PDF Summary:Poor Charlie's Almanack, by Charles T. Munger
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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.”
Poor Charlie’s Almanack 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. You’ll learn why Charlie considers multidisciplinary learning vital to success, his checklist for investment criteria, and how to build a trillion dollar company from scratch.
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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.
Munger argues 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?
You can think of “mental models” as important ideas in a field that have broad relevance outside the field itself.
For example, the idea of “critical mass” comes from physics. Within the field of physics, the idea of critical mass relates specifically to the mass needed to sustain a nuclear chain reaction—if you have less than the critical mass, a chain reaction won’t perpetuate itself. But this concept applies generally outside of physics—metaphorically, it can apply to the minimal mass needed to start any virtuous cycle, like the minimum number of users needed to get a social networking app off the ground.
Other examples of mental models include “margin of safety” from engineering, “compound interest” from math, and “feedback loops” from biology.
Learn Models from Different Fields
The best ideas in the world exist in each of the major fields. No single academic department has all the answers to all the problems. To become the most versatile problem solver, you need to collect mental models from every major field of study.
Modern academia tends to silo fields of study into isolated departments. Ideas stay narrowly defined, and experts within the field stay largely within their lane. Munger argues this is why a literature professor can be esteemed in her field but be considered unwise in other aspects of life.
When you have models from different fields working together, this can yield surprising results that other people don’t see.
A Latticework of Mental Models
As you collect more of these ideas, you will start relating them together. For example, you might see how stock market swings are a combination of psychological biases (loss aversion, social proof), feedback loops from biology, critical mass from physics, and random walks from math. These connected ideas form a latticework of mental models.
On Investing
In Poor Charlie’s Almanack, Munger doesn’t talk directly about Berkshire Hathaway’s decisions much, but he does share the general investment philosophies and practices that have made them successful over decades.
Be Patient But Decisive
Warren Buffett and Charlie Munger make successful investments because they’re able to wait patiently for great deals. Unlike many investors, they don’t mind staying inactive, even for years at a time, when they don’t see great opportunities. However, when they do see great opportunities, they bet big.
When Warren Buffett lectures at business schools, he’s known for saying that everyone would make better investments if they were given a punch card with twenty slots in it and were restricted to only twenty investments throughout their entire lifetime. Once they punched all twenty holes, they would be able to make zero additional investments. Under these conditions, investors would be much more discerning about which investments to pursue, and they’d bet big on the few investments they found.
Find High-Quality Businesses
Beyond just looking for cheap deals, Munger looks for high-quality businesses. In sum, these are profitable businesses that have a sustainable competitive advantage and good growth prospects.
The quality of a company may even override cheapness—”a great business at a fair price is superior to a fair business at a great price.” A company that returns 18% on capital over twenty years can get amazing results, even if you pay a price that looks expensive at first.
Moats and Competitive Advantage
Munger and Buffett consider the primary factor of a great business to be an enduring competitive advantage—what they call a “moat.” Like a moat protecting a castle, the competitive advantage allows a business to resist being made obsolete by competitors or changing markets. Examples of moats include loyal branding (such as See’s Candies) or a massive distribution system that is hard to rival (such as Coca-Cola).
Berkshire Hathaway thus counsels its companies to widen their moats every year. This doesn’t necessarily mean earning more profits each year, but rather growing a company’s strategic position to weather the long term.
Management Matters
The father of value investing Ben Graham never accounted for management quality in his value investing principles, partially because he was writing to a mass audience who wouldn’t have the opportunity to talk to and assess management, and partially because he had an intrinsic distrust of management.
But Munger and Buffett believe management can make a big difference. For example, famed CEO Jack Welch made a big difference for General Electric, in ways that the manager of Westinghouse didn’t. Munger looks for management that is 1) unusually skilled and 2) trustworthy.
Valuing Companies
Of course, to earn great returns, it’s important not just to find great businesses, but also great businesses at great prices. Even a fantastic business can be a terrible investment if the price is too high.
Consider betting on a horse race. The best horse is often obvious, based on its track record, weight, health, and so on, and it’s clearly better than a sickly horse with a bad record. But the odds already reflect that—the best horse might have odds of 2 to 1, while the bad horse has odds of 50 to 1. Which is the better deal? It’s not immediately clear.
On Character and Living a Good Life
In all, Charlie Munger is said to be a man of solid character—hard-working, humble, and always learning. In his speeches, he talks often about the traits leading to a happy and productive life.
How to Live Happily
- Have low expectations.
- Have a sense of humor
- Surround yourself with the love of friends and family.
- Figure out the lifestyle that you want most. You might indeed work eighty hours a week for fifteen years to make partner at a law firm, just to get the right to do more of the same. But if you don’t, this might not be the right life for you.
- To get what you want, try to deserve what you want.
- Avoid self-pity. It’s counterproductive and doesn’t change your situation. If you don’t feel self-pity, you’ll have an advantage over many people, since it’s a common response. Munger had a friend who carried a stack of business cards, and when he heard a self-pitying comment, he’d give the person a card; the card read, “Your story has touched my heart. Never have I heard of anyone with as many misfortunes as you.”
- Be around people you admire. Don’t work under someone you don’t want to be like.
- Work hard. Munger likes the word “assiduity” because it informally means, “Sit down on your ass until you do it.”
- Anticipate trouble. You’ll better know how to avoid it.
Moral Character and Honesty
Munger cares a lot about reputation—the reputation of Berkshire Hathaway, of its owned companies, and of himself. He desires integrity from people he works with and managers of companies he wants to acquire. Companies that have a trusted brand name have a competitive advantage that can persist over time. Trust takes a long time to build, and an instant to vanish.
- “When you borrow a man’s car, you always return it with a full tank of gas.” People notice these little things.
- Track records are important, and if you develop one in an integral trait like honesty, you’ll have a big advantage in the world.
Constant Learning
Munger and Buffett are both famous for their curiosity and their voracious reading.
- “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads — and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
- “You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have that cast of mind, you’re destined for failure even if you have a high I.Q.”
- Spend each day trying to be a little smarter than when you woke up.
Work Hard
Success doesn’t come without hard work.
- Munger thinks that passion is more important than natural talent or brain power. Berkshire has many companies with people who are fanatics about their business.
- Munger and Buffett are both famous for reading a lot. But reading isn’t enough—you need to have the courage to choose the right ideas and do good things with them.
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PDF Summary Shortform Introduction
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Munger’s original speeches are well worth reading for his amusing language. You’ll find gentle wit and amusing quips like “if you mix raisins with turds, and you’ve still got turds” (when talking about how immoral managers can sink good companies).
Poor Charlie’s Almanack quotes extensively from other people. Any quotes without attribution are from Charlie Munger.
PDF Summary On Rationality and Decision Making
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- Example: Munger cites “[CBS head] Paley was a god. But he didn’t like to hear what he didn’t like to hear, and people soon learned that. So they told Paley only what he liked to hear. Therefore, he was soon living in a little cocoon of unreality and everything else was corrupt.”
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.
- “Faced with the choice of changing one’s mind and between proving there is no need to do so, almost everyone gets busy on the proof.”—John Kenneth Galbraith
- “Both Warren and I are very good at changing our prior conclusions. We work at developing that facility because, without it, disaster often comes.”
Be aware that strong psychological biases are in place that prevent you from being objective. The next chapter in the guide will cover his 25 psychological biases. Here are a few notable ones that distort the truth:
- Denial: Be willing to admit that you’re wrong. Denying the truth doesn’t make it any less real.
- Consistency bias: Don’t entrench in your beliefs...
PDF Summary 25 Psychological Biases: Part 1
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What It Is
Self-interest drives human behavior. If someone receives rewards for doing a behavior, they will do that behavior again and again.
Research shows that once a behavior is conditioned, a random distribution of rewards keeps the behavior in place the longest—think a slot machine rather than a fixed, predictable payment like a salary.
Rewards are also known as incentives. Common incentives include money, friendship, sex, and advancement in social status.
People, institutions, and society often design incentive schemes to promote certain behavior. However, people tend to game all incentive schemes to maximize rewards for themselves, even if it violates the intent of the incentive scheme and comes at the expense of the system.
Why It Evolved
The brain has a simple algorithm: “Repeat behavior that works.” Here, what works is what gives the person rewards. Why would the brain evolve any differently?
How It Can Be Harmful
Incentives cause bias, consciously or subconsciously. If you have an incentive to think a certain way, you will find it hard to think any other way.
Because people will maximize their rewards within any incentive scheme, **poorly...
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Learn more about our summaries →PDF Summary 25 Psychological Biases: Part 2
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- You like your decisions more after you’ve made them.
- You like people who are like you (homophily).
Why It Evolved
Believing yourself to be competent and valuable can boost confidence, which helps spur action. In contrast, having constant self-doubt would be crippling.
How It Can Be Harmful
Combined with doubt-avoidance tendency, your overconfidence makes you pick rash decisions that aren’t as good as you believe. Then, denial, inconsistency avoidance, and excessive self-regard tendency make you think the decision is great and not worth changing.
People who are excessively self-confident may do more harm than good.
Homophily collects people who think alike, which tends to breed groupthink.
- Corrupt departments will select for people who fit the corruption, and over time the behavior will be deeply entrenched and very hard to change.
Examples
- The Lake Wobegon effect—in surveys of people on common abilities like driving, the majority of people believe they’re above average, which is of course mathematically impossible.
- In gambling, if you can’t pick your own numbers, gamblers play much less frequently. The presumption that a gambler...
PDF Summary The 25th Bias: Lollapalooza Tendency
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How Cults Work
Let’s walk through how an ordinary person becomes drawn to a cult and over time becomes an unrecognizable cult devotee. Nearly all of Munger’s 25 biases contribute:
- Doubt-avoidance: Cults often give answers to some of life’s most difficult existential questions. Potential members may be more vulnerable if they’ve lost direction in life and feel doubt about aspects of their life, and cults look like an attractive way to assuage their doubt.
- Stress-influence: Potential members may be in stressful situations before joining, such as financial debt or toxic relationships, which hastens their decision making.
- Liking/loving, influence-from-mere-association: The cult leader and cult recruiters can be charismatic, attractive, and likable, and thus cast a positive halo on the entire cult. Generally, cult members may seem like good people.
- Reciprocation: Recruiters may give a small token gift, such as Hare Krishna’s famous tactic of giving flowers to strangers. In return, they expect a donation or ask the recipient to listen to their sales pitch.
- Reason respective tendency: The potential member hears many justifiable reasons...
PDF Summary On Mental Models
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Learn Lots of Mental Models
Think of mental models as tools in your toolkit. The more tools you have, the more you can draw upon to solve the problem.
In contrast, if you have only one or two tools, then you’ll contort the situation to be solved by just those tools, and you’ll arrive at a suboptimal solution. This is similar to the “hammer-and-nail” problem—for people who have a specific hammer they like to use, everything in the world looks like a nail.
Learn Models from Different Fields
The best ideas in the world exist in each of the major fields. No single academic department has all the answers to all the problems. To become the most versatile problem solver, you need to collect mental models from every major field of study.
Modern academia tends to silo fields of study into isolated departments. Ideas stay narrowly defined, and experts within the field stay largely within their lane. Munger argues this is why a literature professor can be esteemed in her field but be considered unwise in other aspects of life.
The same balkanization applies to many modern corporate environments. Individual functions, like marketing and product, are divided and...
PDF Summary On Investing
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However, Munger notes that Berkshire’s historical returns will be hard to match as it grows. It’s much harder to find underpriced, low-competition investments when you have $10 billion than when you have $10 million.
Be Patient But Decisive
Warren Buffett and Charlie Munger make successful investments because they’re able to wait patiently for great deals. Unlike many investors, they don’t mind staying inactive, even for years at a time, when they don’t see great opportunities. However, when they do see great opportunities, they bet big.
When Warren Buffett lectures at business schools, he’s known for saying that everyone would make better investments if they were given a punch card with twenty slots in it and were restricted to only twenty investments throughout their entire lifetime. Once they punched all twenty holes, they would be able to make zero additional investments. Under these conditions, investors would be much more discerning about which investments to pursue, and they’d bet big on the few investments they found.
We’ll break down both aspects of patience and decisiveness.
Wait for the Great Opportunities
Munger waits for business deals that...
PDF Summary On Business Strategy
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Berkshire Hathaway thus counsels its companies to widen their moats every year. This doesn’t necessarily mean earning more profits each year, but rather growing a company’s strategic position to weather the long term.
Under certain conditions, businesses with large moats can increase prices dramatically without cutting volume, and thus increase earnings dramatically. This happened with Disney in the 20th century. For decades Disneyland priced its tickets very affordably. Then the managers realized it was underpriced—it was a unique experience unlike any on Earth; people don’t consume it that frequently, so they’re not as worried about racking up high costs. So Disneyland raised its prices, and attendance maintained steady levels, leading to sudden profits.
(Shortform note: The ideas of competitive advantage were formalized by Harvard Business School professor Michael Porter. For more details, read our guide to Understanding Michael Porter.)
On Competition
Munger speaks further about competition in two respects—competition between rivals, and how new technology changes competition.
Competition...
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PDF Summary On Character and Living a Good Life
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How to Live Happily
- Have low expectations.
- Have a sense of humor
- Surround yourself with the love of friends and family.
- Figure out the lifestyle that you want most. You might indeed work eighty hours a week for fifteen years to make partner at a law firm, just to get the right to do more of the same. But if you don’t, this might not be the right life for you.
- To get what you want, try to deserve what you want.
- Avoid self-pity. It’s counterproductive and doesn’t change your situation. If you don’t feel self-pity, you’ll have an advantage over many people, since it’s a common response. Munger had a friend who carried a stack of business cards, and when he heard a self-pitying comment, he’d give the person a card; the card read, “Your story has touched my heart. Never have I heard of anyone with as many misfortunes as you.”
- Be around people you admire. Don’t work under someone you don’t want to be like.
- Work hard. Munger likes the word “assiduity” because it informally means, “Sit down on your ass until you do it.”
- Anticipate trouble. You’ll better know how to avoid it.
How to Live Miserably
Since one of Munger’s favorite...
PDF Summary Miscellaneous Ideas
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(Shortform note: For more on appealing to a person’s self-interest, check out the advice in the classic How to Win Friends & Influence People.)
Psychological tricks like this can be powerful, but there is a line at which it can become immoral. And if you do this too transparently, using tools that the other person is aware of, he won’t trust you again.
Problems with Soft Sciences
Munger believes that the most fundamental disciplines—say, math and physics—are much more rigorous than the soft sciences like economics and psychology. The soft sciences tend to be unorganized in their thinking and relish in complexity instead of elegant fundamentals.
Munger argues that soft sciences should integrate the ethos of hard sciences:
- They should rank disciplines in order of fundamentalness, and use them in that order.
- They should try to explain things in the fewest fundamental principles possible.
- If the existing principles don’t explain the phenomena, new principles can be devised, but they should first be reconciled with the old principles or the old principles should be...