Poor Charlie’s Almanack – Charles T. Munger11 min read

My Thoughts

Summary

I decided to stop reading about the last one hundred pages. I felt like it rambled on and didn’t have the information I was seeking. I wanted to learn about mental models and have a better understanding of how successful people make decisions. Instead, what I got was a book talking about how amazing Charlie Munger is and how he and Buffett are a great team, and how Berkshire is very conservative so over time they won’t take as much money. Also, throughout the book at least 10 times the phrase “to a man with a hammer, every problem looks like a nail” or some form of that phrase. I REALLY wanted to give this book a chance, but I hope I find better books that are more refined and clearer. I read the book most of the way because I figured maybe the gold nuggets I was looking for are just placed later in the book. Upon getting further through the book I started to lose hope that I would find such valuable information. Now I am disappointed the amount of time I invested. I plan to be more strategic when I allocate to books and drop books that I find not useful.

Update: I just read through my notes. This book had some good points earlier on that I believe were captured well in these notes. The book can be too general at times and too long-winded. However, it mentions several key fundamentals that serve as a nice introduction to becoming more familiar with mental models. A few key takeaways I have are to have patience knowing that success takes a long time of consistent focus in a specific area where your efforts can experience the effects of compounding. Also, there are some valuable life lessons such as “do what you say you are going to do”.

My Book Notes

Poor Charlie’s Almanack – Charles T. Munger

Compiled by Peter D. Kaufman

Chapter 1: A Portrait of Charles T. Munger

The book is organized with 11 of Charlie’s various talks about life over a 20yr period. It mentions that rather than be focused on any one particular area such as making millions in business or investing, he covers a wide spectrum of interests, ranging from how one acquires worldly wisdom to how his mental models can be applied to business.

Early life started working in Buffet grocery store, which was Warren’s grandfather’s store. He was page $2/hr and had to pay 2 cents to cover social security.
After enrolling in a basic course for science, Charlie developed an interest in Physics. He liked the method of problem-solving used in physics.
In college at Harvard, he was one of 12 to graduate Magna Cum Laude. He measured at the top of the IQ curve at Caltech Army Air Corps.

As a lawyer, he wasn’t satisfied with his earnings because they were based on a combination of billable hours and seniority.
Charlie started building wealth by investing in stocks and acquiring equity in one of his client’s electric companies. It was a mutually beneficial relationship because he could protect the company in law and his partner had the business skills.
Charlie had his first investment in property development at the age of 35yrs old and had a payoff of $300,000 for an investment of $100,000. He then undertook several other successful construction and development projects. He left all profits in real estate investments so he could continue taking on bigger projects.

When Warren Buffet and Charlie Munger met in 1959, they realized there were several similarities between the two of them. When they both met they felt each other were the smartest person they had ever met.
Warren said Charlie’s law practice might be a good hobby, but it’s a far less promising business than what Warren is doing.
Buffet and Munger have a strong track record of identifying undervalued companies and then either buying large stakes or buying them outright.

Charlie considers Ben Franklin to be his greatest hero because Munger is largely self-taught and shares many of Franklin’s unique characteristics. Like Franklin, Charlie made himself into a grandmaster of preparation, patience, discipline, and objectivity.

Chapter 2: The Munger Approach to Life, Learning, and Decision Making

Charlie conducts a comprehensive analysis of both the internal workings of the company as well as the larger integrated ecosystem in which the company operates.
“Any year that you don’t destroy your best-loved ideas is probably a year wasted.” – pg. 70. Charlie has a willingness and even eagerness to identify his own mistakes and learn from them.
When properly collected and organized, Charlie’s mental models provide a latticework that provides insights as to the purpose and nature of life.
Mental models can combine to create an amplified and larger effect. They can also have some tradeoffs between them. It’s important to understand the tradeoffs and determine what is worth losing when making a decision.
“I’ll Do it myself.” Munger believes his professors didn’t teach him the correct mental models and he has to learn them himself.
Charlie has never taken a course in chemistry, psychology, economics, or business. Yet these disciplines form the foundation upon which his system is built.
Munger and Buffet believe a successful investment career boils down to only a handful of decisions. Don’t buy/sell very often.

Munger’s Investment Evaluation Process

View the stock as an owner of the business and judge the staying quality of the business in terms of its competitive advantage.
Recognize when you are operating well within your circle of competence and when you are reaching the perimeter.
To identify potential candidates for investing: Charlie looks for an easy-to-understand, dominant business franchise that can sustain itself and thrive in all market environments.
You know you are outside of your circle of competence when you can answer questions in your own words. Simply memorizing something without being able to reason based on knowledge won’t work.
Before pulling the trigger on a major investment, Charlie reminds himself that timing is important. He also has a final checklist he runs the investment through which includes items like: current price, volume, and trading considerations.

  1. What disclosure timing or other sensitivities exist?Do contingent exit strategies exist?Are better uses of capital currently or potentially available?Is sufficient liquid capital currently on hand or must it be borrowed?What is the opportunity cost of that capital?

“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.” – Munger

Charlie practices extreme patience combined with extreme decisiveness. When he goes in on a stock it’s big.
His self-confidence is based not on who, or how many agree or disagree, with him, but on his ability to objectively view or measure himself.

Investing Principles Checklist

  • Risk – All investments should begin by measuring risk.Independence – Just because others agree/disagree doesn’t mean you are right/wrong.Preparation – Develop into a lifelong learner through voracious reading. Cultivate curiosity and strive to be a little wiser daily.Intellectual Humility – Acknowledging what you don’t know is the dawn of humility.Allocation – Proper allocation of capital is an investor’s number one job.Patience – Resist the human bias to act.Decisiveness – When proper circumstances present themselves act with decisiveness and conviction.Change – Live with change and accept unremovable complexity.Focus – Keep things simple and remember what you set out to do.

Charlie’s performance comes from a constant search for better methods of thought. Charlie’s life principles: Preparation, Discipline, Patience, Decisiveness. Honesty and Integrity and Charlie Monger go synonymous together. Doing the right thing can pay off big dividends personally and professionally.
You should have an internal compass. There should be all sorts of things you won’t do even though they are completely legal.

Chapter 3: Mungerisms: Charlie Unscripted: Highlights from Recent Berkshire Hathaway and Wesco Financial Annztal Meetings By Whitney Tilson

“Tell the truth and you won’t have to remember your lies.” – Louis Vincenti
They believe there should be a huge area between everything you should do and everything you legally can do. It helps them make more money too.

“Berkshire’s value will be higher in 20 years but it’s certain that the annual rate of percentage growth will be much lower.” –pg.  89
Berkshire Hathaway doesn’t work to please Wall Street. Berkshire works well because it has controlling owners. Buffet and Munger are trusted by their shareholders.
More people should consider the focused investment strategy of Munger and Buffet because it works. It’s not popular, but it is common sense.
Diversification: The idea of excessive diversification is madness. Almost all good investments will involve relatively low diversification.

When stock prices go up on a stock they like there have been several instances where they don’t buy the stock and lost billions in opportunity costs. When a stock price goes down on a stock they like, they will often buy more.

Short selling: Being short and seeing a promoter take the stock price up is very irritating. It’s not worth it to have that much irritation in your life.
Becoming a great investor takes a lot of learning over a long period of time. The only way to continue learning is to enjoy learning.
Mental Models can’t be presented easily as a list or step by step because you have to derive them yourself to ingrain them in your head.

Harvard Speech 1986

  1. Be reliable. Do what you say you will do.Learn from the mistakes of others. Educate yourself as much as possible.Continue to get back up after a loss in life. We all face adversity.Maximize objectivity to approach challenges clearer.

A Lesson on Elementary, Worldly Wisdom as It Relates to Investment Management and Business

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.
You must have multiple models across a wide range of disciplines.
Understand the elementary math of permutations and combinations and how to use this in real life.
Rule of psychology is to always tell people why because they will understand it better, consider it more important, and be more likely to comply.
The most useful and practical part of psychology can be taught in a week to an intelligent person and is “ungodly important”.
People who narrowly specialize receive advantages of scale. One example is cost reduction. Doing something complicated in larger volumes enables humans to do it more efficiently.
Social proof has an advantage of scale because the more people accept a product the easier it is for others to accept it.
The big companies don’t always win. As you get big you get bureaucracy.

Figure out where you have an edge and play to your circle of competency. If you play games where other people have the aptitudes and you don’t, you’re going to lose.
In human affairs, what determines the behavior are incentives for the decision-maker. For this reason, the manager wouldn’t make much money if they made few investments in winning companies because they would sit on their ass and wait. However, the client would be making all the money passively.
Warren and Munger like Benjamin Graham’s approach to investing. You determine the value of a business (what the whole enterprise would sell for if it was available). Take the stock price and multiply by the total amount of stocks and if the number is one-third the value of the business then you have a lot of edge going for you.

When you have a hammer, everything looks like a nail. They have said this quote at least FIVE TIMES…

It makes sense to load up on the few good insights you have rather than pretend to know everything about everything all the time.
Over the long run, it’s unlikely that the stock of a business to earn a much higher return than the business which underlies it.
Find businesses when they are small. For example: Buy Walmart when Sam Walton just takes it public.
What should a young person look for in a career?

  1. Don’t sell anything you wouldn’t buy yourself.Don’t work for anyone you don’t respect or admire.Work only with people you enjoy.

Solve Problems with Inversion: In life, just as in algebra, inversion will often and easily solve problems that others resist solution.
Avoid working directly under someone you don’t admire or can’t learn from.
“Spend each day trying to be a little wiser than you were when you woke up…Slug it out one inch at a time day by day. If you live long enough, like most people, you will get out of life what you deserve.”
Life can be hard, 3 things to cope with it’s challenges:

  • Have low expectationsHave a sense of humorSurround yourself with the love of family and friends

Live with change and adapt to it.
When you don’t know and you don’t have any special expertise, don’t be afraid to say so.

Try avoiding working with bad people. If you are in a situation where you must take the business, appeal to a man’s interest by telling him how his decisions could harm his reputation, family, career, etc.
If a man has a vast set of skills over multiple disciplines, he, by definition, carries multiple tools and, therefore, will limit bad cognitive effects from man-with-a-hammer tendency.

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