February 8, 2024
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This article is in honor of Charlie Munger; one of the world’s greatest investors.
He was an inspiration to so many and a large influence on our team’s thinking at Evergreen. In my article “Recognizing the Reasons for Success,” I mentioned my favorite investor was Charlie. He is one of the few investors who truly recognizes the reasons for successful investing. Charlie would be a successful investor in any period at any location. On January 1, 2024, Charlie Munger would have been 100 years old. Unfortunately, he passed away on November 11, 2023, at 99 years old.
He was always active, even being Chairman of the Daily Journal, Vice Chairman of Berkshire Hathaway, and a Director of Costco up until his death. He pursued many areas of interest such as starting a law firm in the 1960s (still in business), running an investment partnership from 1962 to 1975, and learning enough architecture to build his catamaran and even design buildings such as college dorms.
Charlie is known for his “witty” wisdom and generosity. Many viewed him as today’s version of Benjamin Franklin (from a wisdom perspective). The book Poor Charlie Almanack was written with his lessons and wisdom. You can read this book for free on Google Books.
This article will share a few of his most popular lessons that have influenced me the most.
Actively Acquiring Knowledge – Disciplined Learning
Charlie lived the example of someone who was always actively learning. The building of knowledge is a compounding experience versus a cumulative one. As we increase our understanding of a subject, we not only learn about that subject, but we also open new avenues of information to explore. This new understanding can also help us grasp some subjects we already know in a better way.
The word “active” is very important. Do we learn from news and media reports, the opinions of our crazy relatives, or only when we are under pressure to make a decision? This kind of reactive learning often gives us information we never act on or grow from. Instead, we should discipline ourselves to learn what we want to learn, how we want to learn it, and by the means we choose to learn it. Gaining understanding by any means can be profitable, but if we are not learning according to these three standards, it’s not disciplined learning. True wisdom lies in understanding how to utilize the acquired knowledge.
Quotes from Charlie on learning:
“Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group, then the hell with them.”
“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.”
“Something that’s more important than what they teach you in college – learn the method of learning.”
“How do some people get wiser than other people? Partly it is inborn temperament. Some people do not have a good temperament for investing. They’re too fretful; they worry too much. But if you’ve got a good temperament, which basically means being very patient, yet combine that with a vast aggression when you know enough to do something, then you just gradually learn the game, partly by doing, partly by studying. Obviously, the more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be. I don’t know anyone who did it with great rapidity. Warren Buffett has become one hell of a lot better investor since the day I met him, and so have I. If we had been frozen at any given stage, with the knowledge hand we had, the record would have been much worse than it is. So the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”
“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.”
“… wisdom acquisition [is] a moral duty. It’s not something you do just to advance in life. Wisdom acquisition is a moral duty, and there’s a corollary to that proposition, which is very important. It means that you’re hooked for a lifetime of learning, and without lifetime learning you people are not going to do very well.”
Latticework of Mental Models
Becoming an expert in any area of life involves developing “mental models.” These models are simplified explanations of ideas, beliefs, or concepts that allow us to focus on key information while ignoring irrelevant details, much like a map. Mental models help us understand and use complex information effectively by breaking it down into manageable chunks. We use mental models in all major disciplines, such as engineering, mathematics, biology, physics, psychology, chemistry, and economics.
Here are a few examples of mental models:
– Margin of Safety: Adding additional margin on the side of safety to make up for any risk not understood or miscalculated.
– Ecosystems: Any group of organisms co-existing and understanding its social and physical systems.
– Circle of Competence: The ability to honestly detect the areas in life you understand and know the limit of your understanding.
– Inversion: Approaching a problem or situation opposite of its traditional starting point, starting from the end and working backward.
– Occam’s Razor: Simpler explanations are more likely to be true than complicated ones.
– Law of Thermodynamics: Describing energy as a closed system, where useful energy is constantly being lost, and energy cannot be created or destroyed.
These models, among many others, are useful to me as an investor, yet none come from finance. If we limit ourselves to using only the models from our line of work, we can’t broaden our abilities. Just like acquiring knowledge, we should consistently try to learn more mental models from all disciplines.
Charlie Munger once said, “I’ve long believed that a certain system – which almost any intelligent person can learn – works way better than the systems that most people use. What you need is a latticework of mental models in your head. And, with that system, things gradually get to fit together in a way that enhances cognition.”
Mental models are problem-solving tools. Every problem looks like a nail to a man who only possesses a hammer. The more tools we possess the better we are at solving problems.
Quotes from Charlie on mental models:
“If you wish to skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands.”
“developing the habit of mastering the multiple models which underlie reality is the best thing you can do.”
“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 the caste of mind, you’re destined for failure even if you have a high I.Q.”
“You need a different checklist and different mental models for different companies. I can never make it easy by saying ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life.”
Embracing the “Art” of Investing
In college, I was a part of many classes in finance and investing. Professors would explain formulas and concepts where situations repeated as if we were solving the same math problem or science experiment. Inputs were slightly different, but the focus was on the equation used to find an answer. Although most investment managers and academia perform in this fashion, great investors do not.
The “science” of an expertise is sometimes the most important to be successful. In mathematics, of course, understanding the execution of formulas is the best way to solve problems. Science is the systematic analysis in the form of inputs and measurements.
When it comes to trades the development of someone’s “craft” is most important. Think of carpenters or plumbers who learn to do their job well. Learning through actions, trial and error, can be the most important to be successful in some expertise.
The “art” of other expertise can be the most important to be successful. My wife and my son are very talented artists. My wife can forgo oil painting for a decade, randomly try it, and create a masterpiece. My son Drew was asked to submit artwork in 5th grade to a competition to see if he was considered “gifted” in art. He painted an abstract art piece of a person for the first time which amazed me. There was no science behind it, no craft experience or practice. My wife and son were born with an artistic ability they could not teach you.
Investing is not as extreme of an art as painting, but the art is the key factor most investors are missing. Yes, I could increase your likelihood of success by explaining the science behind investing, giving you experience, expanding your mental models, etc. However, that is not enough to be truly successful. Studying Charlie helped me understand and rely on the art of investing.
Quotes from Charlie on the “art” of investing:
“Naturally, the people who rise to the top in large corporations are ‘politicians’ with salesmanship, asking them to have ‘money mind’ as Mr. Buffett put it, is asking for a lot. Money mind is more of innate ability than of knowledge to learn.”
“You basically want me to explain to you a difficult subject of identifying moats. It reminds me of a story. One man came to Mozart and asked him how to write a symphony. Mozart replied, ‘You are too young to write a symphony.’ The man said, ‘You were writing symphonies when you were 10 years of age, and I am 21.’ Mozart said, ‘Yes, but I didn’t run around asking people how to do it'”
“Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position, etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it’s not clear which is statistically the best bet using the mathematics of Fermat and Pascal.”
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.”
“if the gap between value and price is not attractive I go on to something else. I can’t reduce investing to a formula. If you want a formula, you should go back to graduate school. They will give you a lot of formulas that don’t work.”
The Virtue of Patience
Patience is a highly regarded virtue, and for good reason. However, it is not something that many people possess. Our fast-paced culture with short attention spans only makes it worse.
Self-control is a valuable skill necessary in all aspects of life and investing. Unfortunately, the need to take action and the impulse to “do something” can lead to irrational decisions. This is particularly true for portfolio managers and wealth planners who may feel pressure to demonstrate value to their customers through action. One must be patient while waiting for opportunities but not give in to irrational behavior when they appear.
Munger’s patience helped him maintain conviction in his investment thesis during difficult times. He remained committed to the long-term potential of his chosen investments rather than being swayed by market sentiments or temporary setbacks. This can be true for us in other areas of life as people think they need to make quick decisions too often. However, most of our bad decisions are the result of impulses that could have waited, or a lack of commitment to our good decisions that take time to realize (like exercise, saving, diets, etc.).
Quotes from Charlie on patience:
“All of humanity’s problems stem from man’s inability to sit quietly in a room alone. It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
“It takes character to sit with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”
“You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.”
“Most people are too fretful, they worry too much. Success means being very patient, but aggressive when it’s time.”
Thank You Charlie
I have gained a lot of knowledge from Charlie, even though I’ve never had the chance to meet him in person. He always showed eagerness to share his wisdom with those willing to expand their knowledge and learn new things. Learning new disciplines, developing a latticework of mental models, understanding the art of investing, and possessing the virtue of patience have all helped me in both investing and life. I firmly believe these things could benefit all of you, too.
I encourage you to take the time to read or listen to some of Charlie’s famous talks. You can find a lot in Poor Charlie’s Almanack. I also have some famous recordings below.
Charlie Mungers Bag of Tricks – Article highlighting some more famous quotes.
Article Art of Stock Picking
Video 2008 Caltech Distinguished Lecture
Video The Psychology of Human Misjudgment
Video A Conversation with Charlie Munger at Ross School of Business (Michigan) 2011
Video A Conversation with Charlie Munger at Ross School of Business (Michigan) 2017
Video USC Commencement Address
None of the quotes, comments, conversations, etc., from Charlie Munger, should be considered investment advice. They are for educational purposes only in describing his beliefs and teachings.
Evergreen Wealth Management, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.