The book is essentially a compilation of timeless wisdom from Charlie Munger, who happens to be one of the world’s most reclusive billionaires. Interestingly, these concepts or mental models or philosophies are not just applicable in the investment world but hold true even in our day to day lives. For those who do not know Charlie Munger – He is the Vice Chairman of Berkshire Hathaway, the investment holding company started by the greatest known value investor Warren Buffett. According to Buffett, Munger is his closest partner and right-hand man.
The book has invaluable life lessons and would help anyone reading it to get better understanding of decision making through various mental models. Some of key takeaways from the book are:
“Spend each day trying to get a little wiser than you were when you woke up…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”
Munger was a big believer in virtue of hard work. He came from a very modest background and used to work in 12-hour shifts in a grocery store for just 2 dollars. But these gruelling work hours made him a workaholic, who could work tirelessly for long hours. He was known for his single minded focus and his uncanny ability to tune out all the distractions. His children remember their father working extremely long hours, leaving at dawn and coming back late for dinners.
It is this work ethic and philosophy which made him rise from a grocery store helper to a billionaire. He also worked hard at instilling this philosophy in his kids.
He also saw deprivations of poverty during the Great Depression. But that not only propelled the hunger in him to be abundant but also made him a philanthropist. His tryst with poverty during great depression made him committed to giving back to the world. He has made several substantial donations to Universities and hospitals along with this wife.
For me biggest lesson from Munger’s life is that “Your past doesn’t define your future, but if you truly work towards what you deserve, you can change your future to what you like”
“In my whole life, I have known no wise people (over a board subject matter area) who didn’t read all the time – none, zero. You’d be amazed 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.”
Charlie Munger was an avid reader. He read about wide variety of subjects and believed that it was the best way to get knowledge. Best way to get diversified knowledge is to start reading things about which you know nothing. We often end up reading more of what we like and stick to our comfort zone. However you can broaden your knowledge only if you read about things which you do not know about. Maybe picking up a book which has diverse perspective which you know nothing about or do not agree, might end up enhancing your knowledge and perspective.
Similarly picking up a skill, which you have never tried before might help you develop mental acuity required in making right decisions in life. Munger and Warren credit their success to their unquenchable thirst for knowledge and openness to understand different perspectives in life
“Knowing what you don’t know is more useful than being brilliant.”
“Acknowledging what you don’t know is the dawning of wisdom.”
Key take away is that, “It’s important to read a lot and do things which are outside your comfort zone to gain knowledge”
“Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group…then to hell with them.”
Munger had an extremely sporadic and unconventional education. Thanks to World War II, he had to halt his studies at University of Michigan. Munger joined Air Corps and was then sent to University of New Mexico to study science and engineering to prepare him for his career as a pilot. Being a pilot helped in paying attention to the minutest details. Post being discharged from Army, he made a career switch by applying to Harvard Law.
Munger’s most remarkable quality has been his out-of-the-box and original thinking. But this has been a result of his exposure to different streams of education which has led him to acquire unique skills and thinking abilities. Biggest lesson in this was – “Sometimes in life your greatest weakness, turns out to be your greatest strength”. Munger’s patchwork education turned out to be his greatest assets. Moreover, his ability to gain wisdom from every experience in his life helped him live life of his choice.
“What are the secrets of success?
-one word answer: “rational”
So many examples are highlighted in the book that showcase Munger’s ability to think and behave rationally at all points in time. The key is to maintain the balance and not to push oneself on to the ends especially while thinking. Because most actions voluntarily or involuntarily start from thoughts and its important to be aware and thus act accordingly.
“I think that, every time you see the word EBITDA, you should substitute the words “bullshit earnings.”
Munger had a strong moral compass & condemned all unethical practices, especially those who use loop holes in the legal system to find ways to avoid paying taxes. According to him it is very tempting and often easy to succumb to pressures and cut corners with the law. However, he steered away from all socially acceptable ways of breaking laws. He believed that good reputation would eventually yield far better results than shortcuts to make money. He believed that “Once you start doing something bad, then it’s easy to take the next step and then you are a moral sewer.”
One of the banks that Berkshire Hathaway invested in decided to do business with some shady partners, despite of the pleas from Berkshire Hathaway not to do so. They were not only disastrous for the bank but also for Berkshire Hathaway and this cemented Munger’s belief that the partners you associate with need to share your values and ethics.
In fact this ethical policy of Minger helped them avoid the crisis of 2008. Munger was keenly aware of danger of inflating your books with value solely based on speculation. Then in 2008 when housing prices crashed, and people were unable to repay their debts, derivatives were essentially valueless and the market eventually toppled and rest is history. Only one firm managed to come out relatively unscathed and that was Berkshire Hathaway. So practicing ethics and resisting temptation was not only good ethical position but a smart business move.
Not only do you need to be ethical but even people you decide to interact with in your life need to share your values and ethical standard
“It takes character to sit with all that cash and to do nothing. I didn’t get to the top where I am by going after mediocre opportunities.”
Munger & Warren wait until they see a good opportunity, like undervalued stock which they think will become valuable over time. They will find the right opportunity and buy large shares of the company and sometimes wait for decades till the company becomes profitable. Though this wait and watch approach may not lead to instant gratification, but it has proved extremely lucrative in long run. Munger has modelled his investment philosophy on the slow tortoise as compared to fast hare and results are there for everyone to see.
In life, we often look for instant gratification or quick fixes to our problems. However, patience to wait for the right opportunity and then focus on it with single minded dedication can lead to lasting results as compared to short cut approach we are so tempted to take often in life.
The biggest learning has been, “Patience & single-minded focus are key qualities to being successful in life.”
“You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in this one way. You know the old saying: ‘To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.”
Munger talks about a parable of a workman who has only one tool – a hammer. Which is why he sees every problem as something which can only be fixed by hammering. To be truly successful in life, you need to have different kinds of tools from different disciplines. This will give you the mental agility to adapt your thinking to the problem at hand.
Any degree or educational institutes can only train you only in one discipline in life. This is a limitation of even the most elite institutes. So one needs to learn and draw from life experiences. Take pilot training for example. They not only learn theory but are forced to apply their training in practice and demonstrate the mastery of what they have learned. Moreover they need to keep learning lifelong and update their knowledge in real life experiences. They are very mentally agile and ready to go. Moreover they are also required to create checklists which includes all kind of possibilities which they might not have not experienced before as well. This exercise alone makes them very mentally agile.
Apply the knowledge that you have learnt, keep updating your skills, draw from life experiences and engage in mental check lists. This will ensure that we bring agility and acuity to our decision making.
We get stuck when we try to use tried and tested models for problem solving and in the process lose our agility in problem solving. A good way to solve problems to use as many mental models as possible, just like Charlie Munger.
“I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.”
Munger had a very different view of mistake-making. Munger loved learning from his mistakes and always loved people who confessed their mistakes and had the ability to learn from them. In fact there is this story of a financial officer who once made an investment mistake, causing the company losses to the tune of thousands of dollars. However as soon as he realised it, he went to the President and confessed. He was allowed to continue his job and left with only a warning because of his honesty in owning up his mistake.
Munger himself admits to making many serious mistakes or judgement of error during the course of his career.
In fact he talks about “errors of omissions”- failure to recognise an opportunity as one of the biggest mistakes of his careers. Berkshire Hathaway refused to invest in Walmart – thinking that stocks were too expensive and this decision cost them notionally several billions of dollars. Instead of lamenting over the loss, one should be able to change his mind. According to him, ideas are like tools – if you find more useful one, then you need to let go of the old ones. It essentially means that when someone disagrees with your views or opinion, you need to be able to objectively decide and be open to learning and growing. Munger has demonstrated that a truly confident person is able to openly admit when they make mistake.
Biggest lesson has been that, “We need to learn from our mistakes and not be afraid to change our minds.”
“It’s not the bad ideas that do you in, it’s the good ideas. And you may say, ‘That can’t be so. That’s paradoxical. What he [Graham] meant was that if a thing is a bad idea, it’s hard to overdo. But where there is a good idea with a core of essential and important truth, you can’t ignore it. And then it’s so easy to overdo it. So the good ideas are a wonderful way to suffer terribly if you overdo them”
The conventional wisdom in life tells us that we should discover our strengths and then capitalize on your strengths or any good ideas you might have and then keep working on them. However working on or overdoing good ideas at times can back fire on you terribly. For example – exercise done in right amounts is good for health but overdoing it puts strain on your body. So it is easy to overdo ideas because they are good but it is important to remember the balance and step back at times.
Parting thought to leave with you – “Your perspective is always limited by how much you know. Expand your mid and transform your mind” –Dr Bruce Lipton