Charlie Munger’s insights

Here’re some strong opinions that have worked well for Charlie Munger who’s the less well known partner of Warren Buffett. The filters and concepts he and Buffett use for investing have produced incredible returns. I’ve shortened some and combined some for clarity:

Often just a few actions that produce most of what we are trying to achieve.

The big thing to do is: avoid being wrong. A lot of success comes from knowing what you really want to avoid. Avoid what might cause the opposite of what you want to achieve because a single, big mistake could wipe out a long string of successes.

Hire people genetically able to recognize and avoid serious risks, including those never before encountered. Look for three things: intelligence, energy, and character. If they don’t have the last one, the first two will kill you.

If a buyer doesn’t care about whose product or service he uses, industry economics are certain to be unexciting, or even disastrous. Take candy bars for example, customers buy by brand name, not by asking for a “two-ounce candy bar”. But it doesn’t work with sugar: people don’t ask for “a coffee with cream and C&H Sugar”.

Look at stocks as part-ownership of a business, and at market fluctuations as your friend to profit from folly rather than participating in it.

Why should we want to play a competitive game in a field where we have no advantage – maybe a disadvantage – instead of playing in a field where we have a clear advantage?

Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term success.

Use “negative” rules – tell people what they can’t do.

If you want to ruin your civilization, pass laws people can easily cheat. It’s much better to let life be hard – than to create systems that are easy to cheat.

With the Navy Model there’s no excuse. If your ship goes aground, your career is over. It doesn’t matter whether it was your fault or not. It’s a rule for the good of all, all effects considered. Civilization works better with some of these no-fault rules. Considering the net benefit, I don’t care if one captain has some unfairness in his life.

Say no to anything that has a strong chance of killing you.

I walk away from anything I don’t understand or can’t quantify or doesn’t work. I only deal with people I trust.

Extraordinary discipline does not eliminate losses; it does prevent foolish losses. We can say no in 10 seconds to 90%+ of all things, simply because we have these filters.

Evaluate new business ideas using four criteria as filters:
* Can I understand it?
* Does it look like it has some kind of sustainable competitive advantage?
* Is the management composed of able and honest people?
* Is the price right?

A checklist must include each critical item necessary for “safety” and avoiding “accidents” so we don’t need to rely on memory for items to be checked. If there are very important items that aren’t on your checklist, you can crash.

A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind. There’re often just a few actions that produce most of what we are trying to achieve. We make fewer and better decisions. The art of being wise is the art of knowing what to overlook.

It’s usually far more profitable to simply stick with the easy and obvious than to resolve the difficult. A good business throws up one easy decision after another, whereas a bad one gives you horrible choices, decisions that are extremely hard to make.

Nobody keeps a record of their erroneous prophecies since they are infinite and everyday. We pay no attention to times when nothing happens. We shouldn’t find significance in amazing past events. Mysteries are not necessarily miracles.

You only have to get rich once. Added money has no utility whatsoever. We never risk something we have and need for something we don’t need.

After years of buying and supervising a great variety of businesses, we haven’t learned how to solve difficult business problems. What we’ve learned is to avoid them. We’ve concentrated on identifying one-foot hurdles we could step over. We haven’t acquired the ability to clear seven-footers.

People go broke because they can’t stop, rethink and say, “I can afford to write this one off and live to fight again. I don’t have to pursue this thing as an obsession.” You must learn how to handle mistakes and new facts that change the odds.

What you won at an auction was really just the right to pay more for something than everyone else thought it was worth.

Nobody can forecast interest or currency rates, the GDP, turning points in the economy, the stock market, etc.

Adding $20k to the payroll should be evaluated as a $3M decision, over lifetime, factoring in raises, benefits, and other expenses.

Don’t underestimate the influence of randomness in bad or good outcomes.