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Charles Munger (of Berkshire Hathaway): Elementary Worldly Wisdom (ycombinator.com)
135 points by apu on May 9, 2010 | hide | past | favorite | 24 comments

Charlie Munger is one of my few heroes. A great all-around thinker, about more than just investing. I highly recommend a dive into his mind via these two books:

Seeking Wisdom: From Darwin to Munger = http://www.amazon.com/dp/1578644283 = a deep read, mostly focused on cognitive biases

Poor Charlie's Almanack = http://www.amazon.com/dp/1578645018 = a big coffee table book of his speeches and essays, good for leaving on the kitchen table to read over a meal

I think if you order the books directly from Charlie Munger's company, the proceeds go to charity: http://www.poorcharliesalmanack.com/

Agreed - Munger has been one of my very few heroes for a long time now. Poor Charlie's Almanack is a great read.

Munger's concept of mental models is the basis for my book ("The Personal MBA"), which comes out in January. The project started because I was looking for a comprehensive treatment of Munger's models, but couldn't find one.

Munger's models also tend to be very clearly focused on making investment decisions, which is great, but tend to overlook how to start / grow a business, so that's what I set out to create.

This approach is now the basis of my work with my clients and course participants, with huge success. Mental models work wonders for people with little knowledge of a topic - they're a great way to teach people something useful quickly.

A great read.

One thing troubles me is that "great businesses" that make more money for their owners and raise prices for customers, seem to be less socially useful than the others, such as those in the airplane industry.

Here's the arithmetic for the 15% pa business, paying 35% tax, annually vs. after 30 years:

    1.15   ** 30 = 66.2117720;   * .65 = 43.0376518
    1.0975 ** 30 = 16.2980583
BTW: My Buffett-based investment approach is to get the total stockholder equity from a while ago (eg. a decade) and now, and calculate its annual growth rate [1], a kind of $-acceleration. Then qualitatively understand what makes the business profitable, and consider whether those factors are likely to continue for x years. Finally, use the growth rate to project x years into the future, and compare with investing in an index fund; but normalize by today's price of the stock (ie you usually pay more than $1 for $1 of shareholder equity). You can see how long it will take before the stock outperforms the index. If it does, with a margin of safety, buy it.

[1] It doesn't account for dividends, and includes valuations of IP and goodwill (which are opinions, not cash), and I'm sure has other flaws. It's crude, but accurate enough if you use a margin of safety; I tend to think more precision is spurious and misleading, like those 7 decimal places above.

Does it work? I've looked at about 10 likely companies, but only one looked really good (30% pa growth rate, and an artificially low price due to bad news). After 5 years, my return today is 212.20%, ie it's worth over 3 times what I paid (and that's ignoring its dividends). Theoretically, it would be 1.3 * * 5 = 4.7, but I paid more than $1 for $1 of equity; the growth rate subsequently dropped to 25% (which is still fantastic!), and the current market is a bit low. So, the margin of safety is important.

"The highest form a civilization can reach is a seamless web of deserved trust." http://www.deeshaa.org/2007/06/06/charlie-munger/

Munger is credited for Berkshire's first major tech investment in BYD. I think, unlike Buffett, Munger unabashedly displays his intellect. It turns a few people off, but if you can get past the brashness, there's much to learn from his approach to thinking.

I also recommend the two books (Seeking Wisdom & Poor Charlie's Almanack). The first is not only about Munger (and Buffett), but about other great thinkers like Darwin, Feynman, Einstein, Mark Twain.

I also definitely recommend watching some of the few videos available of him online:

His talk at CalTech (2008) (requires RealPlayer) 106 min. http://today.caltech.edu/theater/item?story_id=30623

His USC Law School Speech (2007) http://www.youtube.com/watch?v=L6Cy7UwsRPQ

Both are relatively recent, and not in his books.

"I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you." -CM

Anyone know of a good place to study the first mathematical models he talks about? Fermat and Pascal's stuff, and decision theory, I believe.

Any good online resources for learning the basics for these?

You start with wikipedia, e.g. http://en.wikipedia.org/wiki/Permutation

The question is how exactly are guys like Munger and Buffet using this to choose stock. I'm missing some obvious link apparently.

If you start thinking about investments by incorporating decision trees, I think you will start inverting and questioning the potential investment when it comes down to whether or not you should act. This is really helpful to get yourself in the mindset to look at downside risk and evaluate an investment from all angles.

Yeah, but where do permutations and combinations come in? I don't see it at all.

I also recommend his 2003 UCSB lecture paper: [PDF] http://www.tilsonfunds.com/MungerUCSBspeech.pdf

Allow me to be a bit marginal here and ask you, what was not-so-obvious in this annoyingly long talk?

I scrolled to random places a dozen times, read through a few paragraphs each time, and found nothing that would be surprising to me.

You can't get rich by following his "worldly wisdom" alone. You need (a) at least a 7-figure initial capital and (b) extreme intelligence and courage in order to get a miniscule chance of becoming a 9/10-figure rich.

Any counter-arguments are welcome.

Looking across different disciplines for mental models can be extremely useful when identifying potential investments. It might be something that is just intuitive to you, but it is not for most people -- especially business students.

A good example would be Michael Burry, who had Munger's talk on human misjudgment click when analyzing the housing/mortgage market. Munger's talk about human misjudgment was rooted in psychology and how perverse incentives can cause certain breakdowns to occur which lead to disastrous decision making.

Let's say Burry and another analyst were looking at the same set of data during that period (early 2000s). The analyst might have just seen a great trend - loans are up, deposits are up, employment is up, house prices are up. Everything is climbing which makes it so banks appear more safe as an investment.

Burry on the other hand, saw that data but came to a much more alarming conclusion. Right off the bat he started wondering what incentives create such prosperity and by digging deeper he was able to uncover that loan standards were being relaxed, that people were increasingly levering up, and that some banks were giving no-doc loans.

So what did Burry do? He figured out the best way to go short - the credit default swap trade and he was really the first guy to do it as a means of protecting against subprime mortgages. Along the way he generated huge returns.

You are right - you cannot get rich from worldly wisdom alone. But, if you incorporate mental models into your investment process you can often at least help protect against the downside. That in turn helps increase your ability to generate good returns.

> (a) at least a 7-figure initial capital

I don't think Michael Dell, Li Ka-Shing, Slim Helu, or Larry Ellison actually started out with anywhere near that sum of initial capital. From everything I've read, they started in ghettos and middle-to-working-class voids, or as immigrants.

I've read that it just takes extreme, almost Asperger's level of apathy toward risk (AKA chutzpah, balls, juevos, etc), and business acumen from a young age. Oh, and often a cold, utilitarian view of relationships, but not always.

Bill Gates wouldn't have taken off without his mother's help who arranged a contract with IBM for her son in the beginning. And I'm sure there are similar stories for the others too. Let's take Ellison's Government project called "Oracle" that the Govt. never used - looks very suspicious and we know very little about how exactly this turned into a private company.

I don't believe in their cheesy "self-made" stories with $1000 put into the company that eventually turns into a multi-billion corporation. That's just impossible.

The DOS deal was not the beginning of Microsoft. It was already a well-established company.

It is? Well then what the hell are we doing wasting our time on this damn board, then? We should be looking into Build-a-Bear and 10-minute oil change franchises.

I guess Sam's 5&10 shop was just as much BS as Betty Crocker, too.

I noticed you left out Dell's story. Did his orthodontist dad brace up all the kids in his hometown to afford the million to put down on Michael's computer-makin' biz?

Sometimes a businessman starts out with squat. If there is no "there" there, then what are we doing here?

To be a world class investor you need to start out with a huge bankroll. Horatio Alger stories are more prevalent with entrepreneurs. However, the list you gave doesn't really match up with your description. None of those people are "immigrants," Li Ka-Shing was from a wealthy family, Dell was the son of a stockbroker and orthodontist, etc.

I have a number of friends who started funds straight out of college. In almost all of these cases, these friends had been able to get in touch with wealthier, more established fund managers early on via the internet and have gotten their help with raising capital. So this wasn't a case of rich kids getting bankrolled by their parents.

These guys don't come from money. One started out with $2M in AUM in NYC, lives with two roommates, eats tuna fish every day, and has no entertainment budget. He doesn't go out to bars but spends his time at the library, museum, parks, etc -- free stuff.

But, that is the kind of sacrifice that has to be made in order to make living off of a $2M fund work. In the long run it makes sense because if you put up good returns, that $2M can scale fast. Two years into it, a friend that was managing $2M is up to $50M in AUM.

I can't speak for others, but to me the not-so-obvious was simply understanding/exploring the mental models Charles Munger uses to view and manipulate the world.

You can get rich by following his advice to place a few big, good bets. Also, many of us would be happy to grow a 5 to 6-figure net worth into a 7 to 8 figure net worth.

Munger's advice may seem like common sense, but common sense is not so common.

Notes from Charlie Munger's latest Q&A (just a couple weeks ago):


Thanks for the link. Good stuff. I had only seen a condensed version. But, man, scribd just gets worse and worse.

oh, this is brilliant:

Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figureā€”a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.

And that was 1994.

A long read, but well worth it.

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