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

by Charles T. Munger

Carson’s prescription for sure misery included: Ingesting chemicals in an effort to alter mood or perception Envy Resentment

Well, so much for Carson’s three prescriptions. Here are four more prescriptions from Munger: First, be unreliable. Do not faithfully do what you have engaged to do.

My second prescription for misery is to learn everything you possibly can from your own experience, minimizing what you learn vicariously from the good and bad experiences of others, living and dead. This prescription is a sure-shot producer of misery and second-rate achievement.

My third prescription to you for misery is to go down and stay down when you get your first, second, or third severe reverse in the battle of life. Because there is so much adversity out there, even for the lucky and wise, this will guarantee that, in due course, you will be permanently mired in misery.

epitaph written for himself by Epictetus:7 “Here lies Epictetus, a slave, maimed in body, the ultimate in poverty, and favored by the gods.”

My final prescription to you for a life of fuzzy thinking and infelicity is to ignore a story they told me when I was very young about a rustic who said, “I wish I knew where I...

The great algebraist Jacobi had exactly the same approach as Carson and was known for his constant repetition of one phrase: “Invert, always invert.” It is in the nature of things, as Jacobi knew, that many hard problems are best solved only when they are addressed backward.

reliability is essential for progress in life

His rule for all the Braun Company’s communications was called the five Ws: You had to tell who was going to do what, where, when, and why.

So there’s an iron rule that just as you want to start getting worldly wisdom by asking “Why, why, why?,” in communicating with other people about everything, you want to include why, why, why. Even if it’s obvious, it’s wise to stick in the why.

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.

So life is an everlasting battle between those two forces: to get these advantages of scale on one side and a tendency to get a lot like the US Department of Agriculture on the other side, where they just sit around and so forth. I don’t know exactly what they do. However, I do know that they do very little useful work.

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 model I like—to sort of simplify the notion of what goes on in a market for common stocks—is the pari mutuel system22 at the racetrack. If you stop to think about it, a pari mutuel system is a market. Everybody goes there and bets, and the odds change based on what’s bet. That’s what happens in the stock market.

At any rate, the trouble with what I call the classic Ben Graham concept is that gradually the world wised up, and those real obvious bargains disappeared. You could run your Geiger counter over the rubble, and it wouldn’t click.

However, averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But very rarely, you find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business.

Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you’re going to buy something that compounds for 30 years at 15 percent per annum and you pay one 35 percent tax at the very end, the way that works out is that after taxes, you keep 13.3 percent per annum.

But in terms of business mistakes that I’ve seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. I see terrible mistakes from people being overly motivated by tax considerations.

How do you and Warren evaluate an acquisition candidate? We’re light on financial yardsticks. We apply 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? We don’t expect linear growth; cyclicality is fine with us as long as the price is appropriate.

What should a young person look for in a career? I have three basic rules—meeting all three is nearly impossible, but you should try anyway: 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.

What overall life advice do you have 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.

Some of the worst dysfunctions in businesses come from the fact that they balkanize reality into little individual departments, with territoriality and turf protection and so forth. So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries. You don’t have to know it all. Just take in the best big ideas from all these disciplines. And it’s not that hard to do.

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.

It’s very, very important to create human systems that are hard to cheat. Otherwise, you’re ruining your civilization, because these big incentives will create incentive-caused bias and people will rationalize that bad behavior is okay. Then, if somebody else does it, now you’ve got at least two psychological principles: incentive-caused bias plus social proof.

Serpico41 effects: If enough people are profiting in a general social climate of doing wrong, then they’ll turn on you and become dangerous enemies if you try and blow the whistle.

So, once again, we don’t have any system for giving you perfect investment judgment on all subjects at all times. That would be ridiculous. I’m just trying to give you a method you can use to sift reality to obtain an occasional opportunity for rational reaction. If you take that method into something as competitive as common stock picking, you’re competing with many brilliant people. So even with our method, we only get a few opportunities. Fortunately, that happens to be enough.

Each of you will have to figure out where your talents lie. And you’ll have to use your advantages. But if you try to succeed in what you’re worst at, you’re going to have a very lousy career. I can almost guarantee it. To do otherwise, you’d have to buy a winning lottery ticket or get very lucky somewhere else.

I don’t want you to think we have any way of learning or behaving so you won’t make a lot of mistakes. I’m just saying that you can learn to make fewer mistakes than other people—and how to fix your mistakes faster when you do make them. But there’s no way that you can live an adequate life without making many mistakes. Part of what you must learn is how to handle mistakes and new facts that change the odds.

Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand.

There’s another type of person I compare to an example from biology: When a bee finds nectar, it comes back and does a little dance that tells the rest of the hive, as a matter of genetic programming, which direction to go and how far. So about 40 or 50 years ago, some clever scientist stuck the nectar straight up. Well, the nectar’s never straight up in the ordinary life of a bee. The nectar’s out. So the bee finds the nectar and returns to the hive. But it doesn’t have the genetic programming to do a dance that says straight up. So what does it do? Well, if it were like Jack Welch, it would just sit there. But what it actually does is to dance this incoherent dance that gums things up. A lot of people are like that bee. They attempt to answer a question like that. And that is a huge mistake. Nobody expects you to know everything about everything. I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge. To me, they’re like the bee dancing its incoherent dance. They’re just screwing up the hive.

Like Ben Franklin observed, “It’s hard for an empty sack to stand upright.”

Good literature makes the reader reach a little for understanding. Then it works better. You hold it better. It’s the commitment and consistency tendency. If you’ve reached for it, the idea’s pounded in better.

To the extent you become a person who thinks correctly, you can add great value. To the extent you’ve learned it so well that you have enough confidence to intervene where it takes a little courage, you can add great value. And to the extent that you can prevent or stop some asininity that would otherwise destroy your firm, your client, or something that you care about, you can add great value.

The right lessons are easily learned if you’ll work at it. And if you do learn them, you can be especially useful at crucial moments when others fail. And to the extent that you do become wise, diligent, objective, and especially able to persuade in a good cause, then you’re adding value.

If you want it totally easy and totally laid out, maybe you should join some cult that claims to provide all the answers. I don’t think that’s a good way to go. I think you’ll just have to endure the world, as complicated as it is.

Einstein has a marvelous statement on that: “Everything should be made as simple as possible, but no more simple.”

There are a relatively small number of disciplines and a relatively small number of truly big ideas. And it’s a lot of fun to figure it out. Plus, if you figure it out and do the outlining yourself, the ideas will stick better than if you memorize ’em using somebody else’s cram list.

The human mind is not constructed so that it works well without having reasons. You’ve got to hang reality on a theoretical structure with reasons. That’s the way it hangs together in usable form so that you’re an effective thinker.

First, academic psychology, while it is admirable and useful as a list of ingenious and important experiments, lacks intradisciplinary synthesis. In particular, not enough attention is given to lollapalooza effects coming from combinations of psychological tendencies.

Second, there is a truly horrible lack of synthesis blending psychology and other academic subjects. But only an interdisciplinary approach will correctly deal with reality—in academia as with the Coca-Cola Company.

as Dr. [Samuel] Johnson so wisely observed, truth is hard to assimilate in any mind when opposed by interest.

Smart, hardworking people aren’t exempted from professional disasters from overconfidence. Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.

a mindset described by Nobel laureate Richard Feynman as follows: “The first principle is that you must not fool yourself, and you’re the easiest person to fool.”

the truth of Benjamin Franklin’s observation in Poor Richard’s Almanack: “If you would persuade, appeal to interest and not to reason.”

The only antidote for being an absolute klutz due to the presence of a man-with-a-hammer syndrome is to have a full kit of tools. You don’t have just a hammer, you’ve got all the tools. And you’ve got to have one more trick: You’ve got to use those tools checklist-style, because you’ll miss a lot if you just hope that the right tool is going to pop up unaided whenever you need it. But if you’ve got a full list of tools and go through them in your mind, checklist-style, you will find a lot of answers that you won’t find any other way.

Well, 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.

Herb Stein—had a similar tautological saying that I dearly love: “If a thing can’t go on forever, it will eventually stop.”

Extreme success is likely to be caused by some combination of the following factors: Extreme maximization or minimization of one or two variables. Example, Costco or our furniture and appliance store. Adding success factors so that a bigger combination drives success, often in nonlinear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often, results are not linear. You get a little bit more mass and you get a lollapalooza result. And, of course, I’ve been searching for lollapalooza results all my life, so I’m very interested in models that explain their occurrence. An extreme of good performance over many factors. Example, Toyota or Les Schwab. Catching and riding some sort of big wave. Example, Oracle. By the way, I cited Oracle before I knew that the Oracle CFO [Jeff Henley] was a big part of the proceedings here today.

I’ll go further: I say economic systems work better when there’s an extreme reliability ethos. The traditional way to get a reliability ethos, at least in past generations in America, was through religion. The religions instilled guilt.