#78 Tao of Charlie Munger A Compilation of Quotes from Berkshire Hathaways Vice Chairman on Life, Business, and the Pursuit of Wealth

Summary Notes


In this discussion, the host delves into the wisdom of Charlie Munger, vice chairman of Berkshire Hathaway, through David Clark's book "The Tao of Charlie Munger." Munger, a legal and meteorological scholar with no formal training in economics or finance, is lauded by Warren Buffett as the architectural force behind Berkshire's investment strategy: buying wonderful businesses at fair prices. The host emphasizes Munger's disdain for quick riches and leverage, advocating for long-term investment in great businesses and minimal diversification. Munger's approach is rooted in a deep understanding of history, patience, and recognizing the rarity of truly exceptional business opportunities. The conversation also touches on the importance of learning from the past, as echoed by tech figures like Toby Lutke and Marc Andreessen, underscoring the value of biographical insights in shaping successful entrepreneurial mindsets.

Summary Notes

Charlie Munger's Influence on Berkshire Hathaway

  • Charlie Munger is considered an enigma and paradox in American financial history.
  • Warren Buffett credits Munger with the architectural design of modern Berkshire Hathaway.
  • Munger's blueprint for Berkshire was to buy wonderful businesses at fair prices, shifting from the earlier approach of buying fair businesses at wonderful prices.
  • Munger achieved significant success in business and investing without formal training in economics, marketing, finance, or accounting.

"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 wonderful prices. Instead, buy wonderful businesses at fair prices."

This quote highlights Munger's pivotal role in shaping Berkshire Hathaway's investment strategy, which focuses on the quality of the business rather than just the price.

The Tao of Charlie Munger

  • The book "The Tao of Charlie Munger" is a compilation of Munger's quotes on life, business, and wealth.
  • The book serves as an introduction to Munger's philosophy and is highly regarded by readers.
  • It is structured as a series of short essays, each expanding on a quote or observation from Munger.

"The Tao of Charlie Munger by David Clark is easily the most impactful book I've read over the past five years. I've read it probably 20 times just to drill all of Munger's lessons into my head. Better than any MBA."

This quote from a reader's tweet emphasizes the profound impact Munger's wisdom has had, suggesting that the book's lessons are more valuable than formal business education.

Investment in Learning

  • Speaker B advocates for investing in books and knowledge without economizing.
  • The immediate purchase and reading of "The Tao of Charlie Munger" demonstrate the value placed on acquiring wisdom from respected sources.

"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."

This quote expresses the speaker's belief in the importance of not skimping on educational resources, such as books, which are seen as valuable investments.

Charlie Munger's Broader Influence

  • Munger is respected by many thinkers and entrepreneurs for his intellect and approach to business.
  • Studying influential figures like Munger can lead to a deeper understanding of other respected individuals in various fields.
  • Books and the people we admire act as hyperlinks to knowledge and influence.

"And what I noticed a pattern, is a lot of the people that I already respect respect Charlie Munger, and I think that's a good way."

This quote reflects the speaker's observation that the respect for Munger among admired individuals is a pattern, indicating Munger's widespread influence.

The Value of Mimicry in Learning

  • The concept of mimicry is central to human learning and development.
  • By tracing the influences of admired individuals, one can discover the sources of their wisdom and insights.

"We're a species that mimics. Right. So inevitably, the people that you admire were heavily influenced by other people."

This quote underscores the notion that mimicry is a natural and essential part of human behavior, especially in the context of learning from others.

Interconnectedness of Influential Figures

  • The podcast discusses the interconnectedness among influential figures like Steve Jobs, Jeff Bezos, Elon Musk, and their predecessors.
  • Understanding the influences on these iconic entrepreneurs can provide deeper insights into their thought processes and innovations.

"But then the more you study them and you read their biographies, you watch videos of them talking, you realize they always reference who influenced them."

This quote highlights the importance of exploring the influences behind successful individuals to gain a fuller understanding of their contributions and perspectives.

Charlie Munger's Early Life and Learning

  • Munger was an avid reader from a young age, which exposed him to a larger world beyond his immediate surroundings.
  • His first job at the Buffett grocery store introduced him to the world of business and taught him valuable lessons.

"Charlie spent much of his youth reading the television and video games of his day."

This quote metaphorically compares reading to the television and video games of Munger's youth, emphasizing its role as a primary source of entertainment and learning for him.

Importance of Work Ethics and Teamwork

  • Emphasizes the significance of punctuality and cooperation in the workplace.
  • Highlights the role of cash registers in business operations as a vital point where financial transactions occur.

"The importance of showing up on time for work, and how to get along with others while accomplishing a joint task and, of course, running the cash register where money, the lifeblood of business, flowed."

This quote underscores the fundamental work principles such as timely attendance, collaboration, and the critical function of managing financial transactions in a business.

Charlie Munger's Commencement Address

  • Charlie Munger delivered a speech at the University of Southern California School of Law in 2005.
  • Munger is known for referencing historical events during his talks.

"A 30 Minutes talk Charlie Munger gave in 2005. He was given a commencement address, I think it was at the University of Southern California School of Law."

This quote provides context for the source of Charlie Munger's insights being discussed, indicating the time and place of his noted speech.

Munger's Philosophy and Use of History

  • Munger frequently refers to historical events to illustrate lessons.
  • He uses the Great Depression as a reminder of potential economic hardships.
  • Munger's stoic approach acknowledges life's uncontrollable aspects and focuses on our response to them.
  • Emphasizes the value of historical understanding in gaining perspective on personal suffering.

"Charlie often brings up the horrors of the Great Depression at Berkshire Hathaway annual meetings as a reminder of just how bad things can get."

This quote captures Munger's practice of using historical events, like the Great Depression, to set a realistic expectation for the severity of economic downturns.

"Most of what happens to us in life we can't control, but we can control how we react to it."

Here, Munger's stoic philosophy is summarized, highlighting the importance of our reactions to life's challenges over the events themselves.

The Value of Studying History

  • Studying history is seen as beneficial for gaining perspective.
  • History provides context for current suffering by comparing it to past hardships.

"Studying history will put things into your perspective. Like, you may be suffering, but people have suffered way worse than you and they've survived through it."

This quote emphasizes the importance of historical context in understanding and coping with present-day challenges.

The Last Highlander: A Study in Human Adaptability

  • Alistair Urquhart's book "The Forgotten Highlander" is recommended for understanding human resilience.
  • The book recounts Urquhart's experiences during World War II, including being a prisoner of war and surviving the atomic bomb in Nagasaki.
  • The story is seen as an inspiration for perseverance and offers perspective for entrepreneurs.

"The story demonstrates the adaptability of humans, our fierce desire to survive, and puts the stress of building companies into the proper perspective."

The quote summarizes the key message of Alistair Urquhart's story, which serves as an example of human resilience and provides entrepreneurs with a sense of perspective on the challenges they face.

Charlie Munger's Early Career and Investment Philosophy

  • Munger studied mathematics before joining the military and learning meteorology.
  • He developed investment skills by playing poker, learning when to fold or bet heavily.
  • Munger's law career was brief; he learned valuable business lessons from a dealership experience.
  • He dedicated time to his own real estate projects while working as an attorney.
  • Munger realized that practicing law would not lead to significant wealth, prompting him to seek other opportunities.

"Charlie Munger was learning important investment skill while playing poker with his army buddies. That's where he learned to fold his hand when the odds were against him and to bet heavy when the odds were with him."

This quote explains how Munger's poker experiences helped him develop a key investment strategy – knowing when to withdraw and when to invest heavily based on the odds.

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

Munger's disciplined approach to pursuing personal business interests, even while employed as an attorney, showcases his commitment to achieving financial independence.

Entrepreneurship and Wealth Creation

  • Munger sought to join the wealthy elite by moving beyond traditional employment.
  • He recognized the limitations of earning potential as an employee and the benefits of entrepreneurship.
  • IRS data indicates a significant portion of high earners derive income from investments and business ownership.

"There's nothing wrong with having a normal job, it's just you're not going to become wealthy being an employee."

This quote reflects the understanding that traditional employment has its limitations regarding wealth accumulation, highlighting the importance of entrepreneurship or investment for significant financial success.

"Charlie just realized, hey, I want to be on the other side of this transaction. I want to be."

Munger's realization that he needed to be an owner rather than an employee to achieve the wealth he desired is encapsulated in this quote, emphasizing a pivotal moment in his career trajectory.

Early Career and Meeting Warren Buffett

  • Charlie left his job in California and returned to Omaha, where he met Warren Buffett through mutual friends.
  • The first meeting between Charlie and Warren led to a long conversation and the beginning of a significant relationship.
  • Charlie and Warren maintained their connection through frequent phone calls after Charlie returned to California.

"He meets Warren at a lunch through mutual friends, and they instantly hit it off. Like the first time they talked, they wind up talking for hours."

This quote highlights the immediate connection between Charlie and Warren, which was the foundation for their long-standing partnership.

"California, he and Warren talked several times a week on the phone over the."

This quote emphasizes the frequent communication between Charlie and Warren, which helped to strengthen their relationship over time.

Charlie's Investment and Law Career

  • In 1962, Charlie started an investment partnership and a new law firm.
  • The law firm was named Munger, Tolles, Hills, and Woods.
  • Charlie shifted from practicing law to investing full-time within three years.
  • He managed several investment partnerships and a hedge fund, which closed after the financial panic of 1973-1974.

"So he starts his own law firm called Munger, Tolles, Hills and Woods."

This quote tells us that Charlie established his own law practice, signifying his entrepreneurial spirit and independence.

"And within three years, he stopped practicing law to focus on investing full time."

This quote indicates Charlie's transition from law to investing, showing a pivotal change in his career focus.

Charlie's Role at Berkshire Hathaway

  • Charlie became the vice chairman of Berkshire Hathaway in 1979.
  • He played a crucial role in investment and management decisions that significantly grew Berkshire Hathaway's net income and stock price.
  • Charlie's influence changed Warren Buffett's investment style by moving him away from solely buying bargains to considering the quality of the businesses.

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

This quote marks a significant milestone in Charlie's career, indicating his rise to a top position at Berkshire Hathaway.

"That Charlie would help Warren make the investment and management decisions that would take Berkshire Hathaway from a net income of."

This quote underscores Charlie's instrumental role in the strategic decisions that led to Berkshire Hathaway's impressive growth.

Investment Philosophy: Avoiding Fast Money

  • Charlie Munger opposes the idea of making fast money through short-term investments.
  • He believes that trying to get rich quickly is dangerous due to the necessity of gambling on short-term price movements and the risks associated with leverage.
  • Charlie used leverage in his early investments but later recognized its dangers and shifted his focus to long-term business economics.

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

This quote captures Charlie's view on the perils of pursuing quick financial gains, highlighting the risks involved in such a strategy.

"To get rich quick, one often has to use leverage or debt to amplify small price swings into a really huge gain."

This quote explains the risks associated with using leverage to achieve quick profits and why Charlie ultimately rejects this approach.

Understanding Your Circle of Competence

  • Charlie emphasizes the importance of knowing what you don't know and avoiding investments in businesses that are not well-understood.
  • He advocates for self-awareness in investing and staying within one's circle of competence.

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

This quote suggests that recognizing one's limitations is more valuable than intelligence when it comes to investing.

Investment Strategy: Long-Term Focus

  • Charlie promotes a long-term investment strategy, often referred to as "sit on your ass investing," which involves minimal transactions and maximizes tax efficiency.
  • He advises buying and holding investments over engaging in frequent trading or selling.
  • Long-term investing allows for compounding, which is a powerful force for wealth accumulation.

"You're paying less to brokers, you're listening to less nonsense. And if it works, the tax system gives you an extra one, two, or three percentage points per annual."

This quote highlights the benefits of a long-term investment approach, including lower costs and tax advantages.

The Benefit of Holding Investments

  • Charlie points out the economic advantage of holding investments for long periods, such as 20 years, due to the single taxation event.
  • This strategy aligns with the philosophy of buying businesses with exceptional economics and holding them for many years.

"If one holds an investment for 20 years, there's only one tax to pay, which, according to Charlie, equates to an extra one to three extra percentage points of profit per year over the entire time you hold it."

This quote explains the financial benefits of long-term holding and how it can lead to additional profit through tax efficiency.

The Value of Time for Businesses

  • Time can be beneficial for businesses with strong economics, but detrimental for mediocre ones.
  • The concept of time as a factor in business success or failure is highlighted.

nomics working in its favor. But for a mediocre business, time can be a curse.

This quote emphasizes that time can amplify the inherent strengths of a good business, while it may exacerbate the weaknesses of a mediocre one.

Critique of Diversification

  • Charlie Munger criticizes the common financial advice to diversify investments.
  • Munger and Warren Buffett's investment strategy involves concentrating on a few businesses they understand well.

Charlie calls diversification twaddle.

Charlie Munger dismisses the concept of diversification in investing, suggesting it is not a sound strategy.

And he says this worshipping at the altar of diversification, I think that's really crazy.

Munger equates the practice of diversification to blind faith, implying it's an irrational approach to investing.

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

Munger believes diversification is a strategy for those who lack the skill to properly assess and value businesses.

Investment Strategy of Concentration

  • Munger suggests investing heavily in a small number of well-understood businesses.
  • The strategy is to have a concentrated portfolio to allow for close monitoring and better understanding.

There's only so many businesses that one human being can actually understand at a fundamental level, right?

This quote implies that an investor's capacity to deeply understand businesses is limited, therefore, they should focus on a few.

Instead of putting more money into the things that you think are sure winners you're going to put into the 35th bis business. He's like, this is stupid.

Munger criticizes the idea of investing in many businesses for diversification rather than focusing on a few strong ones.

Charlie discovered that if we invest in companies that have great economics working in their favor at a reasonable price, we can bring the number of companies we own down to ten or fewer and still be protected against an unexpected business failure and have good growth on our portfolio over a ten to 20 year period.

This quote summarizes Munger's investment philosophy of owning a small portfolio of strong companies for long-term growth and risk management.

Historical Perspectives on Investment and Business

  • Andrew Carnegie's investment philosophy aligns with Munger's, focusing on concentrated investments.
  • The importance of understanding financial history and applying its lessons to business and entrepreneurship is emphasized.

Andrew Carnegie said 150 years before that... put all your eggs in one basket and watch that basket.

Carnegie's quote supports the idea of concentrated investment and vigilant management of that investment.

Study how the great fortunes are made. It's not a scattershot approach. They've identified the best business possible and they put all their energy and effort into it.

This quote reinforces the strategy of focusing intensely on a single, well-chosen business venture to build great wealth.

Patience and Nature in Investing

  • Charlie Munger and Warren Buffett's success is partly attributed to their patience.
  • Human nature often conflicts with the patience required for successful long-term investing.

The reason that him and Warren are successful is because they have patience.

This quote suggests that patience is a key factor in the success of Munger and Buffett's investment strategy.

It's not in our nature to be patient. That's why it's so heavy. It's not that these ideas are even rare. Unknown. It's the application of the idea that's so rare.

The rarity of applying patience in practice, rather than the concept itself, is highlighted as a barrier to successful investing.

Financial Crises as Opportunities

  • Munger views financial crises as opportunities for savvy investors.
  • Understanding the historical context of financial markets can provide a significant advantage.

Financial crisis equals opportunity.

Munger believes financial downturns present chances for investors to capitalize on market conditions.

If you live long enough, you'll see it.

This quote implies that financial crises are cyclical and that experience and historical knowledge are valuable.

The Importance of Learning from History

  • Bill Gurley's investment mentality is shaped by his understanding of financial history.
  • Silicon Valley's culture of quickly forgetting risk is contrasted with the advantage of historical knowledge.

Silicon Valley is an interesting place because I've never been around a group of people where risk is forgotten so quickly. And I think having that historical background is a huge advantage.

The quote suggests that those who understand financial history are at an advantage, especially in environments like Silicon Valley where risk is often overlooked.

Promoting the Study of Biographies and History

  • The study of personal and business biographies is encouraged for gaining insights into success and failure.
  • Quotes from various influential figures highlight the value of learning from the experiences of others through biographies.

Reading personal biographies allows one to experience multiple lives and successes and failures. Reading business biographies allows one to experience the vicissitudes of a business and learn how problems were solved.

This quote from "The Tao of Charlie Munger" endorses the reading of biographies as a means to learn from others' experiences and problem-solving approaches.

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