Worldly Wisdom, Sit-On-Your-Ass Investing, and other concepts from Poor Charlie’s Almanack
For Christmas I received the expanded 3rd addition of Poor Charlie’s Almanack. I try to take a lot of notes when I read, and I thought I’d share those notes, in blog form, with you all today. The 532 page book is a bit pricey ($55 used, $150 new), but well worth it, in my humble opinion.
I hope you find this review both useful and enjoyable. Please forgive any grammatical errors, as I am sure you will find many.
The notes are organized by topic as follows:
1. The Early Years
2. A Multidisciplinary Approach to Business Analysis
3. Keys to Investing Success
4. Sit-On-Your-Ass Investing
5. The Willingness to Change Your Own Mind
6. On Life
8. Examples of Mental Models
9. Charlie Munger’s suggested Reading List
Poor Charlie’s Almanack : The Wit and Wisdom of Charles T. Munger
“Success obtained via a combination of concentration, curiosity, perseverance, and self-criticism, applied through a prism of multidisciplinary mental models.”
“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.”
The Early Years:
As a boy, in Omaha, Charles Munger got his first job working at the Buffett & Son Grocery store, owned by Ernest Buffett, Warren’s grandfather. Charlie, like the other Buffett & Son employees, worked 12 hr shifts with no meals or breaks. Warren, six year younger than Charlie would later go to work at that same store, a few years after Charlie had moved on.
Young Charlie was very smart, but didn’t work very hard. He used a family connection to get into Harvard Law without a bachelors degree. He did very well at Harvard Law and got a decent job at a reputable firm. (keep in mind that lawyers today, make A LOT more money, relative to other career paths, than they did in the 1960s when Charlie started.)
Despite a good start, Charlie faced significant emotional challenges. By age 29 he had already married, divorced, and lost his young son to leukemia. During this time of his life, people recall often seeing Munger walking through the streets of Pasadena, CA, crying his eyes out, for hours at a time.
Munger eventually remarried and had A LOT of kids. (some acquired by marriage) Though a successful lawyer, Munger wanted much more money than a 1960s lawyer was bringing in. His quest for wealth was fueled, not by a desire for material possessions, but by a desire for independence. (Like his hero Ben Franklin) He turned to outside ventures and alternative ways to generate more income. In the mid-1950s and 60s, Munger started buying stocks, as well as equity in the private businesses of some of his clients. In 1961, he got into property development and developed condominiums and turned a large profit. From there, he took on other construction projects in the Pasadena area. He started his own law firm, Munger, Tolles & Hills. He then opened a small investment partnership soon thereafter. By 1964, Munger had acquired a nest egg of about 1.4 million.
While returning to Omaha, to visit family, Munger attended a dinner that included a fellow named Warren Buffett. Charlie, remembering the surname from his boyhood job at the Buffett & Son grocery store, hit it off with Warren right away. Warren tried to persuade Charlie to give up Law as soon as possible to focus on investing full time. He eventually did just that.
Over 14 years, the Munger Investment Partnership returned a compounded annual rate of return of 19.8% vs the Dow Jone’s return of just 5%. Though Munger and Buffett were partners in some investments, and traded ideas by phone almost daily, they both had separate partnerships. Eventually, their investments became so intertwined that it made more sense for them to more formally merge. Munger was chairman of Wesco. Buffett’s Berkshire bought 80% of Wesco, and Charlie became Vice-Chairman of Berkshire. The rest is history.
A Multidisciplinary Approach to Business Analysis:
According to Munger, many people suffer from “man with a hammer syndrome.” “To the man with only a hammer, every problem looks like a nail.” To avoid this common problem, Munger says we must develop a diverse mental “tool box”, by utilizing a multidisciplinary approach to investing (and life.)
“If you want to go through life like a one legged man in an ass-kicking contest, be my guest. But if you want to succeed like a strong man with two legs, you have to pick up these methods.”
“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 was of handling problems.”
Munger incorporates history, psychology, mathematics, biology, and other academic disciplines into his mental toolbox for evaluating businesses. He refers this combined latticework of knowledge as “worldly wisdom.”
“Worldly wisdom is mostly very, very simple. And what I’m urging you to do is not that hard if you have the will to plow through and do it. And the rewards are awesome – absolutely awesome.” Munger says.
“I consistently see people rise in life who are not the smartest, and sometimes not even the most diligent. But they are learning machines. They go to bed at night a little wiser than they were that morning. And boy, does that habit help, particularly when you have a long run ahead of you.”
Keys to Investing Success:
“The number one idea”, Munger claims, “is to view a stock as an ownership of the business, and to judge the staying power of the business in terms of its durable competitive advantage. Look for more value in terms of discounted free cash flow than you are paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor. “
He also stresses the importance of staying within your “circle of competence.” [I assume you Fool blog readers understand that concept so I won’t repeat it here.]
When it comes to competitive advantage, Munger stresses that what matters is not how strong the advantage is today, but how strong it will be in 5, 10, even 20 or more year from now. Munger asserts that, “Anything less [than a long-term competitive advantage] is too risky.” Competitive destruction results in few businesses being able to survive over multiple generations. Munger cites a 1911 Buffalo Evening News clipping showing the 50 most important stocks on the NYSE. Of those 50, only GE survives to this day as a large independent business. He suggests that the best business to own would be “a simple, easy to understand, dominant business franchise, that can succeed in all types of economies.” He asserts that people overestimate the importance of quantitative methods of analysis and valuation, because they are easy to understand, and conversely, underestimates the importance of the durable competitive advantage and other qualitative aspects of a business, which are more difficult to understand.
"If you buy a business just because it's undervalued, than you have to worry about selling it when it reaches its intrinsic value. That's hard. But if you can buy a few great companies, then you can sit on your ass. That's a good thing.”
“When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so you had twenty punches – representing all the investments that you get to make in a lifetime. And once you’ve punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do much better.”
He advises, “You’re paying less to brokers, listening to less nonsense, and if it works, the tax system gives you an extra 1, 2 or 3 percentage points per annum.” In his view, a portfolio of three companies is plenty of diversification.
“The idea of excessive diversification is madness.” “Our experience tends to confirm a long held notion that being prepared, on a few occasions in a lifetime, [and] to act promptly in scale,…will often dramatically improve the financial results of that lifetime.” “…All that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available, as a result of prudence and patience in the past.”
“It takes character to sit there with cash and do nothing. I didn’t get where I am today, by going after mediocre opportunities. "If you say no to 90% of investing ideas, you're not missing much.
He then repeats the famous Buffett quote, “Few people ever get rich on their 7th best idea.”
The Willingness to Change Your Own Mind:
Charlie hates dogma. He bears not only a willingness, but an eagerness to find his own mistakes and learn from them.
“If Berkshire has made a modest progress, a good deal of it is because Warren and I are very good at destroying our own best-loved ideas. Any year that you don’t destroy one of your best-loved ideas is probably a wasted year.”
Keynes said “It’s not bringing in the new ideas that’d hard. It’s getting rid of the old ones.” And Einstein said it better, attributing his mental success to “curiosity, concentration, perseverance, and self-criticism.” By self- criticism he meant becoming good at destroying your own best loved and hardest-won ideas. If you can get really good at destroying your own wrong idea, that is a great gift.
Ask yourself, how am I fooling myself? Why is this company cheap? Is it for a good reason or for a superficial reason? Play devil’s advocate with yourself. Constant self-criticism is key to investment success.
“The best defense is that of the best physicists, who systematically criticize themselves to an extreme degree.” Munger says. Then he quotes Nobel laureate Richard Feynman, “The first principle is not to fool yourself, and you’re the easiest person to fool.”
“Get out of debt, and have a want for very few material possessions. Also, be a very reliable person, learn from your experiences, don’t envy or resent others, and NEVER give up.”
“The way to win is to work, work, work, and hope to have a few insights.”
“The safest way to get what you want is to try and deserve what you want. It’s such a simple idea. It’s the golden rule. You want to deliver to the world what you would buy if you were at the other end.”
“I should concede, at the outset, that I have never taken a single course in economics, nor tried to make a single dollar, ever, from foreseeing macroeconomic changes.” Be a business analyst, not a market analyst or macroeconomic analyst.
Munger believes that aggressive accounting is rampant in corporate America. "I think that, every time you see the word EBITDA, you should substitute the words, "bulls*** earnings."
“It's 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."
Munger advocates create your own investing checklist and utilizing it every time you consider making an investment. "How can smart people so often be wrong? They don't do what I’m telling you to do: use a checklist to be sure you get all the main models and use them together in a multi-modular way." Guru investor Monish Pabrai, a Buffett/Munger fanboy in his own right, takes this advice literally.
Munger calls Value Line a wonderful tool. (Available for free in most libraries)
Examples of Mental Models Used in This Book:
Invert, always invert (Try to solve problems backwards)
Redundancy/backup system model (engineering)
Compound interest (math)
Decision Tree Theory
Break point/tipping point/autocatalysis models (physics/chemistry)
Darwin synthesis (biology) (Specifically how it relates to competitive destruction in capitalism)
Cognitive misjudgment (psychology)
Cost benefit analysis (economics)
Advantages of scale (economics) (Coca-Cola example)
Social Proof (psychology) (Coca-Cola example)
Pavlonian Association (biology) (Coca-Cola example)
Classical conditioning and Operant conditioning (more Pavlov)
Pari-mutuel betting (horse racing)
The power of incentives (psychology) (Example FedEx story)
Incentive-caused bias (Psychology)
Man w/ hammer tendency
***Munger claims that when multiple models combine in your favor, the “lollapalooza effect” kicks in, and the power of each individual model increases exponentially.***
Munger's Reading Reccomendations:
Munger quotes his famous partner, “In my whole life, I have known no wise people who didn’t read all the time – none, zero.” "I read everything. 10-K's and 10-Q's, biographies, histories, and 5 newspapers a day. Reading is key. Reading has made me rich over time." Then he adds an idea from Cicero’s that a man is never too old to learn something totally new. Munger cites Socrates learning to play the fiddle late in life as an example.
Here are Munger's reading recs:
Deep Simplicity: Bringing Order to Chaos and Complexity by John Gribbin
F.I.A.S.C.O.: The Inside Story of a Wall Street Trader by Frank Partnoy
Ice Age by John and Mary Gribbn How the Scots Invested the Modern World: The True Story of How Western Europe’s Poorest Nation Created Our World and Everything in It by Arthur Herman
Models of My Life by Herbert A. Simon
A Matter of Degrees: What Temperature Reveals About the Past and Future of Our Species, Planet, and Universe by Gino Segre
Andrew Carnegie by Joseph Frazier Wall
Guns, Germs, and Steel: The Fates of Human Societies by Jared M. Diamond
Influence: The Psychology of Persuasion by Robert B. Cialdini
Autobiography by Benjamin Franklin
Living Within Limits: Ecology, Economics, and Population Taboos by Garrett Hardin
The Selfish Gene by Richard Dawkins
Titan: The Life of John D. Rockefeller, Sr. by Ron Chernow
The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David S. Landes
The Wealth of Nations by Adam Smith
The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy by Robert G. Hagstrom
Genome: The Autobiography of a Species in 23 Chapters by Matt Ridley
Getting to Yes: Negotiating Agreement Without Giving In by Roger Fisher, William Ury, and Bruce Patton
Three Scientists and Their Gods: Looking for Meaning in an Age of Information by Roger Wright
Only the Paranoid Survive by Andy Grove
Also Munger suggests your read: The Wall Street Journal, Forbes, Fortune, and Value Line.
If you've made it this far, thanks for reading this unusually long blog post. I hope you found it worthwhile.
Please leave some comments, questions, or general feeback.