“No wise pilot, no matter how great his talent and experience, fails to use his checklist.” – Charlie Munger
Born on January 1st, 1924, Charlie Thomas Munger is the Vice Chairman of Berkshire Hathaway, Inc, a conglomerate owned by the man well known for his riches, Warren Buffet. Munger is an American investor, lawyer, philanthropist and former real estate attorney. He ran his own investment firm in partnership with few others between 1962 and 1975. He handled various positions as chairman of Wesco Financial Corporation, Daily Journal Corporation, etc in the past and at present he is one of the Board of Directors of consumer giant ‘Costco Wholesale Corporation’. Though he is famous as a partner and right hand of Warren Buffet, he is well known for his multidisciplinary mind and intellect which contributed to multiplying the returns of Berkshire Hathaway zillion times.
Coming from a strong backdrop of being a lawyer from Harvard, a military lieutenant and a trained meteorologist at the time of World War II, he carries his knowledge from various disciplines like Economics, Psychology, and History etc. He has developed a system of multiple mental models to answer the problems of a complex social system. His ideas, thought process and beliefs all stand valid with no regard to time. Even today the works he delivered years ago stay strong to their logic and validity.
Charlie Munger believes learning is always catalysed by book reading. Number of times he expressed the importance of reading books and how he was influenced personally from them. He also said how he and Buffet spend maximum amount of time reading and thinking than doing.
He authored a book ‘On Success’ and recommended various books that could make people efficient. His speeches and wisdom are all compiled into famous books ‘Poor Charlie’s Almanack’ by Peter D Kaufman, ‘Tao of Charlie Munger’ by David Clark, ‘University of Berkshire Hathaway’ by Daniel Pecaut and Corey Wrenn, ‘Charlie Munger- The Complete Investor’ by Tren Griffin. Along with his partner Buffet, Munger has been inspiration for many other books which act as investment guides. One such famous book is ‘Seeking Wisdom: From Darwin to Munger’ written by Peter Bevelin.
What’s most to be worshipped in Munger’s approach is that he believes in ethical businesses. He vouches on following ethical standards for a healthy business and advocates that trickery in business dooms its very existence. He expressed his discontentment about quick money making businesses which involve lack of honesty and ethics. He has always been critical of crypto currencies like bit coins and related alternatives. Munger refers to Charles Frankler, a philosopher, while he addressed the financial crisis of 2007-08. Frankler believed that the people who make decisions should bear the consequences. The whole loan system is a failure because the decision makers dumped loans on the public irresponsibly without thinking about the consequences and the butterfly effect it would result in. This is how irresponsible actions affect a larger society leading to chaos.
Elementary, worldly wisdom:
In all the works based on Charlie Munger we can observe how he educates us with his unusual approaches which are surprisingly easy to adopt. In the book Poor Charlie’s Almanack he mentioned ‘elementary, worldly wisdom’ as a requisite for conducting better businesses. He is a visionary with great intellect and lives by learning out of life. He advocates multidisciplinary approach to any problem.
“I idealize Benjamin Franklin and identify myself with him most often; though comparing me with such a man would be silly. Ben Franklin is a self-educated man that wandered over a vast amount of territory and pretty confident over the full range. Lot of his knowledge is psychological and he is a great observer of human nature.” He narrated how he encountered various situations through impactful tools. He put forward great but simple theories based on which he could succeed:
- Common sense is a rarely found good, he believes. He iterated, while talking about his career progression, how it always important to have at least one person with us who performs better than us. We could very well be inspired from the performer instead of envying them and pick up various ideas on how they farewell. People with common sense never think they know it all; he says and that we should discard people from life who are always ready to answer questions without any knowledge about the subject. He believes realizing what we do not know is the dawn of wisdom.
- In June 1986, from one of his speeches to graduates of Harvard school he has given five tips for a great life. Instead of directly advising on a certain aspect like investments or career or business, he showed how to choose a lifestyle that is highly respected and rewarded in all facets of it. Whatever you do, if you lay down the bottom lines results will always be fruitful.
Substance abuse, envy and resentment, unreliability, learning from past mistakes, letting life pull you down are the five most important things we should keep a check on. In his words “envy is a sin because there is no fun but lot of pain involved”. Being unreliable leads to lack of trust in those who deal with us and this directly affects the business goals. Life is no life is we choose to hang it with some sort of substance.
- Big ideas with instructive power are quiet helpful in attending social problems. Irrespective of their territorial boundaries, he explains how he picked them and used at various levels or stages of his life to solve everyday conflicts. He combated inanity by cataloguing ideas collected from everywhere he could.
- Knowing the edge of competency is the key. And if you do not know, that will be a disaster. Attitude backed up by mere knowledge is not sufficient to lead you to the goals. It is highly necessary that you know your limits.
- Identifying the folly saves a life time worth effort we put in to correct it later. Munger has said how he avoided certain risks while working together with Buffet. They increased returns of Berkshire Hathaway up to 20,000 times by investing their capital in highly rewarding enterprises avoiding dangerous and over the board borrowing.
- Patience is a virtue, more importantly to an investor. Investments take a lot of thinking, knowledge, effort and time. We can never gain intelligence by getting a hold on latest news and few important events. Knowledge gets real only when you earn it spending time and effort.
- Maximization or minimization of one or more variables that may contribute to achieve targets is ridiculous. The very first step of identifying that one or few competing variables is far from reality and makes it tough to withstand competition.
- There is no master plan or one formula to achieve results. It only causes resistance to change when the need comes and makes things seem more complicated than they actually are. Businesses have to take situations as they come and deal with them depending upon existing scenario.
- The idea or desire to get rich fast is dangerous. Take one step at a time, be a better person than what you are the day before. And getting rich is nothing about making more money. It is in fact more about spending less than what you have and being happy with it.
Lollapalooza Effect – Its importance to Investors:
Buffet could drive Berkshire almost consistently successful with his constructive peculiarities. He quoted that his decisions are majorly influenced by one of the letters he received from Charlie Munger quoting Lollapalooza Effect. Munger directly quoted this effect in his 1995 Harvard speech. The effect talks about human behaviour and how inherent biases or certain tendencies influence their decision making. These biases or mental models act as confluence and compel the humans to act irrationally resulting in the lollapalooza effect.
Real life scenarios of lollapalooza:
The outcomes of these concerted biases may also be positive at times. This can be directly applied to study how firms succeed working on their clients’ lollapalooza. He quoted Alcoholics Anonymous, an organization that works for de-addiction of drinking problem, as an example of positive outcome. This international fellowship aims at its members’ sobriety. To achieve this, the organization had used the common tendency of people to behave like those around them. It often surrounded the sufferers with other members who fought addiction and turned sober for few years. While all other mental and social factors failed, this pretty much led to their success.
Munger also quoted open auctions as an example for the negative result of this effect. When people are involved in open auctions, they often forget their individual needs and adopt the needs or tendencies of other while purchasing items up for auction. The psychological phenomena called social proof influences people to act like the majority participating in the auction making them foolish. They get driven away by the bidding wars and actively participate by imitating others. This in common terms can be related to compulsive buying behaviour.
The financial crisis of 2007-08 is a typical example of lollapalooza effect. Brokers aggressively sold home loans to earn more money on sales. People borrowed irrationally huge amounts without considering their repayment capacity. When Wall Street has announced selling these mortgages to financial markets, the want for more money has spread like a plague compelling all the market players to get motivated in different ways. As a result of this massive lollapalooza effect brokers, bankers, investors and even the borrowers wanted to make money all at the same time. Had any one of the market players thought about the repercussions of their acts, it would have been a different situation altogether.
Notes to investors:
For investors or investment companies it is very important to keep this effect on a check. This common concierge of ideas or motivations can result in high volatility spreading its effect to larger markets. Succeeding as an investor is more to do with identifying the risks and unpredictable situations involved and staying away from them. Munger often says over confidence feeds only ego but no real purpose.
In his Dubridge International Distinguished Lecture, Caltech 2008, he said how he added his corollary to Einstein’s take on Occam’s razor. Occam’s razor is a scientific rule which says unnecessary multiplication of entities involved should be avoided and explanations for unknown quantities are to be sought out in place of known quantities. Einstein broke it down to convey that everything should be brought down to its simplest form
Adding to this, Munger said for any act of investment or business, if the result you are observing is a lollapalooza effect, search for multiple causes. And avoiding them to the best possible extent can save you from losses and land you in a safe place. He advises investors to pick up ideas from everywhere possible and utilize them in considerable time and in proper areas of complexity.
In one of his interviews with investor Phil Town, he said the quality he has as an investor is patience and aggressive conduct that follows. Predicting future earning power of an investment or a business reveals whether we should go for it or not. When asked if investors need to be smart in order to be successful like him, Charlie says it is not required to be brain smart to become a successful investor. You instead need to be aversive to the standard stupidities such as searching for easy decisions or desiring to be super rich super quick.
Munger’s four principles of investing:
When Daniel Town a corporate attorney, found herself on the verge of losing hope about her financials she quickly turned herself to observe how Charlie Munger and Warren Buffet employed the concept of ‘value investing’ in their lives. She chose to not solely depend on salary income and took up career as an investor. She proudly says her life is inspired by Charlie Munger’s ideologies and how she implemented his four principles of investing to achieve what she wants. He listed these with respect to buying businesses but they can be applied pretty much to any investment.
- It must be an investment that you are capable of understanding. Invest some time to work on the options available to know whether that particular avenue suits you or not. We can never attempt to invest in a place where we are unaware of its intricacies.
- It should have a durable competitive advantage, when compared to the other players in the field. Let your investment be at least a little different from its league so that you can always use its competitive advantage to your profit. Divergence is essential to achieve anything different from others. We cannot expect a better or different result while mimicking what all others are doing.
- Integrity and talent are utmost important when you choose to invest. This can manifest differently under different circumstances. The highly successful duo always emphasized on building a corporation which is capable of withstanding human error. It should be able to rise above from the roots altogether again in the event of downfall. This happens only if we stay with integrity being inclusive of the team working for us and not be too cold to unavoidable human errors.
- Pay a price that makes sense. When you pick a business always have a margin of safety. In the event of failure you will still be able to continue till certain time with this safety margin. And just because a business seems attractive don’t end up paying ridiculously high price which the enterprise may not deserve.
Munger says understanding key principles of investment helps more than learning theoretical concepts. While reading is important and should be a continuous process it should always be coupled with learning from reality. His elementary, worldly wisdom says with a bunch of facts or information that hangs individually, you cannot get to know anything. We need to approach problems with models in our mind along with experience both first and second hand. He also lays importance of being multidisciplinary and how one has never succeeded by being a pro in just one field say economics or management or investments etc. Minds should be broadened collecting big ideas from big disciplines and should be implemented quite often.
Poor Charlie’s Almanack:
This is an unconventionally compiled book which gives us various thoughts, ideas, and philosophies of Munger taken from his speeches. It explains his “Multiple Mental Models” approach to decision making. The book is inspired from Benjamin Franklin’s Poor Richard’s Almanack. The book focuses on how ideas can be collected and retained in memory. It also includes ten most powerful talks of Charlie Munger.
Excerpts from Influencers – By Andy Serwer:
In his latest interview in May 2019 with Andy Serwer in his show Influencers, Charlie Munger has reminisced indirectly few of the concepts he proposed, while discussing the present economy, talking about the Berkshire 2019 Annual Shareholders Meeting. Few examples can be looked into:
- He opposed the idea of Coca Cola’s supposed plans of foraying into Cannabis drinks business. He said Coca Cola is a company that gives so much happiness to its customers and he doesn’t wish that it takes this terrible step inviting recreational drugs which do no greater good.
- When asked about closing billion dollar bills overnight with various short term contracts, he said he never remembers an instance where keeping it simple has resulted otherwise. And that they almost always succeeded in doing so. We can relate to his corollary on Occam’s razor here. The only hurdle Warren and Charlie faced is in identifying businesses based on quantitative measures, which come at best bargain. Once they cracked how they do it, they never had to stop in taking over better businesses.
- He also appreciated the Chinese leadership and how they copied Singapore’s economy and worked on refinement with savings of poor people rather than riches of the elite. ‘It’s not always printing more money and finding ways to spend it’ is his take on it. We can see how his proposition of collecting big ideas from big scenarios plays a role here.
What’s in it for us?
Charlie Munger is an extraordinary intellect par excellence and a well learned man. We have an ocean of knowledge readily available from experiences of investment Gods like Munger and Buffet. They are noble thinkers of our age. Munger’s meetings, interviews and speeches are all unparalleled and provide a bounty of wisdom that could be used by individuals and corporates to achieve success. It is highly surprising when we see how successful people are really simple, straight forward and filled with humility. Along with all the investment guidelines he offers, one could, more importantly, learn lessons for life and develop a personality that naturally leads us to success. His scholarly approach to any business issue gives insights deep into the original and untainted concepts of humanity leaving us spellbound.