By Tren Griffin

The Complete Investor

People calculate too much and think too little.

Charlie Munger is most well known for being the vice chairman of Berkshire Hathaway controlled by Warren Buffet. Munger’s work, alongside, Buffet has seen Berkshire Hathaway’s provide a return to its investors on an unimaginable scale with a $1,000 invested in Berkshire in 1965 being work $27,000,000 vs $200,000 if simply invested in the S&P. However, studying Munger through a pure financial lens (this is just the sandbox that Charlie plays in) would skim the surface with Munger’s approach to decision making, human thought and life being applicable across all domains.

If you are most interested in Munger’s approach to human decision making, his famous talk, “The Psychology of Human Misjudgment”, is a great resource.

Keeping it simple

“If something is too hard, we move on to something else. What could be simpler than that?”

Munger is a follower of Benjamin Graham, the father of the value investing strategy using by Berkshire to this day. This strategy is simple in nature, however, it is “simple but not easy”. Most people cannot implement a value based strategy for reasons including deviating from the basic tenants and being emotional about decisions. As investing is a probabilistic activity, decisions made in ways that are sound do not necessarily produce the right results. Munger states that at Berkshire, “we have three baskets: in, out and too tough… We have to have a special insight, or we’ll put it in the ‘tough tough’ basket”.

Munger believes that the financial industry often has a interest in over-complicating processes’ and harvesting their living from the psychological and emotional dysfunctions of investors.

“It’s a very simple set of ideas and the reason that our ideas have not spread faster is they’re too simple. The professional classes can’t justify their existence if that’s all they have to say”

Margin of Safety

Munger believes that all investment decisions should carry a significant margin of safety similar to building a bridge.

“When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And the same idea works in investing”

The first rule of investing is to not loose money with the margin of safety often preventing you from breaking this rule.

Mental Models

My main take away from the book was Munger’s use of mental models. Munger believes that you should develop multiple mental models across disciplines to allow you to think about problems in many different ways and not get trapped in the prison of analyzing a problem through one world-view. Munger believes that understanding disciplines like biology, chemistry, history, philosophy and engineering makes you a better investor and decision maker.

“All the wisdom in the world is not to be found in one little academic department. That’s why poetry professors, by and large, are so unwise in a worldly sense. They don’t have enough models in their head”

“You must known the big ideas in the big disciplines, and use them routinely — all of them, not just a few. Most people are trained in one model — economics, for example — and try to solve all problems in one way. You know the old saying: to the man with the hammer, the world looks like a nail. This is a dumb way of handling problems.”

“What are the models? Well, the first rule is that you’ve got to have multiple models — because if you jut have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models.”

The blog Farnam Street brilliantly documents various mental models describing the need for various models — “Most of us, however, are specialists. Instead of a latticework of mental models, we have a few from our discipline. Each specialist sees something different. By default, a typical Engineer will think in systems. A psychologist will think in terms of incentives. A biologist will think in terms of evolution. By putting these disciplines together in our head, we can walk around a problem in a three dimensional way. If we’re only looking at the problem one way, we’ve got a blind spot. And blind spots can kill you.”

The Doubt-Avoidance Tendency

Researchers believe that it is a common human tendency to avoid doubt with the avoidance of doubt reducing the processing load of the brain. In behavioral economics, this is known as a “system 1 strategy” with this being ingrained in humans over thousands of years with it being a bad strategy to spend a long time deciding whether to run away once you hear a rustle in a bush.

Munger warns that investors must avoid this tendency and instead be always doubtful and curious.

On Envy

Munger repeatedly warns on the dangers of envy. Envy is an evolutionary habit which promotes us to acquire attributes or possessions beneficial for evolutionary fitness. However, now that we live in the age of abundance there is little upside to envy but large downside with envy clouding our judgement such as being to risky.

“Well, envy/jealousy made, what, two out of the Ten Commandments? Those of you who have raised siblings… or tried to run a law firm or investment bank or even a faculty, you know about envy. I’ve hear Warren say a half a dozen times, ‘It’s not greed that drives the world, but envy’”

“Remember, [Moses] said you couldn’t even covet your neighbor’s donkey.”

Circle of Competence

Buffet and Munger commonly talk about the need to stay in your circle of competence. You can only have a circle of competence if it has strong borders which will be known when crossed. Buffet describes how he looks for this mindset when selecting CEOs for Berkshire controlled companies with this prime example of this being Rose Blumkin of Furniture Mart.

“If you got about two inches outside the permiter of her circle of competence, she didn’t even talk about it. She knew exactly what she was good at, and she had no desire to kid herself about those things” — Buffer referring to Rose Blumkin