The Charlie Munger Checklists “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of o f things.” “It is not given to human beings to have such talent that they can just know everything about everything all the time but it is given to human beings who work hard at it, who look and sift the world for a mispriced bet, that they can occasionally find one. The wise ones bet heavily when the world offers them that opportunity. They They bet big when they have the odds. nd the rest of the time, they don!t. d on!t. It!s just that simple.” The Charlie Munger Checklist…for Psychology… “"rand "eneral #rinciple of $ocial #sychology% &ognition is ordinarily situation'dependent so that different situations often cause different conclusions, even when the same person is thinking in the same general subject area.” ' reward(punishment ' liking(loving ' disliking(hating ' doubt avoidance ' inconsistency avoidance ' curiosity ' )antian fairness ' envy(jealousy ' reciprocation ' influence from mere association ' simple pain avoiding psychological denial ' e*cessive self regard ' overoptimism ' deprival ' social proof ' contrast misreaction ' stress influence ' availability misweighing ' authority misinfluence ' reason respecting ' drug misinfluence ' use it or lose it ' senescence misinfluence ' twaddle ' +++#+- +++#+- of the above forces “The / standard causes of human misjudgment01eward(#unishement, +iking(+oving, 2isliking(3ating, 2oubt'voidance, 2oubt'voidance, Inconsistency'voidance, Inconsistency'voidance, &uriosity, &uriosity, )antian 4airness, 5nvy(6ealousy, 1eciprocation, Influence 4rom 7ere ssociation(ssociation, $imple #ain voiding voiding #sychological 2enial, 5*cessive $elf 1egard, veroptimism, ve roptimism, 2eprival 1eaction 8loss e*perience of possessed or almost possessed reward9, $ocial #roof, &ontrast 7isreaction, $tress Influence, vailabili vailability ty 7isweighting, Use It r +ose It, 2rug 7isinfluence, $enescence $en escence 7isinfluence, uthority 7isinfluence, 1eason 1especting, Twaddle, Twaddle, +ollapaloo:a 8in getting
e*treme conse;uences from streams flowing together(confluences of psychological tendencies acting in favor of a particular outcome9” The Charlie Munger Checklist…of Ultra Simple General Problem Solving Notions… 2ecide the big
. 2ecide big no brainer ;uestions first . pply numerical fluency ?. Invert @ think problems through in reverse A. pply elementary multidisciplinary wisdom never relying en tirely upon others /. =atch for combination of factors @ +ollapaloo:a effect The Charlie Munger Checklist…for Investing an !ecision Making… …Preparation. Discipline. Patience. Decisiveness… "isk @ ll investment evaluations should begin by measuring risk, especially reputational B Incorporate an appropriate margin of safety B void dealing with people of ;uestionable character B Insist upon proper compensation for risk assumed B lways beware of inflation and interest rate e*posures B void big mistakesC shun permanent capital loss Inepenence @ “nly in fairy tales are emperors told they are naked” B bjectivity and rationality re;uire independence of thought B 1emember that just because other people agree or disagree with you doesn!t make you right or wrong @ the only thing that matters is the correctness of your analysis and judgment B 7imicking the herd invites regression to the mean 8merely average performance9 Preparation @ “The only way to win is to work, work, work, work, and hope to have a few insights” B 2evelop into a lifelong self'learner through voracious readingC cultivate curiosity and strive to become a little wiser every day B 7ore important than the will to win is the will to prepare B 2evelop fluency in mental models from the major academic disciplines B If you want to get smart, the ;uestion you have to keep asking is “why, why, whyD” Intellectual humility @ cknowledging what you don!t know is the dawning of wisdom B $tay within a well'defined circle of competence B Identify and reconcile disconfirming evidence B 1esist the craving for false precision, false certainties, etc. B bove all, never fool yourself, and remember that you are the easiest person to fool #nalytic rigor ' Use of the scientific method and effective checklists minimi:es errors and omissions B 2etermine value apart from priceC progress apart from activityC wealth apart from si:e B It is better to remember the obvious than to grasp the esoteric B Ee a business analyst, not a market, macroeconomic, or security analyst B &onsider totality of risk and effectC look always at potential second order and higher level impacts B Think forwards and backwards @ Invert, always invert #llocation @ #roper allocation of capital is an investor!s number one job B 1emember that highest and best use is always measured by the ne*t best use 8opportunity cost9
B "ood ideas are rare @ when the odds are greatly in your favor, bet 8allocate9 heavily B 2on!t “fall in love” with an investment @ be situation'dependent and opportunity'driven Patience ' 1esist the natural human bias to act B “&ompound interest is the eighth wonder of the world” 85instein9C never interrupt it unnecessarily B void unnecessary transactional ta*es and frictional costsC never take action for its own sake B Ee alert for the arrival of luck B 5njoy the process along with the proceeds, because the process is where you live !ecisiveness @ =hen proper circumstances present themselves, act with decisiveness and conviction B Ee fearful when others are greedy, and greedy when others are fearful B pportunity doesn!t come often, so sei:e it when it comes B pportunity meeting the prepared mindC that!s the game Change @ +ive with change and accept unremovable comple*ity B 1ecogni:e and adapt to the true nature of the world around youC don!t e*pect it to adapt to you B &ontinually challenge and willingly amend your “best'loved ideas” B 1ecogni:e reality even when you don!t like it @ especially when you don!t like it $ocus @ )eep things simple and remember what you set out to do B 1emember that reputation and integrity are your most valuable assets @ and can be lost in a heartbeat B "uard against the effects of hubris 8arrogance9 and boredom B 2on!t overlook the obvious by drowning in minutiae 8the small details9 B Ee careful to e*clude unneeded information or slop% “ small leak can sink a great ship” B 4ace your big troublesC don!t sweep them under the rug …Preparation. Discipline. Patience. Decisiveness… The Charlie Munger Checklist…for %&track analysis… “what are the factors that really govern the interests involved rationally considered 8i.e. macro and micro level economic factors9 and what are the subconscious influences where the brain at a subconscious level is automatically” “ track analysis% what are the factors that really govern the interests involved here rationally considered 8i.e. macro and micro level economic factors9 and what are the subconscious influences where the brain at a subconscious level is automatically forming conclusions 8i.e. influences from instincts, emotions, cravings, and so on9” The Charlie Munger Investment Criteria 'ogic ( The )igh *uality +usiness “ver the long term, it!s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns FG on capital over AH years and you hold it for that AH years, you!re not going to make much different than a FG return @ even if you originally buy it at a huge discount. &onversely, if a business earns >G on capital over H or ?H years, even if you pay an e*pensive looking price, you!ll end up with a fine result. $o the trick is getting into better businesses.” “I!d say that Eerkshire 3athaway!s system is adapting to the nature of the investment problem as it really is. =e!ve really made the money out of high ;uality businesses. In some cases, we bought the whole business. nd in some cases, we just bought a big block of stock. Eut when you analy:e what happened, the big money!s been made in the high ;uality businesses. nd most of the other people who!ve made a lot of money have done so in high ;uality businesses.” a. 4ind them small b. 4ind them big c. nd ideally @ and we!ve done a lot of this @ you get into a
great business which also has a great manager because management matters. “$o you do get an occasional opportunity to get into a wonderful business that!s being run by a wonderful manager. nd, of course, that!s hog heaven day. If you don!t load up when you get those opportunities, it!s a big mistake0ccasionally, you!ll find a human being who!s so talented that he can do things that ordinary skilled mortals can!t. I would argue that $imon 7arks @ who was second generation in 7arks J $pencer of 5ngland @ was such a man. #atterson was such a man at Kational &ash 1egister. nd $am =alton was such a man. These people do come along @ and in many cases, they!re not all that hard to identify. If they!ve got a reasonable hand @ with the fanaticism and intelligence and so on that these people generally bring to the party @ then management can matter much03owever, averaged out, betting on the ;uality of a business is better than betting on the ;uality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. Eut, very rarely. you find a manager who!s so good that you!re wise to follow him into what looks like a mediocre business0” “If you!re going to buy something which compounds for ?H years at >/G per annum and you pay one ?/G ta* at the very end, the way that works out is that after ta*es, you keep >?.?G per annum. In contrast, if you bought the same investment, but had to pay ta*es every year of ?/G out of the >/G that you earned, then your return would be >/G minus ?/G of >/G @ or only L.M/G per year compounded. $o the difference there is over ?./G. nd what ?./G does to the numbers over long holding periods like ?H years is truly eye'opening.” “There are huge advantages for an individual to get into a position where you make a few great investments and just sit back and wait% Nou!re paying less to brokers. Nou!re listening to less nonsense. nd if it works, the governmental ta* system gives you an e*tra >, or ? percentage points per annum compounded” 1isks% paying /H or MH times earnings like in the Kifty 4ifties. Eut if you can find some fairly priced great company and buy it and sit, that tend to work out very, very well indeed. Some of Charlie,s Moels B "rowth $ub'position Untapped #ricing #ower B "raham $tyleO"reat 7anagementO=inner Take ll B +ow #ricedO7arketing dvantage8O$urfing Kew Technology9 B &ancer $urgery 4ormula 8#erfectly magnificent business submerged in a mess but still working where you find something sound and cut away everything and if doesn!t work li;uidate, sick' business'fi*'up, bunch of foolishness that could easily be cut out and cut out all the folly and go back to the perfectly wonderful business that was lying there and people come in temperamentally and intellectually designed so they are go ing to cut it out9 &++5&T IKKITI5$ 0 become a collector of inanities. Nou!ll never run out or get bored. “The number one idea is to view a stock as an ownership of the business and to judge the staying ;uality of the business in terms of its competitive advantage. +ook for more value in terms of discounted future cash'flow than you!re paying for. 7ove only when you have an advantage. It!s very basic. Nou have to understand the odds and have the discipline to bet only when the odds are in your favor. =e just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a periods of years.” “=e!re trying to buy businesses with sustainable competitive advantages at a low, or even fair, price.” 0betting on sure things0 “)eep learning and get better over time gradually. =arren has learned alot which allowed him to
e*pand his circle of competence so he could invest in something like #etro&hina. "et a little better over time so you!re virtually certain to make investments that are virtually certain to be good over time. 2iscipline, hard work and patience are the keys. ther people pass you by when you don!t learn. Nou have to work on it.” “light on financial yardsticks w( lots of subjective criteriaC can we trust managementD can it harm our reputationD what can go wrongD do we understand the businessD does it re;uire capital infusions to keep it goingD what is the e*pected cash flowD =e don!t e*pect linear growthC cyclicality is fine with us as long as the price is appropriate.” “don!t sell anything you wouldn!t buy yourself don!t work for anyone you don!t respect and admire work only with people you enjoy” “There!s no limit to what a man can do or where he can go if he doesn!t mind who gets the credit.” ' seamless web of deserved trust ' false precision, false certainty ' invert everything0just in case ' avoid e*tremely intense ideology ' “pounding it in” vs fle*ibility(destroying best loved ideas(adaptive “The best investing opportunities as mispriced bets on horses “=hat we!re really looking for are /H'/H odds which pay three to one”P “”1egard your good name as the richest jewel you can possibly be possessed of @ for credit is like fireC when once you have kindled it you may easily preserve it, but if you once e*tinguish it, you will find it an arduous task to rekindle it again. The way to gain a good reputation is to endeavor to be what you desire to appear.” @ $ocrates” “Taiwan M.F magnitude earth;uake damage 'Q “7uch of the damage resulted from inade;uate steel reinforcement in concrete structures”P “The antidote to man with a hammer is a tool kit full of tools, not just a hammer. nd use the tools checklist style because you!ll miss a lot if you hope the right tool just pops up unaided whenever you need it. Eut if you!ve got a full list of tools and you go through them in your mind checklist'style, you will find a lot of the answers you won!t find an y other way.” “5conomics should emulate physics! basic ethos, but its search for precision in physics'like formulas is almost always wrong in economics.” “=ell, how did I solve those problemsD bviously, I was using a simple search engine in my mind to go through checklist'style, and I was using some rough algorithms that work pretty well in a great many comple* systems, and those algorithms run something like this% 5*treme success is likely to be caused by some combination of the following factors% 9 5*treme ma*imi:ation or minimi:ation of one or two variables. 85*amples, costco or our funiture appliance store9 E9 dding success factors so that a bigger combination drives success, often in non'linear fashion, as one is reminded of the concept of breakpoint and the concept of critical mass in physics. ften results are not linear. Nou get a little bit more mass, and you get a lollapaloo:a result. nd, of course, I!ve been searching for lollapaloo:a results all my life, so I!m very interested in models that e*plain their occurence. &9 n e*treme of good performance over many factors. 85*ample, Toyota or +es $chwab9 29 &atching and riding some sort of big wave. 85*ample, racle9” “Too little attention to second and higher order effects. They chose not to consider effects of
effects on effects, and so on0hence why predictions and projections can be so far off. 8The movement of any individual piece affects, sometimes dramatically, the overall composition9” “void creating easily gameable systems and take into account second'order effects and the third'order effects in lying and cheating 8i.e. Kiederhoffer gaming the economics department system at 3arvard to get straight !s9. ne must think through conse;uences of conse;uences.” “5conomic systems work better when there!s an e*treme reliability ethos 8i.e. cash register, double entry bookkeeping9. nd the traditional way to get a reliability ethos, at least in past generations in merica, was through religion. The religion instilled guilt. nd this guilt, derived from religion, has been a huge driver of a reliability ethos, which has been very helpful to economic outcomes for man.” “The craving for perfect fairness causes a lot of terrible problems in system function. $ome systems should be made deliberately unfair to individuals because they!ll be fairer on average for all of us. Thus, there can be virtue in apparent non'fariness.” “#arado*% “private vices are public benefits”P “”It!s not bringing in new ideas that!s so hard. It!s getting rid of the old ones.” 5instein attributing his mental success to “curiosity, concentration, perserverence, and self criticism”. Ey self critisism, he meant becoming good at destroying your own best loved and hardest won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift.” “Theme of T1U$T% deserved reliance upon the character, values and integrity of those you live and work with. Ko matter how smart you are, there are smart people out there who can fool you if they really want to. $o, be sure you can trust the smart people you work with.” “I have succeeded mostly by restricting action to jobs and methods in which I was unlikely to fail” “The #erception system of man @ as man is easily fooled, either by cleverly thought out manipulation of man, by circumstances occuring b y accident, or by very effective manipulation practices that man has stumbled into during . you must both rank and use disciplines in order of fundamentalness . Nou must master the tested fluency and routinely use the essential parts of all four constitutents of the fundamental four'discipline combination, with particularly intense attention
given to disciplines more fundamental than your own ?. Nou may never practice cross'disciplinary absorption without attribution or departure from a Hk!s, >H;!s, biographies, histories, five newspapers a day. n airplanes, I read the instructions on the backs of seats. 1eading is key. 1eading has made me rich over time” @ Euffett” “Using 4orbes, =$6, 4ortune maga:ines periodicals to perform the function of the aircraft simulator if used to prompt practice in relating events to multidisciplinary causes, often intertwined 8i.e.
understood and e*plained, it can!t bode well for our competency in dealing with much else that is important.” “#eople are often massively irrational in ways predicted by psychology that must be taken into account in microeconomics.” “Think in reverse as you try and disprove your own hardest'won and best'loved ideas.” “”=e build too many walls and not enough bridges” @ Isaac Kewton” “cademic psychology, while it is admirable and useful as a list of ingenious and important e*periments, lacks intradisciplinary synthesis. In particular, not enough attention is given to lollapaloo:a effects coming from combinations of psychological tendancies. This is like rounding pi to an even three. It violates the injunction that everything should be made as simple as possible, but not simpler. In general, psychology is laid out and misunderstood as electromagnetism would now be misunderstood if physics had produced many brilliant e*periments like 7ichael 4araday and no grand synthesi:er like 6ames &lerk 7a*well. $econd, there is truly horrible lack of synthesis blending psychology and other academic subjects. Eut only an interdisciplinary approach will correctly deal with reality @ in academia as with the &oca'&ola company.” “Kot understanding elementary psychology well enough to avoid “new coke” @ very bright people @ is not satisfactory. These bad effects are a lollapaloo:a.” “The correct strategies are clear after being related to the elementary academic ideas brought into play by the helpful notions.” “Neah. I!m passionate about wisdom. I!m passionate about accuracy and some kinds of curiosity. #erhaps I have some streak of generosity in my nature and a desire to serve values that transcend my brief life. Eut maybe I!m just here to show off. =ho knowsD” “I believe in the discipline of mastering the best that other people have figured out. I don!t believe in just sitting down and trying to dream it all up yourself. Kobody!s that smart0” “There!s a lot of simple stuff that many of you are ;uite capable of learning. nd your lives will work way better, too, if you do. #lus, learning it is a lot of fun. $o I urge you to learn it. “ “”$cience cannot solve the ultimate mystery of nature. nd that is because, in the last analysis, we ourselves are a part of the mystery that we are trying to solve” @ 7a* #lanck” “”It is not the possession of truth, but the success which attends the seeking after it, that enriches the seeker and brings happiness to him.” @ 7a* #lanck” “Eut, whatever you decide, I think it!s a huge mistake not to absorb the elementary worldly wisdom if you!re capable of doing it because it makes you better able to serve others, it makes you better able to serve yourself, and it makes life more fun. $o if you have an aptitude for doing it, I think you!d be cra:y not to. Nour life will be enriched @ not only financially, but in a host of other ways @ if you do.” “"iving rules like “6udges shouldn!t talk about legal issues that aren!t before them” without giving reasons is cra:y. The human mind is not constructed so that it works well without those reasons. Nou!ve got to hang reality on a theoretical structure with reasons. That!s the way it hangs together in a usable form so that you!re an effective thinker.” “nd to teach doctrines @ either with no reasons or with poorly e*plained reasonsD That!s wrong” “7any of the legal doctrines are tied to other doctrines. They!re joined at the hip. nd, yet, they teach you those legal doctrines without pointing out how they!re tied to other important doctrinesD That!s insanity @ absolute insanity.”
“3ard science and engineering tend to be pretty reliably done in schoolsV. Eut the minute you get outside those areas, a certain amount of inanity seems to creep into academia @ even inV academia involving people with very high IW!s.” “The whole lawV school e*perience would be much more fun if the really basic ideas were integrated and pounded in with good e*amples for a month or so before you got into conventional lawV school material. I think the whole system of education would work better. Eut nobody has any interest in doing it.” “If you!re like me, it!s kind of fun for it to be a little complicated. If you want it totally easy and laid out, maybe you should join some cult that claims to provide all the answers.” “5verything should be made as simple as possible, but no more simple.” “If there are H factors and they interact some, you!ll just have to learn to handle it @ because that!s the way the world is. Eut you won!t find it that hard if you go at it 2arwin'like, step b y step with curious persistence. Nou!ll be ama:ed at how good you can get. “ “To the e*tent you become a person who thinks correctly, you can add great value.” “Nou have to know when to trust e*perts where you have no wisdom at all and when you override e*perts who may have incentive caused bias decisions. In effect, you got to know what you know and what you don!t know. =hat could possibly be more useful in life than thatD =hen you don!t know and don!t have any special competence, don!t be afraid to say so. 2on!t screw up the hive and do a bee dance you have no knowledge of. Kobody e*pects you to know everything about everything. &onfidently answering ;uestions about which you don!t have any real knowledge is asinine.” “=hat I!m against is being very confident and feeling that you know, for sure, that your particular intervention will do more good than harm, given that you!re dealing with highly comple* systems wherein everything is interacting with everything else.” “5ach person has to play the game given his own marginal utility consideration and in a way that takes into account his own psychology. $o you have to adapt your strategy to your own nature and your own talents. I don!t think there!s a one'si:e'fits'all investment strategy that I can give you. 7ine works for me. Eut, in part, that!s because I!m good at taking losses. I can take em! psychologically. nd, besides, I have very few. That combination works fine.” “Nou will make mistakes, but you can learn to make fewer of them than other people and fi* your mistakes faster when you do make them. Eut there!s no way to live an ade;uate life without mistakes. The trick is to get so you can handle mistakes. #art of what you must learn is how to handle mistakes and new facts that change the odds. +ife, in part, is like a poker game, wherein you have to learn to ;uit sometimes when holding a much loved hand. The tendancy is to put in
3ave a sense of humor $urround yourself with the love of friends and family” “bove all, live with change and adapt to it.” “=e look for no brainer decisions. =e don!t leap over seven foot fences0we look for one foot fences with big rewards on the other side. $ucceed by making the world easy for yourself, not by solving hard problems.” “It doesn!t help us merely for favourable odds to e*ist. They have to be in a place you can recogni:e them. $o it takes a mispriced opportunity that you!re smart enough to recogni:e. nd that combination doesn!t occur often. EUT IT 25$K!T 3R5 T. If you wait for the big opportunity and have the courage and vigor to grasp it firmly when it arrives, how many do you needD Take the top ten business investments Eerkshire!s ever made. =e would be very rich if we!d never done anything else @ in two lifetimes. $o, again, there isn!t any system for giving you perfect investment judgment on all subjects at all times. Nou have here, rather, a method you can use to sift reality to obtain an occasional opportunity for rational reaction. If you take that method into something as competitive as common stock picking, you!re competing with many brilliant people. $o, even with our method, we only get a few opportunities. 4ortunately, that happens to be enough.” The Multi !isciplinary Munger !iscussion Notes 7ath @ compound interest, permutations(combination(decision tree theory, cost(benefit analysis ccounting @ limitations 5ngineering @ ;uality control, back up systems, breakpoints $tatistics @ gaussian(normal distribution(bell shaped curve #hysics @ critical mass Eiology(#sychology @ why why why for compliance and giving why, perceptual apparatus and function and know it!s limitations, who is going to do what where when an d why, rational and subconscious influences, pavlonian ie #aley, munger misjudgement list 8reward(punishment incentives, liking(love'disliking(hating, doubt avoidance, inconsistency avoidance, curiosity, kantian fairness, envy(jealousy, reciprocation, influence from mere association, simple pain avoiding psychological denial, e*cessive self regard, overoptimism, deprival, social proof, contrast misreaction, stress influence, availability misweighing, authority misinfluence, reason respecting, drug misinfluence, use it or lose it, sensescence misinfluence, twaddle9 7icroeconomics @ ecosystem niche, advantages of scale 8cost reductions along e*perience curve and more volume via incentives and more efficient output, geometry ie more volume per unit area of steel, advertising media usage capability, informational ie glot: gum, psychological social proof subconscious and conscious, overwhelming cascade winner take all dominance ie city newspaper, allowance for greater speciali:ation vs big fat beaucracy, purchasing power thus lower merchandise cost and little labratories ie chainstores, patents(trademarks 8ie trademark system well known big operation9(e*clusive franchise 8ie > of ? stations with limited play or small monopoly of store inside airport9, new capital flow through invested into lousy business that will kill or bi: that will help and G return over H years paid a little more e*pensively 0 trick is getting into better businesses, and that involves all these advantages of scale you could consider momentum effects9
&ircle of competence Eet seldom, bet heavy 3ow find great companiesD a. when small b. when big c. great managers 8if had to choose bet on the business momentum, not the brilliance of the manager. Eut rarely you find a manager so good you!re wise to follow him into what looks like a mediocre business9 4rictional costs 4ind a few, sit back and wait 8large disaster can come from large investment too high priced but if you can find some fairly'priced great company and buy it and sit, that tends to work out very well9 Ultimate no brainer% UK251#1I&IK" 0 Untapped #ricing #ower 8growth stock model sub position sub position of graham future earning power ideaV, with brilliant management is perfect 0this model is like finding money in the street if you have the courage of your convictions9 =ashington #ost 2ream 7odel% bought at about HG of value to a private owner graham style basis at >(/th obvious valueV and in addition faced
