay attention to the micro to get the macro.
    • The keys to becoming an investor are discipline, hard work, and practice.
    • A lot of success comes from knowing what you want to avoid – early death, a bad marriage etc.
Quickly eliminate the big universe of what not to do. Follow-up with a fluent, multidisciplinary attach on what remains. Then act decisively when, and only when, the right circumstances appear.
  • Beware of envy
    • If someone else is getting richer faster – who cares?
    • Spend each day trying to be a little wiser.
    • Build your discipline by preparing for fast spurts.
  • Disasters to avoid
    • Envy.
    • Resentment.
    • Revenge.
    • Self-pity.
    • Being unreliable.
    • Debt.
    • Chemicals in an effort to alter mood or perception.
  • Avoid physics envy
    • The tendency to want to reduce enormously complex systems into one-size-fits-all Newtonian formulas.
    • A scientific theory should be as simple as possible, but no simpler.
  • Cash flows
    • Where can you find the money in a business?
    • Where is the free cash being generated?
    • How will they repay loand
  • What to look for in a partner
    • Someone smarter and wiser than you.
    • Someone who will never second-guess you, nor sulk when you make expensive mistakes.
    • A generous soul who will put up his own money and work for peanuts.
    • Someone who will constantly add to the run as you travel a long road together.
  • Lessons from children
    • Do the job right the first time.
    • Be responsible.
    • Admit your mistakes.
    • Endless practice and determination will allow you to succeed.
    • Going along with normal social customs allows harmonisation.
    • Durability is a first-rate virtue.

🎤 Lollapalooza

  • Critical mass of success
    • Extreme maximisation or minimisation of a variable – Costco vs Luxury
    • Extreme performance over many factors – Toyota or Les Schwab
    • Catching and riding a big wave – Oracle.

🎓 Learn From Other People’s Success

  • Lifelong learner
    • The acquisition of knowledge is a moral duty.
    • Better to be roughly right than precisely wrong.
    • Once you have the ideas, countinuously practice their use.
    • Consider second-order and higher-order events.
    • You can cause enormous offence by being right in a way that causes someone else to lose face in his own discipline or hierarchy.
The only life worth living is dedicated in substantial part to good outcomes one cannot possibly survive to see.
  • Two-track analysis
    • What factors govern the interests? Macro and micro-level factors.
    • What are the subconscious influences? Instincts, emotions, cravings.
  • Career rules
    • Do not sell anything you would not buy yourself.
    • Do not work for anyone you don’t respect and admire.
    • Work only with people you enjoy.
  • Problem-solving notions
    • Decide the big no-brainer questions first.
    • Apply numerical fluency.
    • Invert the problem – think in reverse.
    • Apply multi-disciplinary wisdom.
    • Watch for combinations of factors – the lollapalooza effect.

🛠 Become a Swiss Army Knife

Investing and Decision Making Checklist

  • Risk
    • All investment evaluations should begin by measuring risk.
    • Especially reputational risk.
  • Margin of safety
    • Avoid dealing with people of questionable character.
    • Insist upon proper compensation for risk assumed.
    • Always beware of inflation and interest rate exposures.
    • Avoid big mistakes.
    • Shun permanent capital loss.
  • Objectivity and rationality
    • Use independent thoughts.
    • Whether others agree or disagree does not make you right or wrong.
    • The only thing that matters is the correctness of analysis and judgement.
    • Mimicking the herd invites regression to the mean, average performance.
  • Preparation
    • The only way to win is to work, work, work, and hope to have a few insights.
  • Lifelong learning
    • Read voraciously.
    • Cultivate curiousity and strive to become a little wiser every day.
    • The will to prepare is more important than the will to win.
    • Develop fluency in mental models.
    • To get smart, keep asking why?
  • Intellectual humilty
    • Acknowledge what you do not know.
  • Determine value from price
    • It is better to remember the obvious, than to grasp the esoteric.
    • Consider the totality of risk and effect – always look at the second-order and higher-order impacts.
    • Always invrt – think forward and backwards.
  • Opportunity cost
    • The highest and best use is measured by the next best ues.
    • Good ideas are rare.
    • When the odds are greatly in your favour, bet heavily.
    • Do not fall in love with an investment.
    • Be situation-dependent and opportunity-driven.
  • Patience
    • Resist the natural human bias to act.
  • Compound interest
    • Never interrupt compounding unnecessarily.
    • Avoid unnecessary transactional taxes and frictional costs.
    • Do not take action for it’s own sake.
    • Be alert for the arrival of luck.
Enjoy the process along with the proceeds. The process is where you live.
  • Decisiveness
    • Whe circumstances present themselves, act with decisiveness and conviction.
  • Be fearful when others are greedy
    • Opportunity does not come often, so seize it when it does.
    • Let the opportunity meet a prepared mind.
  • Adapt
    • Live with change and accept unremovable complexity.
    • Continually challenge and willingly amend your most loved ideas.
    • Recognise reality, especially when you don’t like it.
  • Focus
    • Keep things simple.
    • Remember what you set out to do.
  • Reputation is your most valuable asset
    • Reputation can be lost in a heartbeat.
    • Guard against hubris and boredom.
    • Do not overlook the obvious by drowning in the minute.
    • Be careful to exclude unneeded information – a small leak can sink a great ship.
    • Face your biggest troubles – don’t sweep them under a rug.

📈 Investing Notes

Trade infrequently

  • If you could only make 20 trades in your lifetime, how would that change your approach?
  • Find your fat pitch and swing hard.
  • Look for opportunities where you have a big advantage.
  • Must be prepared and have capital available.
  • There are three buckets: yes, no, and too hard to understand.

First cut

  • Too difficult or complicated to understand
    • Eg pharmaceuticals or technology.
  • Heavily promoted
    • Eg IPOs or great deals.

Second cut

  • Financial reports
    • Examine company accounts with skepticism.
  • Recast financial figures
    • Free cash flow.
    • Inventory.
    • Working capital.
    • Fixed and intangible assets.
    • Stock options.
    • Pension plans.
    • Retiree medical benefits.
  • Additional factors
    • Current and prospective regulatory climate.
    • Labour.
    • Customer and supplier relations.
    • Technology changes.
    • Competitive strengths and vulnerabilities.
    • Pricing power.
    • Scalability.
    • Environmental issues.
    • Presence of hidden exposures.
  • Management
    • Are they able, trust worthy, and owner-oriented?
    • Do they deploy cash?
    • Do they allocate cash intelligently on behalf of the owners?
    • Do they overcompensate themselves?
    • Do they pursue ego-oriented growth for growth’s sake?
  • Competitive advantage
    • Products.
    • Markets.
    • Trademarks.
    • Employees.
    • Distribution channels.
    • Social change.
    • What is the durability of the advantage?
    • What competitive forces may deteriorate the advantage?
A great business at a fair price is superior to a fair business at a great price.

Final checklist

  • Trading considerations
    • Current price.
    • Volume.
    • Disclosure timing or other sensitivities.
    • Are better uses of capital available?
    • Is sufficient liquidity available, or must it be borrowed?
    • What is the opportunity cost of capital?

💡 Problem Solving Notions

🧠 25 Psychology Based Tendencies

  • Reward and punishment
    • If you want to persuade – appeal to interest and not reason.
    • Incentives have huge power.
    • Fear professional advice, when it benefits the advisor.
    • Incentives can cause poor behaviour when checks are not in place.
    • People will game human systems.
    • Anti-gaming features are necessary.
    • You must first do the unpleasant thing before receiving your reward.
  • Loving
    • People will ignore the faults and comply with the object of affection.
    • Facts are distorted to facilitate love.
    • We favour people, products, and actions merely associated with the object of affection.
    • This also applies in reverse – the admiration itself can intesify the love.
  • Hating
    • Haters will ignore the virtues in the object of dislike.
    • Facts become distorted to facilitate the hatred.
  • Doubt avoidance
    • We are programmed to quickly remove doubt by reaching a decision.
    • Puzzlement and stress will trigger doubt avoidance.
  • Inconsistency avoidance
    • We are reluctant to change.
    • Few people can list bad habits that they have eliminated.
    • A life wisely lived consists of many good habits maintained, and many bad habits avoided or cured.
    • Confirmation bias – we ignore or discount evidence to maintain our previously held belief.
    • Darwin trained himself to intensively consider all counter-evidence.
    • To achieve a particular state – pretend to have already done it.
    • Smiling makes you happier, just as being happier makes you smile.
  • Curiosity
    • Humans possess an innate curiosity.
  • Kantian fairness
    • Humans follow behaviour patterns that make the overall system better, if followed by others.
    • For example, queing and being courteous.
  • Envy
    • We have a strong tendency to compare ourselves to others.
    • It is not greed that drives the world, but envy.
  • Reciprocation
    • We tend to reciprocate favours and disfavours.
    • Train yourself to delay reaction.
  • Influence from association
    • Actions and objects become associated with rewards previously bestowed.
    • Carefully examine past success.
    • Look for accidental and non-causative factors that tend to mislead.
    • Look for dangerous aspects of a new venture that were not present when past success occured.
    • Strong emotions, such as hating or loving, can distort the facts.
    • Develop a habit of welcoming bad news.
  • Pain avoiding denial
    • When the reality is too painful to bear – facts become distorted.
    • Eg death and drug addiction.
  • Excessive self-regard
    • We regard ourselves more highly than others perceive us.
    • We prefer people who are similar to ourselves.
    • We overestimate our talents in comparison to others.
    • Fixable yet unfixed bad performance is bad character that creates more of itself. Each tolerated instance causes greater damage.
    • Force yourself to be more objective when thinking about yourself ot your loved ones.
    • Pride in a job well done and a life well lived is a good force.
  • Overoptimism
    • Understand probability theory and expected value.
    • Even successful people display excess optimism.
  • Deprival
    • Loss avoidance – we overvalue losses compared to an equivalent gain.
    • We frame problems differently when dealing with loss.
    • Many will persist when they should be cutting their losses.
  • Social proof
    • We automatically think and do what we observe to be done or not done around us.
    • Triggering most often occurs in the presence of puzzlement or stress.
    • Stop bad behaviour before it spreads.
    • Foster and display good behaviour.
    • Learn to ignore the examples of others when they are wrong.
  • Anchoring
    • We judge things in relation to what is immediately available.
    • Anchoring causes drift.
    • Drift occurs when a small step in the wring direction is unrecognisable, because it is so small. However, a large number of these steps lead to ruin.
  • Stress influence
    • Small amounts of stress can influence performance.
    • Heavy stress can destructuvely change behaviour and lead to depression.
    • Reversing a breakdown only happens when stress is re-imposed.
  • Availability misweghting
    • Use checklists.
    • Emphasise factors that do not produce large amounts of easily available numbers.
    • Hire skeptical and articulate people to play devils advocate.
    • Exceptionally vivid evidence should be underweighed.
    • Attach vivid imagery to persudade others to reach a conclusion.
    • An idea or fact should not be worth more just because it is easily available.
  • Use it or lose it
    • All skills diminish with disuse.
    • Engage in the practice of all useful, yet rarely used skills.
    • Assemble skills into a checklist that is routinely used.
    • Skill of a high order can only be maintained through regular practice.
  • Drug misinfluence
    • Do not use drugs.
  • Senescence misinfluence
    • The cognitive decline is inevitable.
    • Continuous thinking and learning can delay the inevitable.
  • Authority misinfluence
    • We overweigh the instructions or actions set by people of authority.
  • Illusion of busy
    • Beware of distraction from serious work.
    • We fill time with work or communication that is not useful.
  • Reason
    • We possess a love of accurate cognition.
    • We are more prone to learning when there is a good reason for it.
    • Communicate clearly the who, what, where, why.
  • Lollapalooza
    • Combining multiple tendencies or mental models is likely to produce more extreme outcomes.

🤯 Other Mental Models

  • To the man with a hammer, the world looks like a nail.
  • Redundancy / backup system model (engineering).
  • Compound interest (math).
  • Breakpoint/tipping-point/autocatalysis (physics/chemistry).
  • Darwinian synthesis (biology).
  • Cognitive misjudgments (psychology).
  • Permutations and combinations (math); Fermat/Pascal system.
  • Decision-tree theory.
  • Accounting (double-entry bookkeeping).
  • Breakpoints (engineering).
  • Advantages of scale (microeconomics).
  • Specialization (biology/microeconomics).
  • Surfing (finding a wave and staying there for a long time).
  • Tragedy of the commons (economics).
  • Invisible hand (economics).
  • Invisible foot (biology/economics).
  • Comparative advantage in trade (economics).
  • Pin factory (economics).

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