By Tren Griffin

Charlie Munger

The Complete Investor

People calculate too much and think too little.

Who is Charlie Munger?

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

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.

Margin of Safety

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

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.

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.

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.