This article is an excerpt from the Shortform book guide to "Poor Charlie's Almanack" by Charles T. Munger. Shortform has the world's best summaries and analyses of books you should be reading.
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What is the book Poor Charlie’s Almanack about? What investment tips can you get from the book?
The Poor Charlie’s Almanack book is a collection of Charlie Munger’s best advice given over 30 years in the form of roundtable talks and public speeches. On investing, Charlie emphasizes investing in high-quality businesses with good management and established competitive advantages.
Read on to learn more about the lessons on management and investing from the book Poor Charlie’s Almanack.
Poor Charlie’s Lessons
Charlie Munger is Warren Buffett’s long-time partner at Berkshire Hathaway. Content to being the lesser-known of the two, Munger is no less impressive. Bill Gates says that Charlie Munger “is truly the broadest thinker I have ever encountered,” and Buffett calls him the ideal partner who is “both smarter and wiser.”
The Poor Charlie’s Almanack book is a collection of Charlie Munger’s best advice given over 30 years, in the form of 11 speeches given as commencement addresses and roundtable talks. He covers a wide range of topics, including rationality and decision making, investing, and how to live a good life.
Rationality and Decision Making
When asked to describe himself in one word, Charlie Munger chose “rational.” He knows he’s subject to the same biases affecting all other humans. The book Poor Charlie’s Almanack explains how he trained himself to recognize when the biases are active and how to limit their damage.
Objectivity and Changing One’s Mind
If you want to make better decisions, you need to seek truth—what is really happening in the world, not what you want to believe is happening. Recognizing the truth is often painful—it may go against your prior beliefs or desires, but recognizing reality is better than deluding yourself. Three steps to seeking the truth are listed in the Poor Charlie’s Almanack book:
- First, recognize that it’s very easy to delude yourself.
- Second, you should readily entertain other opinions. You should deliberately consider arguments of the other side. In fact, try to state the other side’s opinions better than they can themselves.
- Third, after considering other viewpoints, you should readily change your mind. Be willing to destroy your favorite ideas. Munger says that any year he doesn’t destroy one of his beloved ideas is a wasted year.
Practice Divergent and Contrary Thinking
Social proof bias is the tendency to believe what others believe, to improve social cohesion. This causes humans to think like sheep, even if the ideas they believe are wrong. Practicing contrary thinking invites new ideas that might be more correct than what everyone else thinks.
Munger and Buffett practice this regularly in their financial management. If you adopt the same investment practices as everyone else, you can by definition only get average returns. To achieve outstanding returns, you need to think differently from the crowd.
Invert, Always Invert
One way to practice divergent thinking is to invert your view on a situation, to look at it from the opposite perspective. This can reveal new insights. “Many hard problems are best solved only when they are addressed backwards.”
The Poor Charlie’s Almanack book provides a few examples of inverting thinking:
- Instead of thinking about how something can succeed, think about how it can fail. “What can go wrong that I haven’t seen?”
- When physicists were trying to revise Maxwell’s electromagnetic laws to be consistent with Newton’s mechanical laws, Einstein inverted the situation—he revised Newton’s laws to fit Maxwell’s, and so discovered special relativity.
Know Your Circle of Competence
To make good decisions, you need to know what you’re good at and what you’re bad at. In the book Poor Charlie’s Almanack, Munger calls this the “circle of competence”—know where your boundary is, and don’t step outside of the circle.
Here are quotes from the book Poor Charlie’s Almanack that elaborate on this idea:
- “Knowing what you don’t know is more useful than being brilliant.”
- “People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”
- “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 are going to lose.”
- “It’s great to have a manager with a 160 IQ—unless he thinks it’s 180.”
In investments, Charlie Munger and Warren Buffett know what they’re good at and what they’re bad at. They hesitate to stray outside their circle of competence. For example, the Poor Charlie’s Almanack book shows that they have three baskets for investing: yes, no, and too tough to understand.
- First, Munger looks for an easy to understand, dominant business franchise that can sustain itself and thrive in all market environments. Most businesses don’t make this cut.
- Certain businesses, like pharmaceuticals and technology, go into the “too tough to understand” bucket. Munger finds that the dynamics of software and computer chips are simply outside their area of expertise, so they reject them completely. Munger and Buffett don’t try to grasp the esoteric—they simply try to remember the obvious.
- “Hot” deals and IPOs get rejected as no’s (Munger considers these as overhyped and overpriced).
Learn Vicariously from Others’ Mistakes
One of the major lessons in the Poor Charlie’s Almanack book is that Munger and Buffett both read and learn constantly, and one of the reasons is to learn from other people’s mistakes. You can learn vicariously from other people’s terrible experiences and save yourself from the same fate.
Understand and Avoid Psychological Biases
A student of human psychology, Munger compiled a list of 25 psychological biases that distort how you see the world and impair decision-making. Here are a few of the notable ones explored in the Poor Charlie’s Almanack book:
- Incentive bias: Self-interest drives human behavior. If someone receives rewards for doing a behavior, they will do that behavior again and again.
- Doubt-avoidance tendency: Doubt is painful, causing puzzlement and stress. When you feel doubt, you reach a decision more quickly than a fully considered decision would take.
- Inconsistency-avoidance tendency: People are reluctant to change. This applies to personal behavior, beliefs, relationships, and commitments. Once someone believes something, it’s typically hard for them to change their mind.
- Influence from mere association: When two items are placed close together, the qualities of one item transfer to the other. If you like something, you’ll like other things that it’s paired with. The inverse is also true.
- Deprival superreaction: We hate having things taken away from us. Being deprived of things ignites a strong counterreaction.
- Social proof: You think you’re in independent control of your actions, but in reality you do what you observe from other people. You think their thoughts and you mirror their actions.
- Authority misinfluence: Man was born mostly to follow leaders, with only a few people doing the leading. People tend to follow instructions from authority, even blindly.
- Lollapaloozas: this is a kind of “super-tendency”—it involves the confluence of multiple tendencies that reinforce each other and lead to extreme consequences. Examples include people who join extreme cults and the Milgram shock experiment.
The best way to guard against biases is to learn what they are and how they affect cognition, then construct a checklist to go through each one and think about whether it’s affecting your current judgment.
Build a Latticework of Mental Models
Charlie Munger has learned a lot about the world, and he calls the main ideas from the major fields “mental models.” He stresses the importance of multidisciplinary learning and connecting the major ideas together in a latticework, where the ideas can interact with each other.
The inferior way to learn is to learn isolated facts that exist entirely in separate silos. You can recite the facts, but you don’t know the ideas underlying them, and you can’t apply those ideas to solve problems in real life. This is a failure of rote learning, which is common in many national education systems.
The Poor Charlie’s Almanack book effectively conveys Munger’s argument that the superior way to learn is to learn lots of mental models, then assemble them into a connected latticework (or a network).
What are Mental Models?
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Like what you just read? Read the rest of the world's best book summary and analysis of Charles T. Munger's "Poor Charlie's Almanack" at Shortform .
Here's what you'll find in our full Poor Charlie's Almanack summary :
- A collection of Charlie Munger’s best advice given over 30 years
- Why you need to know what you’re good at and what you’re bad at to make decisions
- Descriptions of the 25 psychological biases that distort how you see the world
