Insights from One of the World's Greatest Investors - Waller's Reading Room
Legendary investor and philanthropist Charlie Munger passed away in November of 2023. He and his partner Warren Buffet built one of the most successful investment management companies in history. Their investments often outperformed the return of the markets best index and mutual funds. How did he do it? What were some of his guiding philosophies?
Poor Charlie’s Almanack is a collection of his speeches and writings. They provide direct insight into his mindset and investing philosophies. These are my key takeaways.
#1 Charlie Munger’s General Investment Philosophy
I’ll start by providing Munger’s guiding principles.
Bet big on a small number of high potential companies - Charlie spent a lot of time evaluating the growth potential and health of companies. Understand their balance sheet, leadership dynamics, and competitive landscape. Once he finds a truly rare company, he bets big on it by investing a large percentage of his available funds into it. He does not believe in overdiversification of investing. He does his due diligence to pick the very best company and pushes all his chips to the table.
Be patient and disciplined, yet extremely decisive - “Extreme patience combined with extreme decisiveness”. Charlie is like the crouching tiger. He waits patiently for the best opportunity and uses all available financial analysis tools to ensure he’s making the best investment. He may have appeared to some as indecisive or apprehensive. Yet, once he came to the conclusion that a particular investment showed the most promise, he was all-in.
Leverage best practices from all disciplines, not just your own - We’ll talk more on this later, but Charlie strongly believes in a multi-disciplinary approach to evaluating investment opportunities. He uses elements of psychology, economics, biology, and others to better inform his investment decisions. Many people become siloed in their industry or discipline. Charlie believed in using the best ideas from different disciplines.
#2 Take a Multi-Disciplinary Approach to Problem Solving
This is one of my biggest takeaways from the book. Charlie strongly believed in using elements of psychology, economics, physics, and other disciplines to solve problems in completely different fields. He searched for synergy between theories and ideas. He did not try to become an expert in all things. Yet, he did believe strongly in understanding the core concepts of different disciplines and how they apply in life.
These include theories like evolutionary biology, social proof tendencies, and the Lollapalooza effect. After reading this book, I’m committing to learning more across disciplines and finding synergy in finance and engineering.
#3 Psychology and Economics Are Most Tightly Bound to Financial Investing
Munger believes strongly in the use of theories from behavioral psychology and microeconomics. When investing, we tend to forget that companies are more than stock tickers, balance sheets, and cash-flow statements. Companies are made of people (psychology) and people must consume whatever the business is producing (economics). By only looking at the financial makeup of a company and ignoring human psychology and economics, investors are destined to fail.
#4 Use Checklists Often
Checklists are used commonly in safety critical industries by pilots, healthcare professionals, and military operators. Munger believes other industries could gain immensely by use of common sense checklists before performing an action. He uses checklists to evaluate companies before deciding to invest.
In finance, metrics like Net Present Value, Internal Rate of Return, and estimated cash flow are good checklist items to ensure a project is worth investing in. Creating and abiding by a checklist will help prevent poor decision making and likely save much pain and suffering.
#5 Psychological Biases to Look Out For
Charlie has a list of 25 psychological human misjudgment tendencies that cause people to make poor decisions. I’ll summarize my top 7.
Reward and Punishment Super-response Tendency (Incentives) - “Get the incentives right”, says Munger. Incentives are extremely powerful. This is both good and bad. How humans are incentivized by rewards and punishment play an oversized role in the performance of all endeavors. Leaders should be very careful to incentivize good behavior and de-incentive bad behavior.
Envy/Jealousy Tendency - Munger notes, Moses took words from God himself on the importance of avoiding envy. Four out of ten of the Ten Commandments relate to the power of human envy (adultery, stealing, coveting your neighbor’s wife, coveting your neighbor’s goods). The effects of envy play a huge role in human behavior. Beware of your own envy and the envy of others.
Simple, Pain Avoiding Tendency (Denial) - People tend to avoid coming to grips with the reality of a situation if that reality will cause them a lot of psychological pain. This has implications in business and life. The truth is often unpleasant. It’s typically much easier to live in denial or create alternative realities to support denial.
Excessive Self-Regard Tendency (Ego) - Beware of your tendency to believe you are a special snowflake. You are 1 of 8,000,000,000 people walking this planet. Many people have come before you and will come after you. Check your ego by working with others and remaining humble.
Social Proof Tendency - Social proof can work for us or against us. Following the crowd when trying to find where the Baseball stadium entrance is may be helpful. However, just because others are partaking in an activity, it doesn’t always mean it’s the best decision for YOU. Be skeptical of social proof, it is often just really good marketing.
Stress Influence Tendency - When stressed, humans tend to take the path of least resistance. The path of least resistance, or the easy way, is often not optimal. Be self-aware of how your stress level impacts decision making. Humans tend to make lower quality decisions as stress level increases.
Lollapalooza Tendency - Lollapalooza is an annual American four-day music festival held in Grant Park in Chicago. It is truly a cultural phenomena with attendance of nearly 500,000 people annually. Munger states, the Lollapalooza tendency is, “the tendency to get extreme consequences from confluences of a psychological tendencies acting in favor of a particular outcome”. Essentially, this means explosive unpredictable success due to the combination of different psychological factors working in your favor. The founders of Lollapalooza likely did not envision the level of success encountered with their event. It eventually took a life of its own and became bigger than any one person. The same effect can be seen elsewhere. This can work in your favor if you understand human psychology.
Actions or habits I will take as a result of reading this book:
Learn best practices from other disciplines like psychology, economics, and biology
Create and abide by checklists to prevent forgetting things and avoid poor decision making
Be more self-aware of human biases and misjudgment
Waller’s Reading Room Rating (W3R) for this book:
Purpose/Persuasiveness - Did the author convince me to adopt his/her point of view? - 5 out of 5 stars
Clarity/Conciseness - Does the author have well thought out and clearly articulated ideas without a bunch of fluff? - 4 out of 5 stars
Ideas/creativity - Does the author have a unique perspective and convey the message creatively? - 5 out of 5 stars
Thanks for reading this edition of Waller’s Reading Room! If you enjoyed it or have thoughts, you can reply directly to this email and let me know. Don’t forget, I’m always taking recommendations, let me know what I should read next.
