Lessons Learned from Poor Charlie's Almanack

Teachings from one of the world's most successful investors

Poor Charlie's Almanack is the memoirs and life advice of its namesake, Charles T. Munger Jr. Charlie, as he's commonly known, has been Warren Buffett's right hand man for decades as the two grew Berkshire Hathaway ( $BRK.A ) into the conglomerate it is today. 

Charlie Munger is one of the most successful investors of our generation. Over the course of a remarkable career, he built one of the world's greatest fortunes. He is a brilliant thinker and a superb writer -- and he is underappreciated by the public. In Poor Charlie's Almanac, he shares what he has learned about investing during his long career.

In this book Charlie shares his thoughts about what he calls "the most important investment decision you'll ever make." He says it's not whether to invest in stocks, bonds, real estate or gold, but how you live your life.

Munger started his career in a law firm, but something about it didn't click with him. He saw that a lawyer could work 80 hours a week for fifteen years to become a partner... Which earns you the right to continue working 80 hour weeks.

To him that was short-term thinking. He could earn a lot of money this way, but it wouldn't set up his life the way he wanted it. Munger argues that investors are often too focused on short-term returns, while ignoring long-term growth potential. 

Leaving the law firm to try investing was a gamble for Munger, but it's one I think he's glad he made. He says a lot of people suffer from doubt-avoidance tendency. They doubt the outcome so they tend to avoid making a tough decision like leaving a lucrative job.

But taking the gamble is more often than not worth it according to Munger. 

Here are a few more top lessons learned from Charlie Munger's speeches over the years. 

Rationality and Decision Making

Rationality is about making decisions that are based on evidence rather than emotional responses or intuition. Rationality is about thinking clearly and logically. Emotions and intuition play a role in decision making, but rationality is what makes us better decision makers.

When we make decisions, we sometimes use our emotions and intuition to guide us. We don't always act rationally.

Everyone suffers from psychological tendencies and it's important to understand the pitfalls in our decision making.

Sometimes we just react emotionally without thinking things through. For example, you might want to go out for drinks tonight because it feels like fun, but you know you shouldn't drink too much alcohol. You could rationalize your decision by saying something like "I'm having fun." But sometimes we don't even realize that we're acting irrationally.

We can learn how to improve our decision making skills by understanding why we make some of the choices we do. We can also become aware of biases that influence our behavior. These include:

• Confirmation bias, where we tend to seek information that confirms our beliefs

• Overconfidence bias, where we overestimate our ability to make good decisions

• Hindsight bias, where we look back at previous events and see patterns that weren't there.

Objectivity and Changing One's Mind

If you're looking for objective facts about anything, it's hard to find them. This is because there are no such things as "objective facts." There are just different opinions. And people hold those opinions differently.

Some people think that they know what the truth really is; others don't even bother trying to figure out what the truth actually is. But why does one person believe something while another doesn't? Why do some people change their minds over time? How can we learn to make better decisions? 

This is something Charlie talks about a lot in his speeches. He says he has an "iron prescription" that helps keep him sane if he starts drifting towards on intense ideology over another. 

This prevents from locking himself into a certain line of thinking. We see this a lot in investing... Any time people follow an investment idea with religious zealousness, we should be wary. 

The $TSLAQ crowd never wavers despite Tesla turning a cash flow positive.

Both the bitcoin skeptics and bitcoin "hodl-ers" have been proven right and wrong at different periods. 

And the tech bulls, like Cathy Wood of Ark Invest, were right for years, but then their heavy ideology didn't allow them to sell when all the signs of a market top appeared in late 2021 and early 2022. 

This is another tendency that plagues people. Munger calls this inconsistency-avoidance tendency. People don't want to appear inconsistent so they avoid making decisions... Even when new data says they should change their mind.

Practice Divergent and Contrary Thinking

According to Malcolm Gladwell, practice divergent thinking to create ideas and ways of doing something. This is because it forces us to think outside the box and look at different possibilities. He says that we often rely too much on our existing knowledge and experience to solve problems and come up with solutions. 

Gladwell explains that practice contrary thinking helps us break out of our comfort zone and challenges our preconceptions. This allows us to see things differently and make connections we wouldn’t normally make.

For example, he says that if someone tells you that people who wear glasses tend to be smarter, you probably won’t consider wearing glasses. But if you tell yourself that people who wear glasses are likely to be smart, you might start considering getting some frames.

Framing of our minds is important (pun intended). Many successful people have a curiosity tendency which keeps them learning about many new things. And incorporating new data. 

And they will read thoughts that are opposite of their own. They introduce cognitive dissonance into their lives. This is something 95% of the population is sorely missing today... Especially in the political realm. Republicans and Democrats can't even get together and have a civil conversation anymore. 

But this also goes to investing ideologies. Value investors think the growth investors are wrong. The perma-bears get angry with the bulls. We should always be reading opposing viewpoints.

Reduce Complexity

Charlie Munger believes simplicity is the best way to approach life. In the book, he explains how complexity creates problems. Instead, he advocates focusing on the basics and reducing everything down to its most basic form.

Conventional wisdom makes up believe complexity equals insane wisdom. But often times because of academic psychology, we make things more complex than we need to.

In the world of investing, it's easy to become enamored with complex formulas and models. But Charlie says that's where you run into trouble. You end up trying to fit too many variables into one equation. And while that might work well enough for some situations, it won't always produce good results.

Instead, Charlie suggests simplifying things to their simplest form and letting those simple rules guide your decisions. This allows you to focus on what matters most.

Build a Latticework of Mental Models

Charlie Munger, Warren Buffett’s longtime friend and Berkshire Hathaway vice chairman, says that we should build a "latticework of mental models." He explains how he came up with his idea during a conversation with Warren Buffett.

Munger says that there are three ways to approach learning something new:

1. You can read about it, listen to someone talk about it, watch someone do it, etc.

2. You can try to imitate what you see done.

3. You can build a latticework. This involves building multiple models of the subject matter, connecting them together, and continually adding new ones.

For example, Munger suggests that people should start by understanding the basics of investing, such as value investing, fundamental analysis, and technical analysis. They should then move onto reading books about those topics, listening to podcasts, watching videos, etc. Then, once they understand the fundamentals, they can begin applying them to real world situations. For example, they could look at companies that fit into one of the categories above, and decide whether they want to invest in them.

Munger adds that the third method is important because it helps you avoid getting stuck in a rut. If you just focus on imitating what you see others doing, you might end up repeating the same mistakes over and over again. By building a latticework of models, however, you can constantly add new ideas and information to your repertoire.

Learn Models from Different Fields

Models are useful because they help us understand something we don't know much about. In fact, models are everywhere in our lives, and there are countless examples of people combining models from different fields to achieve amazing results. For example, consider how a doctor uses medical knowledge to diagnose diseases. Or think about how a scientist combines scientific knowledge with engineering expertise to build bridges.

The acquisition of wisdom from different fields can help us be better investors. 

For instance Learning better mental habits, like creating mental models, can help us organize the massive amounts of information we consume every day. We can separate the noise from the important facts... And that helps us see the bigger picture. 

In late 2022 the most important things moving the market is the rate of inflation and the projection of future rate hikes by the Federal Reserve. Learning about these trends is more important than following what politicians are doing in DC, if Germany will have enough natural gas this winter, or what the earnings trends are in the S&P 500. 

This is just one example of many examples. 

Understanding Investing and Business Strategy

Warren Buffett says it’s important to put aside one hour every day to dedicate to learning something new. He suggests reading newspapers and magazines, watching documentaries, listening to podcasts, attending lectures and classes, and even taking online courses. This helps you develop skills and knowledge that you can apply to your life outside of work. You might find that you enjoy learning new things and want to pursue a career in finance, marketing, sales, management, etc.

Find High-Quality Businesses

Warren Buffett says it's important to find businesses that are growing rapidly. "I like buying things that grow," he told CNBC's Becky Quick recently. "And I don't like investing in anything that isn't growing."

Buffett added that he doesn't mind owning a stock that's down 50% over the long term because he knows that eventually the company will rebound. But he does prefer to avoid companies that haven't been growing for some time.

He said his favorite way to identify such companies is to look for those that have had rapid growth in recent quarters. For example, Berkshire owns about $1 billion worth of shares in Coca-Cola. "We've owned Coke for quite a while now," he said. "But what we're seeing now is really good growth. And I think that's going to continue."

The Oracle of Omaha also noted that he looks for companies that are expanding into new markets. He pointed out that Berkshire Hathaway bought a majority stake in Lubrizol in 2011. "Lubrizol makes chemicals," he said. "They make products that go into making plastics. They've got a huge market."

Moats and Competitive Advantage

A moat is a source or competitive advantage. Companies should keep widening their mounds. In fact, it is better to build a moat around your business than to try to compete directly with competitors.

One way to do this is to invest in research and development. This helps you develop products and services that no one else offers. Then, you can charge a premium price.

Another way to widen your moat is to focus on customer experience. You want customers to love you. If you provide great service, you will attract repeat customers.

If you don't offer something unique, someone else will. So, make sure you're offering something people really value.

The best investment you can make is yourself

Warren Buffett once said that people are too busy worrying about what others think of them to worry about themselves. He believes that it is important to take care of yourself because no matter how much money you earn, you cannot buy happiness. In his book "The Snowball", he shares some advice on how to improve oneself.

He recommends that everyone should start saving money early in life. This way, they can spend less later on and save up for retirement. They must learn to live within their means. If they fail to do so, they might end up living under debt.

Buffett advises people to invest in themselves rather than in real estate or stocks. He explains that there is nothing wrong with owning a home. However, he thinks that most people overvalue homes. He warns that houses are not like ATMs where you withdraw cash whenever you want. You don't really know how long you'll be able to use your house. Therefore, you need to plan ahead and prepare for the future.

In addition, he says that people should stop spending money on things that they don't need. For example, he doesn't believe in buying expensive watches. Instead, he suggests that people go out and buy a nice watch for $10. Then, they can sell it for $50. This way, they will realize that they wasted money on something useless.

Lastly, Buffett advises people to work hard and become successful. He mentions that if you're working hard and doing well, you won't feel guilty about spending money on yourself.

That’s great advice… And that’s what all subscribers to BarbellAlpha.com should strive for. Every day to get a little bit better and to grow our skills a little bit more. It’s important to set aside that time to build up our knowledge, skills, or business.

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