My Personal Summary
This book is a compilation of 11 talks given over the years by Charlie Munger, Warren Buffett’s business partner, and one of the most successful investors of all time.
The book distills Munger’s “wit and wisdom” as he often dishes out wise advice with a heavy dose of humor and wit.
Charlie has two ideas he considers to be critically important if you want to go anywhere in life:
(1) You must learn the “big idea” or “mental models” from a variety of disciplines and then hang these big ideas on a latticework so that you can run through them like a checklist before making any big decisions on what to invest in, in regards to both your money and your time.
(2) You must identify your circle of competence and be disciplined enough to not wander outside of that circle.
If you can do these two things, which are actually much harder to practice than they sound, you will go far in life.
- Charlie once said, “ I wanted to get rich so I could be independent , like Lord John Maynard Keynes.” Independence is the end that wealth serves for Charlie, not the other way around .
- Charlie’s affinity for Benjamin Franklin’s expansive career in government, business, finance, and industry can be found in his many speeches and whenever he holds an audience, large or small.
- “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.”
- 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. As John Muir observed about the interconnectedness of nature, “ When we try to pick out anything by itself , we find it hitched to everything else in the universe.”
- Charlie’s “big ideas from the big disciplines” approach to investment evaluation is certainly unique in the business world — as is its origin . Not finding any existing approach adequate to the task , Charlie painstakingly created his own largely self – taught system . The “ self – taught ” statement is no exaggeration ; he once said , “ To this day , I have never taken any course , anywhere , in chemistry , economics , psychology , or business.” And yet these disciplines, especially psychology, form the foundation upon which his system is built.
- Munger, like Buffett , believes a successful investment career boils down to only a handful of decisions . So when Charlie likes a business , he makes a very large bet and typically holds the position for a long period. Charlie calls it “ sit – on – your – ass investing ” and cites its benefits : “ You’re paying less to brokers, you’re 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.
- “We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued , then you have to think about selling it when it approaches your calculation of 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.”
- What is elementary, worldly wisdom? Well , the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’ em back . If the facts don’t hang together on a latticework of theory , you don’t have them in a usable form .
- “You’ve got to have models in your head. And you’ve got to array your experience — both vicarious and direct — on this latticework of models. And the models have to come from multiple disciplines — because all the wisdom of the world is not to be found in one little academic department. That’s why poetry professors , by and large , are so unwise in a worldly sense. But fortunately , it isn’t that tough — because 80 or 90 important models will carry about 90 percent of the freight in making you a worldly – wise person . And, of those, only a mere handful really carry very heavy freight.”
- “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.”
- “People who could never win a chess tournament or stand in center court in a respectable tennis tournament can rise quite high in life by slowly developing a circle of competence , which results partly from what they were born with and partly from what they slowly develop through work.”
- “Over the long term , it’s hard for a stock to earn a much better return than the business that underlies it earns . If the business earns 6 percent on capital over 40 years and you hold it for that 40 years , you’re not going to make much different than a 6 percent return , even if you originally buy it at a huge discount . Conversely , if a business earns 18 percent on capital over 20 or 30 years , even if you pay an expensive looking price, you’ll end up with one hell of a result.”
- 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
- The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better, just as in reverse , a system that can be easily defrauded ruins a civilization. A system that’s very hard to defraud, like a cash register – based system , helps the economic performance of a civilization by reducing vice , but very few people within economics talk about it in those terms.
- “What are the core ideas that helped me? Well , luckily I had the idea at a very early age that the safest way to try to get what you want is to try to 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 on the other end . There is no ethos in my opinion that is better for any lawyer or any other person to have . By and large, the people who have had this ethos win in life , and they don’t win just money and honors . They win the respect , the deserved trust of the people they deal with. And there is huge pleasure in life to be obtained from getting deserved trust.”
- “I constantly see people rise in life who are not the smartest , sometimes not even the most diligent. But they are learning machines. They go to bed every 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.”
- “Consider Warren Buffett again. If you watched him with a time clock, you’d find that about half of his waking time is spent reading.”
- Cicero is famous for saying that a man who doesn’t know what happened before he’s born goes through life like a child. That is a very correct idea . Cicero is right to ridicule somebody so foolish as not to know history. But if you generalize Cicero , as I think one should , there are a lot of other things that one should know in addition to history . And those other things are the big ideas in all the disciplines.
- “It doesn’t help you much just to know something well enough so that on one occasion you can prattle your way to an A in an exam. You have to learn many things in such a way that they’re in a mental latticework in your head and you automatically use them the rest of your life.”
- “Many an academic is like the truffle hound, an animal so trained and bred for one narrow purpose that it is no good at anything else.”
- One of Munger’s most important lessons in regards to human psychology is that incentives are much, much more powerful than people think and they explain much of people’s behavior.