Thursday, August 21, 2008

Lessons from Charlie Munger

Yesterday's post, "Lessons from Warren Buffett", highlighted some of Buffett's shared wisdom on business and investing.

In today's post, we will learn from Buffett's long-time friend and business partner, Berkshire Hathaway Vice-Chairman, Charlie Munger.

While Charlie Munger is not as well known as Warren Buffett, his thoughts on investing, education, and life are highly prized by those who have followed his investment career. Shareholder meetings for Berkshire Hathaway and Wesco Financial Corporation, of which Charlie is the chairman, have yielded many valuable insights from Mr. Munger over the years.

Charlie Munger Caltech videoThis video conversation with Charlie Munger (click #1 in the iTunes playlist or watch on YouTube), filmed at Caltech in March of 2008, is testament to his unique thinking. Here, Munger shares his thought process with students and viewers, and challenges us to think across disciplines. 

Some important points made by Munger in this discussion: 

· Humility was a problem for Munger, especially as a young man. He still recognizes this as a character flaw. Still, he and Warren are very good at recognizing what they don't know. As Charlie says, know the edge of your own competency in a given area. This was an important factor in Berkshire's success. 

· Studying folly. "I was very lucky in my own life because every place I looked, at the pinnacle there was somebody better than I was". Charlie knew he could succeed by studying folly and using common sense (which is uncommon) to avoid it. This was his great advantage. 

· Invert, always invert. Tackle problems by inversion. 

· Charlie always liked finding big ideas which held a great deal of instructive power. He searches through disparate fields of study for these concepts, and uses them with no regard for the territorial boundaries of academic disciplines. He uses these ideas in his daily life, to solve problems and educate himself. 

· Munger likes to collect inanities and learn from them. There is never a shortage of inanities, and he finds them amusing and instructive. 

· Integrating ideas. Munger is interested in integrating ideas taken from seperate disciplines. 

He likes to do this in his head, sorting out ideas that may conflict by learning more or trying to figure out the synthesis for himself. He works to find some explanation for conflicting ideas, rather than retreating to the safety of one's own orthodoxy or discipline, which is what most people do.

· If you understand the main ideas of all the disciplines, you are, by definition, a man in possession of many tools. You are therefore unlikely to commit the inanities made by others, especially those who are more limited in their understanding of the issues. 

· With his expanded base of knowledge and bag of "mental tricks", Munger feels he is able to enter new areas and can sometimes solve problems that might have stumped people who are more experienced or eminent in those fields. 

This gives him the flexibility and confidence to operate in areas outside his own. He notes, "this is a very dangerous attitude to have in ordinary social discourse, but it's a very good way to make money". 

· Charlie idolizes Benjamin Franklin for his very wide range of knowledge, and the competency which he showed over the full range. He notes that Franklin was also self-educated and a wise observer of human nature. A thirst for learning and knowledge of human psychology are often attributes of successful investors. 

· Focus on the big ideas and use common sense to pick up the obvious finds. Charlie uses a gold mining anology: he would rather look for the big nuggets of gold than spend his time placer mining and sifting through gravel, trying to uncover small pebbles. 

There is plenty more to hear and learn in this discussion, so be sure to bookmark this post and view the whole clip when you have time. Enjoy the lessons, and apply them as you see fit! 


Related posts:

1. Lessons from Warren Buffett.

2. Lessons from Market Wizard, Ray Dalio.