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

by Charles T. Munger

Look first for someone both smarter and wiser than you are. After locating him (or her), ask him not to flaunt his superiority so that you may enjoy acclaim for the many accomplishments that sprang from his thoughts and advice. Seek a partner who will never second-guess you nor sulk when you make expensive mistakes. Look also for a generous soul who will put up his own money and work for peanuts. Finally, join with someone who will constantly add to the fun as you travel a long road together.

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.

This section details both Charlie’s unconventional way of thinking and his extraordinary work ethic—the twin fonts of his amazing success.

He enjoyed challenging the conventional wisdom of teachers and fellow students with his ever-increasing knowledge gained through voracious reading, particularly biographies.

He saw hobos roaming the streets looking for handouts and others who were willing to sweep a driveway or porch in exchange for a sandwich.

Charlie learned that by supporting each other, the Mungers weathered the worst economic collapse in the nation’s history.

He has often stated that anyone who wants to be successful should study physics because its concepts and formulas so beautifully demonstrate the powers of sound theory.

With Nancy’s support, he turned to outside ventures and alternative ways to generate income.

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.

I am a biography nut myself. And I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. 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 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.

Father’s ability to Chinese wall off the most intrusive distractions from whatever mental task he was engaged in—a practice alternately amusing and irritating if you were trying to get his attention—accounts as much as anything else for his success.

Like Franklin, Charlie has made himself into a grandmaster of preparation, patience, discipline, and objectivity.

The unassailable logic of Charlie’s ecosystem approach to investment analysis: Just as multiple factors shape almost every system, multiple models from a variety of disciplines, applied with fluency, are needed to understand that system.

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

Charlie strives to reduce complex situations to their most basic, unemotional fundamentals.

“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.”

He recasts all financial statement figures to fit his own view of reality, including the actual free or owners’ cash being produced, inventory and other working capital assets, fixed assets, and such frequently overstated intangible assets as goodwill. He also completes an assessment of the true impact, current and future, of the cost of stock options, pension plans, and retiree medical benefits. He applies equal scrutiny to the liability side of the balance sheet. For example, under the right circumstances, he might view an obligation such as insurance float—premium income that may not be paid out in claims for many years—more properly as an asset.

Above all, he attempts to assess and understand competitive advantage in every respect—products, markets, trademarks, employees, distribution channels, societal trends, and so on—and the durability of that advantage.

This latter comparison is the fundamental purpose of the whole process—comparing value (what you get) with price (what you pay).

“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.

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.