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

by Charles T. Munger

“Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group … then to hell with them.”

lifelong learning, intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, willingness to test one’s own beliefs, and many more.

However, he never forgot the sound principles taught by his grandfather: to concentrate on the task immediately in front of him and to control spending.

Charlie built the Wheeler, Munger partnership from 1962 through 1975. It did exceptionally well for the first 11 years, compounding at 28.3 percent gross (20 percent net) versus 6.7 percent for the Dow, without a single down year. But the partnership was hit hard in the vicious bear market of 1973 and 1974 when it fell 31.9 percent and 31.5 percent in back-to-back years, as the partnership’s largest holdings, Blue Chip Stamps and New America Fund, fell sharply. This decline was despite, as Charlie puts it, “having its major investments virtually sure of eventually being saleable at prices higher than the quoted market prices.” But the partnership rebounded strongly in 1975, rising 73.2 percent, bringing the overall record over 14 years to 19.8 percent (13.7 percent net) compounded annual returns versus 5 percent for the Dow.

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.

More pertinent to our purpose here, his models supply the analytical structure that enables him to reduce the inherent chaos and confusion of a complex investment problem into a clarified set of fundamentals. Especially important examples of these models include the redundancy and backup system models from engineering; the compound interest model from mathematics; the breakpoint, tipping moment, and autocatalysis models from physics and chemistry; the modern Darwinian synthesis model from biology; and cognitive misjudgment models from psychology.

Charlie counts preparation, patience, discipline, and objectivity among his most fundamental guiding principles.

Often, as in this case, Charlie generally focuses first on what to avoid—that is, on what not to do—before he considers the affirmative steps he will take in a given situation. “All I want to know is where I’m going to die, so I’ll never go there” is one of his favorite quips.

In business, as in life, Charlie gains enormous advantage by summarily eliminating the unpromising portions of the chessboard, freeing his time and attention for the more productive regions.

“What I’m against is being very confident and feeling that you know, for sure, that your particular action will do more good than harm. You’re dealing with highly complex systems wherein everything is interacting with everything else.”

Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain, at a subconscious level, is automatically doing these things—which, by and large, are useful but which often misfunction? One approach is rationality, the way you’d work out a bridge problem: by evaluating the real interests, the real probabilities, and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions, many of which are wrong.

“Quickly eliminate the big universe of what not to do; follow up with a fluent, multidisciplinary attack on what remains; then act decisively when, and only when, the right circumstances appear.”

Is it worth the effort to develop and adhere to such an approach? Charlie seems to think so: “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 more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience.”

Thomas Watson Sr., the founder of IBM: “I’m no genius. I’m smart in spots, and I stay around those spots.”

“We have three baskets for investing: yes, no, and too tough to understand.”

“a great business at a fair price is superior to a fair business at a great price.”

Knowing that a necessary companion to proper valuation is proper timing, he applies yet a finer screen, a “prior to pulling the trigger” checklist, which is especially useful in evaluating what he refers to as close calls. The checklist includes such items as: What are the current price, volume, and trading considerations? What disclosure timing or other sensitivities exist? Do contingent exit strategies exist? Are better uses of capital currently or potentially available? Is sufficient liquid capital currently on hand or must it be borrowed? What is the opportunity cost of that capital? And so on.

“Hard work is an essential element in tracking down and perfecting a strategy, or in executing it.”

While poor outcomes are excusable in the Munger–Buffett world—given the fact that some outcomes are outside of their control—sloppy preparation and decision-making are never excusable because they are controllable.

“extreme patience combined with extreme decisiveness.”

Avoid dealing with people of questionable character.

Always beware of inflation and interest rate exposures.

Avoid big mistakes; shun permanent ...

Objectivity and rationality require independence of thought.

Remember that just because other people agree or disagree with you doesn’t make you right or wrong—the only thing that matters is the correctness of your analysis and judgment.

“The only way to win is to work, work, work, work, and hope to have a few insights.”

If you want to get smart, the question you have to keep asking is “Why, why, why?”

Stay within a well-defined circle of competence.

Identify and reconcile disconfirming evidence.

Resist the craving for false precision, false c...

Above all, never fool yourself, and remember that you are the eas...

Determine value apart from price, progress apart from activity, wealth apart from size.

It is better to remember the obvious than to grasp the esoteric.

Consider the totality of risk and effect; look always at potential second-order a...

Think forward and backward: Invert, a...

Good ideas are rare—when the odds are greatly in your favor, bet (allocate) heavily.

Don’t fall in love with an investment—be situation-dependent and opportunity-driven.

“Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily.

Enjoy the process along with the proceeds, because the process is where you live.

When proper circumstances present themselves, act with decisiveness and conviction.

Be fearful when others are greedy and greedy when others are fearful.

Opportunity doesn’t come often, so seize i...

Opportunity meeting the prepared mind—th...

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 even when you don’t like it—especially when...

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 drownin...

In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness. Each attribute is, in turn, lost without the other, but together they form the dynamic critical mass for a cascading of positive effects for which Munger is famous (the lollapalooza).