10 Lessons From Charlie Munger
The Road to Wisdom and Wealth
Welcome to the blog post #35! Click here to read more from previous posts.
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At the remarkable age of 99, Charlie Munger continues to dazzle us with his sharp mind and timeless wisdom. His legacy isn't just about his incredible success as Warren Buffett's trusted partner at Berkshire Hathaway; it's also about the profound life philosophy he's shared with the world.
Charlie Munger is a one-of-a-kind individual, irreplaceable but incredibly inspiring. We can't replicate him, but we can certainly absorb his timeless lessons and let wisdom grow with each passing day on our own journeys.
As I delve into his life and investment voyage, I've distilled 10 invaluable lessons that have become a part of my own learning journey. Today, I'm excited to share these insights with you, just as Charlie Munger once said:
The best thing a human being can do is to help another human being know more.
I'm eager to hear your thoughts and discoveries too. Feel free to comment on the Substack app or reply to this email. Let's stay connected!
Now, let's dive into the heart of today's article.
Charlie Munger, Vice-Chairman of Berkshire Hathaway (Getty Images) - Source: Yahoo Finance
1. Wisdom Blooms From a Life-long Learning.
One of Charlie Munger's most remarkable traits is his unwavering love for books. He's a voracious reader, dedicating a significant portion of each day to the pursuit of knowledge.
If it's wisdom and knowledge you seek, then the door to that wisdom and knowledge is reading. There's no other way to get it. There isn't any other trick.
For Munger, books are the wellsprings of wisdom, especially biographies of great individuals. He immerses himself in a vast sea of subjects, from economics and history to psychology, philosophy, and science. This breadth of knowledge has been the cornerstone of his legendary investment career.
Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.
Charlie Munger's lesson is clear: wisdom isn't found in shortcuts or secrets; it's found in the pages of books, and it's an ongoing journey to become a little wiser with each passing day.
2. A Clear Thinker Requires a Latticework of Mental Models
Charlie Munger places great importance on mental models as tools for effective decision-making. He's renowned for employing a multitude of mental models to make well-informed choices, emphasizing the value of learning diverse models to gain a well-rounded perspective on problem-solving.
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.
In our complex world, relying solely on a limited set of mental models can lead to a short-sighted understanding of problems. Mental models span a wide range of fields, from economics and physics to biology, mathematics, psychology, and even military strategy. The more mental models we grasp, the less susceptible we are to cognitive biases and lapses in critical thinking.
Munger is known for effectively applying various mental models, including inversion thinking, worldly wisdom, and the circle of competence, among others. These mental tools serve as beacons, guiding us through the complex maze of decision-making and enabling clearer, more informed thinking.
You can delve deeper into some of these mental models in the previous article here.
3. Wisdom Finds Its Measure in Humility
The more we learn, the more we realize the limits of our knowledge. This realization forms the bedrock of humility. Charlie Munger, ever mindful of his own limitations, advises us against the trap of overconfidence, where we overestimate our abilities and underestimate the work of others.
Acknowledging what you don't know is the dawning of wisdom.
Munger's pursuit of knowledge is often coupled with humility. He acknowledges that he doesn't know everything and is open to learning from others.
It is 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.
Through the lens of humility and using inversion thinking, Munger isn't driven to outshine others or flaunt his intellect. Instead, he strives for informed decision-making and long-term progress, always measuring himself against the yardstick of wisdom.
4. Harness Your Circle of Competence
With a sense of humor, Munger employs a vivid analogy to underscore the significance of identifying and leveraging our areas of expertise to achieve remarkable success.
You’ll do better if you have passion for something in which you have aptitude. If Warren had gone into ballet, no one would have heard of him.
Munger's wisdom shines through when he emphasizes the necessity of understanding our own aptitudes. He makes it clear that competing in areas where others possess the expertise while we lack it is a surefire path to failure.
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 that you can make.
Both Charlie Munger and Warren Buffett are masters of using the circle of competence principle in their investment strategy. Coca-Cola and See’s Candies are just a couple of illustrations of how this principle is embedded into their approach, focusing on industries they thoroughly understand rather than chasing market trends. This straightforward principle has stood the test of time as an effective investment strategy, allowing them to build immense wealth over several decades.
5. Discipline Is The Bedrock of Success
We don't have to be smarter than the rest; we have to be more disciplined than the rest.
Charlie Munger's life story emphasizes the truth behind his own words. His journey spans a remarkable lifespan, and throughout the decades, discipline has been the guiding force in both his personal life and his investment career.
What underscores the validity of Munger's statement? It's the unwavering consistency that defines his life. From a young boy to a centenarian, he maintains an continuous thirst for learning and lives frugally, despite his billionaire status. His life philosophy is marked by a commitment to giving back and leaving a positive mark on society, all without the need for extensive public recognition.
Discipline can also be found in his investment philosophy. Munger seeks out straightforward, comprehensible businesses with wide moats for investment. If a business proves too complex or lies beyond his competence, he adheres to his discipline to ignore it even if it happens to be the market's trend. This was evident in his and Warren Buffett's decision not to invest in technology companies during the Dotcom bubble.
We have three baskets for investing: yes, no, and too tough to understand. We find a lot in the 'too tough' basket. We have to have a special insight, or we'll put it in the 'too tough' basket.
By consistently applying a well-thought-out strategy, Munger has set himself apart to remain success during last few decades. His secret is simply sticking to his principles, making rational decisions, and avoiding impulsive actions based on short-term emotions or market fluctuations.
6. Patience Is The Well of Wealth
The stock market is designed to transfer money from the Active to the Patient.
Influenced by Benjamin Graham's value investing principles and their discipline of investing only in great businesses at reasonable prices, Charlie Munger and Warren Buffett have cultivated a deep conviction in their investments. This conviction becomes their anchor, allowing them to weather short-term market fluctuations and headwinds with patience. They understand the magic of compounding, the secret to their lasting success.
The big money is not in the buying and selling, but in the waiting.
One standout example of this patience is Berkshire Hathaway's investment in American Express during the turbulent 1960s. American Express faced a severe scandal related to the Investors Overseas Service (IOS), in which American Express was the major shareholder. This scandal involved fraudulent and questionable activities within the company, which badly impacted the reputation of American Express. While many investors fled, Munger and Buffett remained steadfast. They believed in the company's fundamental strength and its wide moat, confident that it could recover in the long term. Their patience paid off handsomely when, by the late 1970s, American Express successfully emerged from the shadow of scandal to regain its status as a prominent financial services company.
Charlie Munger's life story and investment journey remind us that patience is not just a virtue; it's a source of wealth.
7. Mistake Is A Wise Teacher
If you're capable of being trained by your own mistakes, you're going to be a super-learner, and if you want to make money from being a super-learner, you will be able to do it.
Charlie Munger, despite his legendary status as an investor, is not immune from mistakes. What sets him apart is his willingness to openly acknowledge these mistakes. He doesn't shy away from admitting when he's erred.
In the Berkshire Hathaway’s 2017 annual shareholder meeting, Munger candidly admitted that missing out on investing in Google and Walmart was a significant mistake. They deemed the prices too high years ago. Munger's ability to admit such errors not only showcases his humility but also underscores his belief in learning from his missteps. "Rub your nose in your mistakes," is Munger's motto. As humans, we all must learn our lessons and grow from them.
Another recent lesson Munger considers one of his biggest mistakes is his investment in Alibaba, which he shared at the Daily Journal annual shareholder meeting in February 2023. He initially invested in Alibaba when it was the largest B2B and C2C e-commerce platform in China and the world. However, as Alibaba has faced challenges under the scrutiny of the Chinese government since 2020, its stock price has plummeted by 75% from its peak. Finally, he realized his mistake and exited in the first quarter of 2022.
In thinking about Alibaba, I got charmed by their position in the Chinese internet and didn’t stop to realize, 'they’re still a gawd-damned retailer.'
Charlie Munger's life story teaches us that mistakes, when acknowledged and learned from, become invaluable stepping stones on the path to wisdom and success.
8. Strive For Asymmetric Rewards
It’s a common thought that a high return requires a high risk, but it is not applied for Charlie Munger and Warren Buffet. They want to find businesses which have huge upside rewards with small downside risks and bet big in these opportunities.
The conventional thinking often dictates that high returns come hand in hand with high risks, but for Charlie Munger and Warren Buffett, this isn't a steadfast rule. Their approach is different. They seek out businesses that offer substantial upside rewards while minimizing downside risks, and they're willing to place significant bets on these opportunities.
"The goal is to get the odds on your side. If you're smart, it's not necessary to understand everything about a business. It's only necessary to understand the aspects that can be controlled.”
One of the most iconic examples of such an asymmetric bet is Berkshire Hathaway's investment in Coca-Cola during the 1980s. At that point, Coca-Cola was already a global powerhouse in the beverage industry. The company's robust brand and extensive global reach presented a relatively low-risk investment opportunity with the potential for substantial long-term rewards.
Coca-Cola, an enduring symbol of American culture, continues to wield immense brand power despite the various shifts and challenges in politics, society, and the global economy. Munger and Buffett's approach is a testament to their knack for making calculated bets that tilt the odds in their favor, proving that sometimes, the biggest rewards come from well-calibrated risks.
9. No Compromise On Integrity
Simply put, "No mostly integrity" means there's zero tolerance for anything less than complete integrity. In various interviews and speeches, Charlie Munger underscores the importance of values such as honesty, integrity, and responsibility. He firmly believes that these values should serve as guiding principles in both personal and professional decision-making.
Remember that reputation and integrity are your most valuable assets and can be lost in a heartbeat.
Munger's strong emphasis on integrity is influenced by Benjamin Franklin, who prioritized this value highly. Munger asserts that conducting oneself in an ethical and transparent manner pays dividends in both personal and professional realms.
"Ethical wisdom is much like a friend of mine told me: hard to describe, but easy to recognize.”
There's a story that illustrates Munger's commitment to integrity. He was known to offer to pay more than the price agreed upon if he believed the initial offer was unfair to the seller.
According to Munger's ethical philosophy, he draws a clear distinction between taking advantage of a good deal in the stock market and taking advantage of a business partner. For him, conducting business in a fair, ethical, and transparent manner is not just the right thing to do; it's a core principle that defines his approach to life and business.
10. Decision Is Based On Opportunity Cost
“If you take the best text in economics by Mankiw, he says intelligent people make decisions based on opportunity costs – in other words, it’s your alternatives that matter. That’s how we make all of our decisions. The rest of the world has gone off on some kick – there’s even a cost of equity capital. A perfectly amazing mental malfunction.”
Munger begins by praising a concept in economics outlined by Gregory Mankiw. According to Mankiw, intelligent people make decisions based on opportunity costs. In simple terms, opportunity cost refers to the value of the best alternative that you give up when you make a choice. It's the idea that when you decide to do something, you should consider what you're sacrificing by not doing something else.
Munger is emphasizing that the key to making intelligent decisions is to carefully evaluate the alternatives you have. By doing so, you can assess the trade-offs and make choices that maximize your overall benefit.
With the simplicity-focused principle, he also criticized for using the finance term like “cost of equity capital” as it involves complex calculations and assumptions about risk and expected returns which adds unnecessary complexity in decision-making.
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That’s all for today. I hope you find these lessons helpful.
Till next week!
Cheers,
Do Thi Dieu Thuong