18: The wit and wisdom of Charlie Munger

Hi, I just finished this book about the life and wisdom of Charlie Munger from Berkshire’s Hathaway. oh, you’re a fan of Berkshire? Okay, let’s dive right in.

The internet is awash with quotes and advises from the richest man alive, Warren Buffet. Warren has enjoyed the fame and he reveled in it. But, Berkshire Hathaway is the product of a joint effort of two of the most unique minds on the planet: Warren Buffet and Charlie Munger. Charlie is the silent, wise guy in the room, mostly known for his "nothing to add" comments during the annual shareholder meetings. But Charlie as Warren describes him has the fastest 30 second mind on the planet, making connections at a breakneck speed before Warren even finishes the sentence. What made Charlie the perfect partner for Warren? What is so special about him?
Charlie had started his career as a lawyer before starting taking over Berkshire with Warren. Charlie had studied physics, chemistry, went to the military, and dabbled in many other fields when he was young.

Throughout the book and the 11 talks he gave at several places, Charlie emphasizes what he thinks made him successful. He argues that in order to succeed in life you have to build a latticework of mental models in your mind that contains the biggest ideas in various different fields( physics, engineering, chemistry, philosophy, algebra, arithmetics,accounting, psychology, economics...) and upon which you integrate the experience you acquire in real life amd the learnings you accumulate through people you study and learn from vicariously. Charlie underlines the importance of learning from others mistakes amd not committing the same mistake. Hence the value of reading:

In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the timenone, zero. You'd be amazed at 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."

Here is Charlie praising Warren for his constant learning:

"It's hard to believe that he's getting better with each passing year. It won't go on forever, but Warren is actually improving. It's remarkable: Most men in their seventies are not improving,but Warren is ".

The main premise prevalent in Charlie's philosophy is that Man shouldn't fool himself and he is the easiest man to fool. So lattice work of mental models following a multidisciplinary approach to learning, learning vicariously as much as possible and through experience, inversing problems, thinking backward and forward to come up with novel solutions.

I've long believed that a certain system which almost any intelligent person can learn works way better than the systems that most people use. What you need is a latticework of mental models in your head. And, with that system, things gradually get to fit together in a way that enhance cognition.

And now comes the duty to seek worldly wisdom as Charlie puts it. Charlie thinks that there is removable ignorance everyone can exorcise out of themselves by a bit of effort. Doesn't matter if you deem yourself intelligent or stupid, there are areas where, if you removed this tiny ignorance you have, you'll fare much better in life. Speaking of not being confident of how intelligent you are, Charlie talks about how one should pursue areas where he is competent. He calls it the circle of competence, where you operate in a cricle where you're the best of something and you know where your limitations are and where high risks start. You can of course seek out ways to enlarge your circle of competence.

Charlie has become known: lifelong learning,intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, willingness to test one's own beliefs

When thinking what to pursue, think of it this way: 1third of people are talented at some narrow skill like golf,tennis,and these games that you know you just don't have the necessary aptitude to excel at. You don't force it here,you seek out what the 2 third of people can do but don't. Choose the multidisciplinary approach.
When making investment decisions, Munger and buffet work under this framework: they think of life as a 20 slot opportunities. Now,if you only have 20 big opportunities in life, you'd think more about how you'd spend those opportunities. So, Berkhire Hathaway invest in companies that will make the biggest return on investment( think Cocacola). Charlie argues that over your life you'd be lucky to have more than 15 insights or so where you see something others are oblivious to. You need to use these insights wisely across your given 20 slots. Charlie and buffet make these decisions when they see a mispriced opporunity or where the win is virtually guaranteed, of course when all the decisiom pass all Charlie's filters( what are the immediate benefits for the two parties, what subconscious biases are playing a role here, what are the incentives of the two, what are the second order consequence of this acquisition, are in our circle of competence?...). Berkshire Hathaway is known as the compund interest machine. Charlie thinks that business should defer taxes until 20-30 years later, as opposed to every year tax which over time compounds and the rate of return declines overall.
Charlie's influences included the intelligent investor's Ben Graham amd Benjamin Franklin. He didn't stop at what Ben Graham had to teach him but adopted newly developed strategies of his own: you make a big acquisition and you "sit on your ass" for the rest of your life.
In one of his talks, Charlie criticises the way the educational system is balkanized into isolated fields. He reiterates how imporatnt it is we have more multidisciplinary teachers. In another talk, Charlie brings up economics complexity and how it has become isolated as well. He mentions Adam smith's invisible hand, the pin factory, and Keynes's the tragedies of the commons to illustrate the extent to which today's economics has failed the rest of society.

I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas. I think it’ll work better for you in life and work better in education. It is way better than just learning the basic concepts.''

In another talks, one of the fields where data are messed up and professors are not doing a good job is psychology. Charlie thinks that psychology despite being the most important field one can learns is poorly communicated. He sheds the light on our psychological biases and he lists 25 psychological tendencies we're unconscious of and how we can correct for them: the liking/hating tendencies, the pavlovian conditioning/endowment effect tendency, social proof tendency, deprival superresponse/ award superresponse tendencies, availability misweighing tendency, pain avoidance psychological denial tendency, over self appraisal tendency, authority misinfluence tendency, free association, reason respecting tendency, twaddle tendency( not getting the job done) LALLAPALLOZA effect, a term charlie coined which means a combination of several paychological tendencies which causes some huge impact negative or positive. One should make a checklist of these 25 psychological tendencies before making a rational,objective decision.
Charlie warns of fooling of one self by having a chauffeur knowledge, as in the story where Max Plank did so many lectures that the chauffeur once asked him to lecture in his stead and when asked a follow up question he freezes. One should have the physicist's knowledge not the chauffeur's who thinks he knows stuff.
Surprisingly enough,Charlie thinks of his younger self a bad role model for the young. He thinks that smart people should not waste their years managing money, cause that is not a good use of one's life. One better gets into the hard sciences and solve engineering problems that create wealth,increase the gdp of the world economy and advance civilization. The world of finance and managing money is a place where a huge amount of capital is circulating between traders, one loses on the expense of the other, with no real value for society.
This book is a wealth of worldly wisdom. Charlie Munger is witty, funny, and wise. He left a big impression on me and I'm now ready to do my duty and acquire as much worldly wisdom as I can.

Charlie has a touching essay taking about his old age at the beginning of the book. I will leave you with this:

The best Armour of Old Age is a well spent life preceding it.