Poor Charlie’s Almanack — Charlie Munger

“Life is one damn relatedness after another.”

Start — 1/1/17 Finish — 1/15/17

Thoughts:

This is a modern-day treatise on being a rational human. And while it’s packed with wisdom on investing, its advice is much more general and can apply to every aspect of your life. Munger wouldn’t have it any other way, as one of his main points (that is hammered into the reader’s head quite repetitively) is that we should all take a multi-disciplinarian approach towards our thinking and our work. We have to draw on the big ideas and mental models from all different disciplines (accounting, biology, math, economics, psychology…) in order to solve real-world, intricate problems. To have an extremely narrow and specialized focus is to limit your vision and your general problem-solving ability.

Poor Charlie’s Almanack is something I would like to recommend to everyone as it preaches ideas that should be common knowledge or practice but generally aren’t. But it would be tough to gift to someone, given that Munger’s principles really need to be turned over and inspected thoroughly to truly take them all in. Besides that, anyone who considers themselves an auto-didact of some sort will enjoy the numerous lectures in the book, many of which extoll the benefits of being a life-long learner.

Munger emphasizes the use of checklists in all sorts of work to prevent oneself from falling victim to cognitive biases or from making unforced errors. He largely echoes the virtues of checklists (especially in investing) just like The Checklist Manifesto. Munger also has a very long talk on psychological tendencies that pulls a lot from Cialdini’s Influence, all of which is very informal but extremely practical and sensible. He explains his multi-disciplinarian approach to learning and life in a fairly succinct manner, adding some very wry humor as necessary. Most of the talks are filled with interesting anecdotes and memorable life lessons.

The book is packed with nuggets of wisdom. All of the things Munger preaches — constant reading, avoiding inflexible ideologies, being a multi-disciplinarian, guarding against our worst cognitive biases, understanding incentives, diagnosing errors in conventional wisdom — are far too important to ignore. I know I’ll be revisiting the principles in this collection in the future, or otherwise figuring out how to incorporate them into my everyday life.

Score: 10/10


Directives:

· Be a generalist. Take mental models and big-picture ideas from all different disciplines in order to solve problems.

· In investing — focus on preparation, patience, discipline, and objectivity at all times.

· When the odds are in your favor, bet heavily.

· Know your basic cognitive biases and how they influence your behavior and the behavior of others.

· Use checklists whenever possible, both to avoid common psychological tendencies and unnecessary errors.

Notes:

Cicero

  • The study of philosophy, in a life-long search for basic causes, is an ideal activity in old age
  • The only life worth living is dedicated in substantial part to good outcomes one cannot possibly survive to see
  • The best armor for old age is a life well-spent preceding it, pursuing knowledge, usefulness, and virtue all along the way

General Approach

  • Necessary to use multiple mental models (from different disciplines) for analysis/assessment of a company and its ecosystem
  • Need to see relatedness between factors and models on different levels
  • Cannot just memorize isolated facts, must array experience (both vicarious and direct) on a latticework of models
  • Mathematics (permutations, combinations, algebra), accounting (and its limitations), statistics (basic distributions), biology/physiology (cognitive function), psychology (common heuristics and biases), microeconomics (scale effects, incentives,
  • Guiding principles of preparation, patience, discipline, and objectivity always adhered to, leading to very little trading activity; large, infrequent, focused bets make up most of the decisions [twenty slot punch-card analogy]
  • Staying within carefully identified circles of competence; sticking with simple, understandable candidates
  • Committing far more time to learning than doing
  • If you have to choose one, bet on the business momentum, not the brilliance of the manager; rarely, you will find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business
  • Must consider financial reports, current and prospective regulatory climate, state of labor/supplier/customer relations, impact of technology changes, competitive strengths and weaknesses, scalability, pricing power, hidden exposures, management being owner-oriented
  • Above all, competitive advantage must be understood in every regard (products, markets, IP, employees, distribution channels, social trends), and the durability of that advantage
  • Strong belief in concentration with an ultra-long-term horizon over diversification
  • “A great business at a fair price is superior to a fair business at a great price.”

The Checklist

  • Risk
  • Incorporate an appropriate margin of safety
  • Avoid questionable management
  • Always be aware of inflation and interest rate exposures
  • Shun permanent capital loss
  • Independence
  • Objectivity and rationality require independence of thought
  • Other people agreeing/disagreeing with you doesn’t make you right or wrong
  • Mimicking the herd invites regression to the mean
  • Preparation
  • Become a lifelong self-learner through voracious reading, cultivating curiosity everyday
  • More important than competitive spirit is the will to prepare
  • Develop fluency in mental models from the major academic disciplines
  • Always ask why three times
  • Intellectual Humility
  • Stay within your circle of confidence
  • Identify and reconcile disconfirming evidence
  • Resist the craving for false precision and false certainties
  • Remember you are the easiest person to fool
  • Be very wary of heavy ideology
  • Analytic Rigor
  • Determine value apart from price; progress apart from activity; wealth apart from size
  • Better to remember the obvious than to grasp the esoteric
  • Be a business analyst — not a market, macro, or security analyst
  • Allocation
  • Remember that highest and best use is always measured by the next best use
  • Good ideas are rare — so bet heavily when you see one
  • Don’t get married to an investment — be situation-dependent and opportunity-driven
  • Patience
  • Never interrupt the process of compound interest unnecessarily
  • Avoid unnecessary taxes and frictional costs; never take action for its own sake
  • Be alert for the arrival of luck
  • Decisiveness
  • Be fearful when others are greedy, and greedy when others are fearful
  • Opportunity doesn’t come often, so seize it when it does
  • Success is the right opportunity meeting preparation
  • Change
  • Recognize and adapt to the true nature of the world around you — don’t expect it to adapt to you
  • Continually challenge and willingly amend your best-loved ideas
  • Recognize reality especially when you don’t like it
  • Focus
  • Remember that reputation and integrity are your most valuable assets — and can be lost in a heartbeat
  • Guard against the effects of hubris and boredom
  • Don’t overlook the obvious by drowning in minutiae
  • Be careful to exclude unneeded information
  • Face your largest troubles

Practical Thought Talk

  • It’s best to simplify problems by deciding big “no-brainer” questions first
  • Numerical fluency is necessary to breaking down almost all problems — think of math as the key to revealing reality
  • It’s not enough to think problems through forward — they must also be thought about in reverse; invert, always invert
  • The best and most practical wisdom is elementary academic wisdom, but you must use it in a multi-disciplinary fashion
  • Really big effects will often only come from large combinations of factors

The Multi-Disciplinarian

  • A multi-disciplinary approach is necessary to improve professional cognition — namely guarding against an incentive-based bias (concluding that what is good for the professional is good for the client/others) and the man-with-a-hammer tendency (where all problems are only viewed from one angle or skillset)
  • The pilot approach
  • Formal education is wide enough to cover practically everything useful in the skill
  • Knowledge of everything needed is not taught just well enough to enable him to pass one or two tests; instead, all his knowledge is raised to practiced-based fluency
  • Made to think both forwards and backwards; he knows when to concentrate mostly on what he wants to happen and also when to concentrate mostly on avoiding what he doesn’t want to happen
  • Training time is allocated among subjects so as to minimize future mistakes — the most important coverage gets the most time
  • Checklist routines are mandatory
  • Even after original training, he is forced into a special knowledge-maintenance routine so that certain skills don’t atrophy over time
  • Changes to the education system
  • Should make more courses mandatory — those that decide what is mandatory must possess large, multidisciplinary knowledge maintained in fluency
  • More problem-solving practice that crosses several disciplines
  • Most soft-science professional schools should increase use of the best business periodicals, which can perform the function of the aircraft simulator if used to prompt practice
  • Avoid professors of strong political ideology — need objectivity
  • Soft science should more intensely imitate the fundamental organizing ethos of hard science

The Psychology of Human Misjudgment

· Man is easily fooled, either by the cleverly thought out manipulation of man, by circumstances occurring by accident, or by very effective manipulation practices that have been kept in place because they work so well

· Tendencies

o Reward and punishment super-response — never think about something else when you should be thinking about the power of incentives; incentives can cause rationalized, terrible behavior in all fields

o Liking/Loving — this tendency acts as a conditioning device that makes the liker/lover tend to ignore faults of the object of his affection, to favor people/products/actions merely associated with the object of his affection, and to distort other facts to facilitate love

o Disliking/Hating — the reverse is also true, and mainly manifests itself in modern day in the form of politics (“the art of marshalling hatreds”) or religious divides

o Doubt-Avoidance — our brains have evolved to quickly remove doubt by reaching a decision; delay before decision-making should thus be forced in order to counter it

o Inconsistence-Avoidance — our brains conserved programming space by being reluctant to change, most likely to facilitate faster decisions when speed of decisions and cooperation was important for survival; people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed (even if there is plenty of evidence they are wrong)

o Curiosity — enhanced by modern education, curiosity helps man to prevent or reduce bad consequences arising from other psychological tendencies

o Fairness — reciprocal courtesy and a first-come-first-served bias are largely ingrained into our thinking and expectations

o Envy/Jealousy — being designed to want often-scarce food through evolution, we are bound to encounter conflict when we see others have things we want

o Reciprocation — facilitates group cooperation for the benefit of its members (both favors and disfavors); nature has no general algorithm making intra-species, turn-the-other cheek behavior a booster of survival; the antidote to one’s overactive hostility is to train oneself to defer reaction

o Influence from Association — small or trivial associations to past success, one’s liking/loving, or disliking/hating can drive behavior subconsciously; must carefully examine our past successes and look for accidental/non-causative factors and look for dangerous aspects of our new undertakings that were not present in past instances

o Pain-Avoiding Denial — this tendency to distort reality to make it more bearable is usually mixed up with love, death, or addiction

o Excessive Self-regard — we usually think ourselves above average in most aspects, and misappraisals apply to our possessions as well (the endowment effect); this makes us prefer people like ourselves AND make excuses for our fixable poor performance

o Over-optimism — we tend to have an excess of optimism even when we are already doing well; we must counter this with habitual use of probability in decision-making

o Deprival-Superreaction — losses hurt more than gains feel good (this includes ideological losses, which leads to groupthink); we tend to misframe our problems, overweighting what is near instead of what really matters

o Social Proof — an automatic tendency to think and act as he sees others around him thinking and acting (including inaction); triggering most readily occurs in the presence of puzzlement or stress

o Contrast-Misreaction — since our brains do not naturally measure absolute scientific units, it relies more upon simple contrast; cognition, misled by ting changes involving low contrast, will often miss a trend that is inevitable

o Stress Influence — heavy stress prompts faster and more extreme reactions (and mental dysfunction/depression), which can amplify Social Proof effects

o Availability Misweighing — the mind overweighs what is easily available/recallable or vivid; antidotes include checklists and an emphasis on disconfirming evidence

o Use-it-or-lose-it — skills deteriorate without frequent usage; must engage in constant practice of all useful, rarely-used skills (especially many outside your discipline) in a checklist-like manner

o Authority Misinfluence — our culture augments our natural follow-the-leader tendency, which is to our disadvantage when our leader is wrong or when his ideas don’t get through properly

o Twaddle — we are prone to prattling on when serious work needs to be done

o Reason Respecting — we are prone to learn well when we are given correct reasons for what is taught, instead of simply being given the desired belief with no reasons given; meticulously lay out your reasoning before making large decisions

o Lollapalooza — we tend to get extreme consequences from confluences of psychological tendencies

Book Recommendations

· Deep Simplicity — John Gribbin

· FIASCO — Frank Partnoy

· Ice Age — John Gribbin

· Models of My Life — Herbet Simon

· A Matter of Degrees — Gino Segre

· Andrew Carnegie — Joseph Wall

· Guns, Germs, and Steel — Jared Diamond

· The Third Chimpanzee — Jared Diamond

· Influence — Robert Cialdini

· Autobiography of Benjamin Franklin

· Living within Limits — Garrett Hardin

· The Selfish Gene — Richard Dawkins

· Titan — Ron Chernow

· The Wealth and Poverty of Nations — David Landes

· The Warren Buffer Portfolio — Robert Hagstrom

· Genome — Matt Ridley

· Getting to Yes — Roger Fisher

· Three Scientists and Their Gods — Robert Wright

Phrases/Quotes:

  • “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 c 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.”
  • And Cicero twice quotes with relish that was often said of Solon, the great man of early Athens: “Daily learning something, he grew old.”
  • “People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.”
  • “Envy is a really stupid sin because it’s the only one you could never possibly have any fun at.”
  • “Life is hard enough to swallow without squeezing in the bitter rind of resentment.” — Samuel Johnson
  • “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 is one damn relatedness after another.”
  • “My controversial argument is an additional consideration weighing against the complex, high-cost investment modalities becoming ever more popular at foundations. Even if, contrary to my suspicions, such modalities should turn out to work pretty well, most of the money-making activity would contain profoundly antisocial effects. This would be so because the activity would exacerbate the current, harmful trend in which ever more of the nation’s ethical young brainpower is attracted into lucrative money management and its attendant modern frictions, as distinguished from work providing much more value to others. Money management does not create the right examples. Early Charlie Munger is a horrible career model for the young because not enough was delivered to civilization in return for what was wrested from capitalism. And other similar career models are even worse.”
  • “The acquisition of wisdom is a moral duty. It’s not something you do just to advance in life. And there’s a corollary to that idea that is very important. It requires that you’re hooked on lifetime learning… You are not going to get very far in life based on what you already know.”
  • “Self-pity is always counterproductive. It’s the wrong way to think. And when you avoid it, you get a great advantage over everybody else, or almost everybody else, because self-pity is a standard response. And you can train yourself out of it.”
  • “You should often appeal to interest, not to reason, even when your motives are lofty.”
  • “It is important not to thus put one’s brain in chains before one has come anywhere near his full potentiality as a rational person.”
  • “An idea or fact is not worth more merely because it is easily available to you.”