#78 Charlie Munger the Tao of Charlie Munger

Summary Notes


In "The Tao of Charlie Munger," David Clark compiles the wisdom of Berkshire Hathaway's Vice Chairman, Charlie Munger, a self-made billionaire with no formal education in economics or finance. The host discusses Munger's unconventional path, from meteorologist and lawyer to Warren Buffett's right-hand man, and the architect behind Berkshire's investment philosophy: buying wonderful businesses at fair prices. Munger, who learned investment skills through poker and reading extensively, advocates for patience, frugality, and a deep understanding of business and human nature. He warns against the dangers of leverage and fast money, emphasizing the value of holding onto good businesses and learning from mistakes. The book encapsulates Munger's stoic approach to life's vicissitudes, his disdain for modern financial education, and his belief in continuous learning and the compounding effect of knowledge. The host underscores Munger's influence on respected thinkers and the importance of studying history and biographies to gain perspective and wisdom.

Summary Notes

Charlie Munger: The Enigmatic Influence on Berkshire Hathaway

  • Charlie Munger, despite lacking a formal education in economics or business, is credited with designing the blueprint for today's Berkshire Hathaway.
  • Warren Buffett attributes Berkshire's approach of buying "wonderful businesses at fair prices" to Munger's influence.
  • Munger's background includes training as a meteorologist and a lawyer.

"Warren Buffett said Charlie's most important architectural feat was the design of today's Berkshire. The blueprint he gave me was simple. Forget what you know about buying fair businesses at one prices. Instead, buy wonderful businesses at fair prices."

The quote highlights the business philosophy that Munger imparted to Buffett, which has been fundamental to Berkshire Hathaway's success.

The Tao of Charlie Munger

  • The book is a compilation of Munger's quotes on life, business, and wealth.
  • It's structured as short essays expanding on Munger's quotes.
  • The book is recommended as a digestible reference and an introduction to Munger's thinking.

"The Tao of Charlie Munger by David Clark is easily the most impactful book I've read over the past five years."

This quote from a tweet expresses the profound influence the book has had on one reader, suggesting its value to others.

The Value of Books and Learning

  • Speaker A advocates for investing in books and education.
  • They consider it unwise to economize on resources that can teach you something.

"I think it's foolish to like, I think you should economize and be frugal about with most of your resources in most things in life. But I don't think books is one of the things you should economize on or anything that teaches you something."

The speaker is emphasizing the importance of spending money on education and knowledge rather than being frugal in this area.

Charlie Munger's Influence and Respect Among Thought Leaders

  • Munger is revered by many respected individuals.
  • Understanding who influences the people you admire can be valuable.
  • Books and individuals serve as "hyperlinks" to knowledge and influence.

"A lot of the people that I already respect respect Charlie Munger, and I think that's a good way."

This quote indicates that the respect for Munger among thought leaders is a compelling reason to study his work and ideas.

Charlie Munger's Early Life and Introduction to Business

  • Munger spent his youth reading extensively.
  • His first job was at the Buffett grocery store, where he learned basic business principles.
  • Munger often references historical events like the Great Depression at Berkshire meetings.

"Charlie was introduced to the world of business at the Buffett grocery store."

The speaker is explaining how Munger's early experiences at a grocery store owned by Warren Buffett's grandfather provided him with foundational business knowledge.

Charlie Munger's Military Service and Education

  • Munger served in the US Army Air Corps and studied meteorology at Caltech.
  • He learned about risk and odds while playing poker in the army, a skill he later applied to investing.

"While the teenage Warren Buffett was busy learning about odds and probability at the horse racing track, Charlie Munger was learning important investment skill while playing poker with his army buddies."

This quote draws a parallel between the early experiences of Buffett and Munger, both of which contributed to their future success in investing.

Transition from Law to Full-time Investing

  • Munger realized he would not become wealthy practicing law.
  • He dedicated time to develop real estate projects while still working as a lawyer.
  • Munger eventually left law to focus on investing, starting an investment partnership and a law firm.

"He decided that each day he would devote 1 hour of time at the office to work on his own real estate projects."

The quote demonstrates Munger's strategic use of his time as a lawyer to build his wealth through real estate, which was a stepping stone to his full-time investing career.

Munger and Buffett's Partnership

  • Munger met Buffett through mutual friends and they formed a strong relationship.
  • After returning to California, Munger and Buffett maintained regular communication.
  • Munger eventually became Berkshire Hathaway's first vice chairman.

"In 1979, Charlie became Berkshire Hathaway's first vice chairman."

This quote marks a significant milestone in Munger's career, indicating his formal partnership with Buffett and his influence on Berkshire Hathaway.

Impact of Charlie Munger on Warren Buffett

  • Charlie Munger influenced Warren Buffett to move beyond just buying bargain stocks.
  • Munger's mindset shifted Buffett's investment strategy, leading to Berkshire Hathaway's significant growth.
  • Buffett acknowledges the profound impact Munger had on his approach to investing.

"Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me...It was the power of Charlie's mind."

This quote highlights Charlie Munger's pivotal role in reshaping Warren Buffett's investment philosophy, pushing him to consider more than just the immediate value of stocks and to appreciate the broader strategic thinking in investing.

The Danger of Fast Money

  • Charlie Munger is opposed to the pursuit of quick riches through short-term investments.
  • Short-term investments are risky due to unpredictable market fluctuations and the potential need for leverage.
  • Munger advocates for long-term investment strategies and warns against the dangers of debt.

"The desire to get rich fast is pretty dangerous."

Here, Munger emphasizes the risks associated with the desire for rapid wealth accumulation, suggesting that it can lead to dangerous investment behaviors.

Circle of Competence and Avoiding Idiocy

  • Understanding one's limitations is crucial in investing, according to Munger.
  • He advises investors to focus on areas they understand well.
  • Munger's philosophy includes avoiding stupidity rather than trying to be overly clever.

"Knowing what you don't know is more useful than being brilliant."

Munger's quote underscores the importance of self-awareness in investing, suggesting that recognizing one's ignorance can be more valuable than intelligence.

Long-Term Investing and Business Ownership

  • Munger promotes the idea of "sit on your ass investing," which involves minimal trading and holding investments long-term.
  • He criticizes the concept of frequently starting and selling businesses.
  • Munger believes in focusing on one's best business idea rather than diluting efforts across multiple ventures.

"Sit on your ass investing. You're paying less to brokers, you're listening to less nonsense."

This quote reflects Munger's endorsement of a passive, long-term investment strategy that minimizes costs and maximizes the benefits of compounding.

Diversification vs Concentration

  • Munger criticizes excessive diversification, which he refers to as "twaddle."
  • He suggests that understanding a few great businesses deeply is better than spreading investments too thinly.
  • Munger respects focused investment in a small number of high-quality companies.

"Diversification is only for people that don't know how to value businesses."

Munger's critical stance on diversification highlights his belief that a well-researched, concentrated portfolio can outperform a diversified one.

Financial Crises as Opportunities

  • Munger sees financial downturns as opportunities to invest at lower prices.
  • He and Buffett accumulate cash reserves to capitalize on market crashes.
  • Munger views patience and the ability to act during crises as key to investment success.

"Both Charlie and Warren let cash pile up waiting for a recession and crash, even if it means getting low rates of return on their cash holdings."

This quote illustrates the strategic cash reserve approach adopted by Munger and Buffett, who prioritize readiness for market downturns over immediate returns on cash.

The Importance of Cash Reserves

  • Munger advises keeping substantial cash on hand for seizing investment opportunities.
  • Berkshire Hathaway maintains a large cash balance for this purpose.
  • Holding cash is part of Munger's investment strategy, despite the potential for low initial returns.

"The way to get rich is to keep $10 million in your checking account in case of a good deal that comes along."

Here, Munger expresses the importance of liquidity in being able to take advantage of investment opportunities that may arise unexpectedly.

Critique of EBITDA

  • Munger criticizes the use of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a misleading metric.
  • He believes that interest, taxes, and depreciation are real costs that should not be ignored.
  • Munger emphasizes the importance of considering all expenses to assess the true health of a business.

"I think that every time you see the word EBITDA, you should substitute the word bullshit earnings."

Munger's blunt critique of EBITDA highlights his belief that it is a deceptive measure that overlooks significant business expenses.

EBITDA Misinterpretation

  • EBITDA can give an unrealistic view of a company's true economic nature.
  • It is not always a reliable measure of earnings.

"use this EBITDA to determine the earnings of a company, we will get an unrealistic view of the company's true economic nature."

The quote emphasizes the limitation of EBITDA as a measure of a company's earnings, suggesting it may not accurately reflect the company's economic reality.

Overconfidence in Smart People

  • Smart people are not immune to professional disasters due to overconfidence.
  • Reference to the collapse of Long-Term Capital Management, a hedge fund established by John Merriweather.
  • Hedge fund failure attributed to high leverage and strategies that could lead to catastrophic losses.

"Charlie's going to give us some lecture on overconfidence. So he says, smart people aren't exempt from professional disasters, from overconfidence."

This quote introduces the theme of overconfidence and its consequences, even among intelligent individuals, as illustrated by the collapse of Long-Term Capital Management.

Patience as an Investor

  • Patience is crucial for investors.
  • The ability to wait for the right investment opportunity is a key to success.
  • Warren Buffett's five-year hiatus from the stock market exemplifies extreme patience.
  • Charlie Munger and Warren Buffett's investment philosophy includes holding investments indefinitely.

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait."

The quote underscores the importance of patience in investing, suggesting that the inability to wait can be detrimental to investment success.

Enduring Problems

  • Distinguishing between rare isolated problems and continuous problems is essential.
  • Excellent companies may face significant issues occasionally but can overcome them.
  • Mediocre companies often experience ongoing problems.
  • Personal life can also reflect this pattern of either isolated challenges or continuous misery.

"an isolated example that's very rare is much easier to endure than a perfect sea of misery that never ceases."

This quote reflects on the nature of problems faced by companies and individuals, noting that rare, isolated problems are more manageable than constant difficulties.

A Few Good Companies

  • Investing in a few excellent companies is better than seeking numerous opportunities.
  • A durable competitive advantage in a company can lead to significant long-term value.
  • Entrepreneurs should focus on their businesses for long-term growth rather than seeking quick exits.

"if you buy something because it's undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value."

The quote discusses the strategy of buying undervalued companies and the consideration of selling them once they reach intrinsic value, contrasting with the approach of holding on to great companies for the long term.

Avoiding Stupidity

  • Consistently avoiding stupidity can be more advantageous than striving to be extremely intelligent.
  • Overconfidence, akin to strong swimmers drowning, can lead to failure.
  • Patience is reiterated as a virtue in investing.

"it is remarkable how much long-term advantage people like us, meaning him and Warren, have gotten by trying to be consistently not stupid instead of trying to be very intelligent."

This quote conveys the idea that avoiding mistakes can be more beneficial than attempting to be highly intelligent, as exemplified by the success of Charlie Munger and Warren Buffett.

Academic Sorcery

  • Finance education is often criticized by Charlie Munger as unnecessary and overly complex.
  • Munger believes the essentials of finance can be learned quickly.
  • Reading business biographies is more beneficial than studying theoretical finance.

"By and large. I don't think too much of finance professors."

The quote reveals Munger's skepticism towards finance academia, suggesting that practical experience and biographies offer more valuable insights.

No Single Formula

  • There is no magic formula for success in investing or entrepreneurship.
  • Understanding business, human nature, and numbers is crucial.
  • Learning from business biographies provides practical insights into overcoming challenges and achieving greatness.

"There isn't a single formula. You need to know a lot about business and human nature and the numbers."

This quote emphasizes the complexity of success in business and investing, dismissing the idea of a simple, universal formula.

Capitalism and Failure

  • The concept of "too big to fail" is criticized.
  • Capitalism requires the possibility of failure to function properly.
  • The balance of incentives (carrots) and consequences (sticks) is necessary for prosperity.

"Capitalism without failure is like religion without hell."

The quote draws an analogy to highlight the necessity of failure in a capitalist system, suggesting that without the risk of failure, the system is flawed.

Going to Extremes

  • Success in business can involve maximizing or minimizing certain variables to an extreme degree.
  • Costco's strategy to minimize costs is an example of such an extreme approach.
  • Berkshire Hathaway companies share a focus on cost minimization.

"in business we often find that the winning system goes almost ridiculously far in maximizing or minimizing one or a few variables, like the discount warehouses of Costco."

The quote discusses the strategy of extreme focus on specific variables as a path to success in business, illustrated by Costco's cost-saving measures.

Two Kinds of Businesses

  • Charlie Munger categorizes businesses into two types.
  • One type earns a consistent return, while the other experiences fluctuating fortunes due to external factors.
  • Understanding these differences is key for investors and entrepreneurs.

"According to Charlie Munger, there are two kinds of businesses. The first earns 12% a year, and you..."

The quote introduces the concept of two distinct types of businesses with different earning patterns, although the transcript ends before the explanation is completed.

Importance of Taking Craft Seriously

  • No matter the role, be it employee, business owner, or athlete, one should strive for excellence.
  • Taking your craft seriously is essential, but it's also important not to make oneself miserable in the process.
  • Life is finite, so the pursuit should be meaningful without adding unnecessary stress.

"So my opinion is like, you should take your craft seriously. It doesn't matter what you do, whether you're an employee, a business owner, an athlete, whatever, just whatever you're going to spend your time doing, why are you doing it if you're not going to try to be really good at it? Right?"

This quote emphasizes the importance of dedication and striving for excellence in whatever one chooses to do, as time spent should be worthwhile and aimed at achieving proficiency.

Business Longevity and Decision Making

  • The survival of businesses over the long term is generally low.
  • Good businesses are characterized by the ease of decision-making, while bad businesses often require difficult choices.
  • Learning from bad business experiences can lead to understanding the value of a durable competitive advantage.

"history shows that the chances of any business surviving in a manner agreeable to a company's owners are slim at best."

This quote reflects on the harsh reality that most businesses do not last in the long term in a way that satisfies their owners, implying the difficulty of business longevity.

Competitive Advantage in Business

  • Businesses in competitive industries often struggle due to price wars and low-profit margins.
  • Charlie Munger and Warren Buffett have learned from owning businesses in challenging sectors.
  • A durable competitive advantage allows a business to maintain high margins and generate free cash flow.

"Now, we know that the secret is always to go with the better business that has a durable competitive advantage."

This quote summarizes the lesson learned from Munger and Buffett's experiences: it's crucial to choose businesses with a strong, enduring competitive edge.

Market Fluctuations and Investor Temperament

  • Investors must be prepared to face significant market declines without panic.
  • A philosophical approach to market fluctuations is a sign of a suitable investor temperament.
  • Being emotionally equipped to handle the ups and downs is critical for long-term investment success.

"If you're not willing to react with equanimity to a market price decline of 50% two or three times a century, you're not fit to be a common shareholder."

This quote advises on the necessary emotional stability required to endure substantial market dips without distress, highlighting the importance of investor temperament.

Dangers of Leverage

  • Excessive leverage is risky and often mistaken for financial acumen.
  • Berkshire Hathaway practices conservative borrowing, prioritizing favorable terms and less leverage.
  • Missing out on opportunities is preferable to the risks associated with high leverage.

"use less leverage. As you can tell in Berkshire's operations, we are much more conservative. We borrow less and on more favorable terms."

The quote underscores Berkshire Hathaway's conservative approach to leverage, suggesting that less borrowing on better terms is a safer, more sustainable strategy.

Adaptability Over Planning

  • The world's complexity exceeds our understanding, making adaptability more crucial than rigid planning.
  • Berkshire Hathaway avoids master plans, preferring to adapt to new information and situations.
  • Adaptability is presented as a key to success in both business and life.

"the idea of having master plan is twaddle. At Berkshire, there's never been a master plan."

This quote criticizes the notion of a fixed master plan, advocating for flexibility and responsiveness to new information as a more effective approach.

Incremental Approach to Life and Career

  • Charlie Munger advocates for daily self-improvement and taking life one step at a time.
  • Consistency in self-education and duty is valued over short-term intensity.
  • Munger's personal growth through continuous learning is highlighted as a model for success.

"Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well."

This quote encapsulates Munger's philosophy of gradual self-improvement and diligent responsibility as a pathway to a fulfilling life.

Career and Life Advice

  • Munger offers three rules for career success: integrity in sales, respect for employers, and enjoyable work relationships.
  • He values the ability to acknowledge ignorance and learn from mistakes.
  • Admitting and learning from failures is seen as a way to avoid repeating them.

"Three rules for a career one, don't sell anything you wouldn't buy yourself. Two, don't work for anyone you don't respect, admire and three, work only with people you enjoy."

The quote provides straightforward career advice, emphasizing the importance of personal ethics, respect, and enjoyment in a professional setting.

Frugality and Wealth Accumulation

  • Frugality is seen as a defense against inflation and a means to accumulate wealth.
  • Munger and Buffett's modest living despite their wealth is highlighted as a strategic choice.
  • Avoiding unnecessary expenses allows for more investment and protection against rising costs.

"One of the great defenses if you're worried about inflation is not to have a lot of silly needs in your life if you don't need a lot of material goods."

This quote suggests that a frugal lifestyle can be a strategic hedge against inflation, as it reduces the need to spend money on non-essential items.

Trust and Relationships

  • Munger believes in the value of a "seamless web of deserved trust" in personal and professional relationships.
  • Trustworthy relationships are seen as essential, and untrustworthy individuals should be avoided.
  • The concept of a catechism is introduced as a method for teaching the importance of trust.

"The highest form that civilization can reach is a seamless web of deserved trust."

The quote emphasizes the ideal of having a network of reliable and trustworthy relationships, which is seen as the pinnacle of civilized interaction.

Continuous Learning and Improvement

  • Munger and Buffett are portrayed as "learning machines" who continually seek knowledge and self-improvement.
  • Continuous learning is presented as a key to long-term success and wisdom.
  • Munger criticizes multitasking and promotes deep, focused thought as a competitive advantage.

"I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines."

This quote highlights the significance of being a lifelong learner and how it can lead to success, regardless of one's initial intelligence or diligence.

Perspective on Life's Challenges

  • Munger draws inspiration from philosopher Epictetus, viewing missed opportunities as chances for growth and learning.
  • Accepting and constructively using life's hardships is recommended for a fulfilling life.
  • Munger's personal experiences with loss provide context for his perspective on adversity.

"I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well."

The quote reflects Munger's belief that missed opportunities should not lead to self-pity but rather be seen as chances to act honorably and learn valuable lessons.

Impermanence and the Fate of Civilizations

  • All civilizations, businesses, and individual lives are subject to eventual decline and end.
  • This inevitability is presented as a natural part of the life cycle and a reminder to appreciate the present.

"Over the long term, the eclipse rate of great civilizations being overtaken is 100%."

The quote serves as a sobering reminder that nothing, including great civilizations, lasts forever, underscoring the importance of understanding and accepting the transient nature of all things.

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