Since we read less and less, here is the TLDR;
You will have only a limited number of opportunities in your life. When you encounter one, bet big on it.
Learn basic ideas from every field of work everywhere.
Become a lifelong learner and aim to get wiser every day.
Have a sense of humor; chances are, life will be rough, with many ups and downs, and you need a way to handle the downs.
Create mental models that incorporate human tendencies and psychological pitfalls, and identify the world with one of your mental models.
Realize the importance of Compounding Returns.
Invert: whenever you want to solve a problem, ask yourself, what would be the solution to the opposite problem?
Charlie (left) and Warren (right)
Charlie is best known for being the mentor and business partner of Warren Buffett; the duo has together created the investment firm Berkshire Heatway. Berkshire is one of the world’s most valuable 10 companies in the world.
What I really admire about Charlie is how he has had his fair share of unfortunates in life and has been able to rise up from them. Charli Munger participated in WW2 in the midst of his studies and lost his first child when he was 9. Yet he has helped create a business empire, and at the end of his life, has given away 75% of all his wealth to philanthropy while having a family of 9. Warren, on his part, has pledged to give away 99% of all his wealth. If the duo had never given away their wealth, Warren would be worth $400 billion (making him the second richest person in the world today) , and Charlie would be worth $16 billion (instead of $2.6 billion). This shows the impact of the good that they have done in the world.
A quite remarkable achievement, and let’s explore what this person has shared as lessons with us in his book “Poor Charlie’s Almanac”. I recently read this book and was very inspired to share the life lessons from it. To be more precise, the book is a collection of talks given by Charlie and edited by Peter Kaufman in 2007.
I will share the lessons I took from the book, so don’t expect a summary. It’s what I found the most interesting and original ideas. My suggestion: go read the book anyway.
1. You will have limited opportunities in your life, learn to size them and Bet Big!
This is the most unique advice I have taken from Charlie, also the biggest change that Charlie has added on top of Ben Graham, who was the previous mentor of Warren Buffett.
The idea is that there are only limited opportunities in life, and you will only encounter some of them. This is not only true for investment and business but also for every other aspect of life. His idea: when you find that opportunity, GO BIG! Of course, a big bet means bigger risk, but the advice from Charlie is: pull up your courage, it will be worth it!
Let’s make this more concrete and use investment as a basis. If you look at any portfolio, you will see that most of the gains are coming from a handful of investments. This is partly coming from the nonlinear nature of the business, the so-called power law. The idea here is to realize that this will be the case, and when you find a winner, don’t just allocate 10% of your capital to 10 businesses that you think are OK. If you find an opportunity, bet big on it! Berkshire has done that; they pick a few investments, and most of their capital has been invested in those.
Charlie makes the following analogy: you are graduating from college and imagine they gave you 20 punch cards to invest in companies, and that’s all. You don’t get 1 more, 1 less. You would be very careful to use any of these punch cards in any company. And that’s a reality that we need to face if we look at history: a person will approximately get 20 such insights, opportunities in life, and that’s it. So if you were to find one, bet big on it.
I extend this to the other realms of life; you will also meet a limited number of truly remarkable people in your life. Whether in a job opportunity, a business partnership, a friend, or a lover, you get limited opportunities. If you find that, go big!
2. Learn basic ideas from every field.
Our education system is made such that we have departments and departments which don’t interact as much as they ought to. Charlie calls this “balkanization” of academia. Of course, economics is very much tied to psychology and statistics. They may create these turfs while in college, but as an independent thinker, you should be able to cross these boundaries.
Main ideas that contribute to every field are learnable by everyone. You can get to 95% understanding of a field by just knowing a handful of ideas, and it won’t take you that long. Take physics, for example; you need to know about Newton’s law of motion, and that they work most of the time, and in the quantum world, there is a different dynamic. And in its essence, that dynamic is that nothing can be known for certain, and everything works in terms of probabilities. This is enough for having worldly wisdom. Now apply the same idea in every field. Psychology is the most important one. It ties into every interaction we have with other people.
You should have mental models of the world, which stem from the main ideas of each field. Charlie’s approximations: You need about 100 such models of the world. 1 such model would be a binomial distribution. Is the thing you are observing falling into this model? If not, find another model to fit this pattern that you are seeing.
3. Become a lifelong learner
According to Charlie, it’s a moral duty to become wiser. The goal should be to become a lifelong learner because there is so much to learn. If you aim to go to bed a little wiser, your life will become much more enjoyable. You will be able to understand the world around you, you will feel much more in control, and it’s just so fun to know stuff.
And what happens if you stop learning? There is a case of a very famous psychologist, Skinner, who has shaped the world in the 1960s by the experiments he did to show how reinforcements can be used to teach rats and apes incredible tasks. He was the most famous psychologist of his time because of this study. Hi, a study showed the world the importance of positive and negative reinforcements. But of course, the world is more complicated than that. What Skinner did was to stop learning, and he tried to explain the whole human behavior via his reinforcement idea. And of course, the world is much more complex than a single person can explain. So he was later discredited and shamed. All because Skinner stopped learning and adjusting to other developments in the world. If this can happen to the world’s top scientist, it can happen to you.
4. Have a sense of humor
The idea is, if you work for it, you will get what you want out of life. But life is not linear, so you will be struck by misfortunes. Having lived through war, a loss of a child, Charlie has been able to pick himself up from the unfortunates of life. His advice: have a sense of humor.
I want to add his response to the question verbatim. When asked “What’s your advice for young people?”, Charlie gives the following advice.
“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step, you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts… 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.
Life in its various passages can be hard, brutally hard. The three things I have found helpful in coping with its challenges are
Have low expectations
Have a sense of humor
Surround yourself with the love of friends and family.”
5. Learn about human psychology
Humans behave like animals living in limited-size, dominance hierarchies. This has profound implications. First of all, we are not rational. What does it mean to not be rational? It means we behave in ways that will hurt us, yet we still do it. Its becasue our emotional systems belong to a world where we had close connections with the people who belonged to our dominance hierarchy and had hostilities with people from other dominance hierarchies.
We have all kinds of biases, and we are imperfect in all kinds of ways. If we don’t take this into account, then we might fall into traps.
Following up on the basic idea principle, we can get 95% of the benefits of psychology by learning the main ideas. In his talks, he comes up with 25 principles. Listing all of them would be too much for this article. If you are curious, put it in the comments, and I would be happy to write another blog on these 25 principles.
Let’s give an example from Charile’s list: reward and punishment superresponse tendency. It really means that incentives matter. FedEx, for years, struggled to make the night cargo shipments on time, which delayed the whole operation. They consulted with multiple companies, and they tried to do multiple solutions; giving extra money to workers on night shifts, etc., but the problem was never solved, and it caused great pain to the company. Only when a smart fella realized that the incentives were set up wrong. The workers were getting paid hourly. So they were always trying to fill the 8-hour shift to the fullest to get paid the maximum. And it didn’t matter how much more you paid them, they were aiming to get things done just barely in time. So instead, this fella made it such that workers would get full compensation if they finished the job; and the night shipmen work was done 3 hours. And FedEx night shipments were working like clockwork.
6. Importance of compounding returns
I have learned this idea by studying Warren and Charlie in general. The idea is simple: invest in a great business and wait for it to compound. The duo has done great returns by “sitting on their asses” and just waiting for the investments to compound.
To give examples, the longest-held stocks of Berkshire are
Coca-Cola: Held since 1988, initial investment: 1.3 Billion, total income (dividend and appreciation): 29 Billion
American Express: Held since 1991, initial: 1.3 Billion, total income: 44.9 Billion.
“The first $100,000 is a b****, but you gotta do it”. Meaning that after the 100.000, compounding will take care of itself.
7. “Invert, always invert.”
In many of the talks that Charlie gives, he inverts the question and tries to answer it. For example, “how to have a miserable life”. Let’s see if this idea holds by giving the examples he shares
Be unreliable; don’t keep the promises that you make.
learn everything for yourself, never take lessons from other people’s lives
If life makes you go down, stay there and never recover from the battle of life
He makes the case for many other things, such as how a country should be prosperous by answering the question, “How would you make this country suffer?” And in its essence, this is the way science works. Science makes a hypothesis and then tries not to prove that, but to disprove every other possibility. You cannot actually prove anything. And this is true of my own work as well. We are doing formal verification to prove that a system works, but what we actually do is disprove everything else. So in order to verify that X is true, we need to search all the other cases where X is false and conclude that X is true, bc it cannot be otherwise.
Coming to the end of the article, I want to finish it with the following words by Charlie, and hope that this article helped you become a little wiser.
“There is an old two-part rule that often works wonders in business, science, and elsewhere: 1. Take a simple, basic idea. 2 Take it very seriously.”