#79 Charlie Munger The Complete Investor



In this episode, the host delves into the investment philosophy and decision-making strategies of Charlie Munger, as presented in Tren Griffin's book, "Charlie Munger: The Complete Investor." Munger, renowned for his partnership with Warren Buffett at Berkshire Hathaway, is celebrated not only for his investment success but for his unique approach to thinking and independent decision-making, which has given him an edge in avoiding psychological errors. The host reflects on Munger's emphasis on continuous learning, the importance of understanding one's circle of competence, and the value of simplicity in business practices. Munger also advocates for reading widely, particularly biographies, to learn from others' experiences and to become a 'learning machine.' The episode touches on Munger's investment principles, such as the significance of having a 'moat' around a business and the power of compound interest, while also highlighting his disdain for unnecessary complexity and bureaucracy in large organizations.

Summary Notes

Charlie Munger's Thinking and Emotional Control

  • Charlie Munger is renowned not just for his investment success, but for his distinctive thinking style and emotional regulation.
  • Munger uses succinct language to effectively communicate and make decisions.
  • Independent thinking is a rare skill that gives individuals an edge in decision-making and avoiding psychological errors.
  • Warren Buffett highlighted Munger's independent thought process with the Scott Fetzer acquisition anecdote.

"Munger's ability to cut to the heart of an issue with a few well chosen words is legendary, as is his desire to think independently."

This quote emphasizes Munger's concise communication and his preference for independent thought, which contributes to his success.

Warren Buffett's Anecdote on Munger

  • Buffett tells a story about Munger's approach during the acquisition of Scott Fetzer.
  • Despite a banking firm's unsuccessful attempt to sell Scott Fetzer, Buffett expressed interest and quickly made a deal with CEO Ralph Shea.
  • Munger humorously declined the banking firm's offer to read their analysis, demonstrating his confidence in his own evaluation.

"In 1985, a major investment banking house undertook to sell Scott Fetzer real quick... I wrote Ralph Shea... expressing an interest in buying the business... Charlie responded, 'I'll give you $2.5 million not to read it.'"

The quote illustrates Munger's trust in his own judgment over external analysis, even in the context of a multimillion-dollar deal.

Tren Griffin's Book on Charlie Munger

  • The book "Charlie Munger, the Complete Investor" by Tren Griffin is a comprehensive look at Munger's thought process.
  • Griffin's book is structured with chapters and quotes from both Munger and Buffett.
  • The book emphasizes learning from biographies and the experiences of others.
  • Elon Musk, Jim Senegal, and other successful individuals also value learning from biographies.

"This book is about investing... Munger likes to say that a successful investor reads successful entrepreneur never stops being a learning machine."

The quote suggests that continuous learning is crucial for success in both investing and entrepreneurship.

Simple but Not Easy

  • Munger's philosophy is to observe what works and learn from it.
  • He emphasizes the importance of thinking deeply and learning from experiences.
  • Munger and Buffett allocate significant time for thinking and reading.
  • Munger advocates for using checklists to avoid missing important factors in decision-making.

"Much of what is interesting about Munger is explained by this simple sentence. I observe what works and what doesn't and why."

Munger's approach is to learn from observation and reflection, which although simple, is not necessarily easy to practice.

Worldly Wisdom and Mental Models

  • Munger's concept of worldly wisdom involves using models from various disciplines.
  • He stresses the interconnectedness of these models to gain a comprehensive understanding of complex systems.
  • Munger and Buffett apply this multidisciplinary approach to investing, management, and learning.

"You've got to have models in your head, and you've got to array your experience, both vicarious through reading and direct on this lattice work of models."

This quote encapsulates Munger's belief in the importance of a diverse set of mental models to navigate the complexities of life and business.

The Importance of Reading

  • Munger values the insights gained from reading and learning from others.
  • He believes that no one is smart enough to figure everything out on their own.
  • Munger links continuous learning to personal and financial success.

"I believe in the discipline of mastering the best that other people have already figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart."

Munger acknowledges the limits of individual knowledge and the value of learning from others' wisdom and experiences.

Reward and Punishment Super Response Tendency

  • Charlie Munger identifies the power of incentives and disincentives in shaping human cognition and behavior.
  • Even someone who understands the importance of incentives can underestimate their power.
  • Recognizing incentives can help in product design, managing people, and analyzing behavior.
  • Munger and Buffett personally handle compensation decisions at Berkshire Hathaway to align incentives properly.
  • A seamless web of deserved trust can be built with the right incentive structures.

"Almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so. For instance, I think I've been in the top 5% of my age cohort, almost all of my adult life in understanding the power of incentives. And yet I've always underestimated that power. Never a year passes. Never a year passes. But I get some surprises that pushes a little further my appreciation of incentive superpower."

This quote emphasizes the underestimation of the influence of incentives and disincentives, even by those who are aware of their significance.

Doubt-Avoidance Tendency

  • Confidence in entrepreneurs, despite potential failure, contributes to economic growth and productivity.
  • Doubt avoidance reduces the brain's processing load but can be dangerous.
  • Nassem Taleb acknowledges the sacrifices entrepreneurs make for economic growth and societal benefit.

"The confidence of entrepreneurs bolstered by doubt avoidance tendency creates positive benefits for society in the aggregate by generating productivity and genuine growth in the economy. Even if legions of entrepreneurs may fail."

This quote suggests that the confidence driven by doubt avoidance can have positive effects on society, despite the high failure rate among entrepreneurs.

Curiosity Tendency

  • Charlie Munger emphasizes the importance of being prepared to act on significant opportunities.
  • A curious mind is essential for recognizing complex opportunities.
  • Patience and frugality are key traits for capitalizing on favorable odds.
  • Tren Griffin warns against the dangers of excessive curiosity leading to business failure or lack of focus.

"Experience tends to confirm a long held notion that being prepared on a few occasions in a lifetime to act promptly in scale in doing some simple and logical thing will often dramatically improve the financial results of that lifetime."

Munger's quote highlights the impact of seizing a few major opportunities with a prepared and curious mind on one's financial success.

Reciprocation Tendency

  • Humans have a strong tendency to reciprocate both favors and disfavors.
  • The urge to reciprocate can be triggered by even minor gestures, like a smile.
  • This tendency can influence behavior and decision-making in social and business contexts.

"The automatic tendency of humans to reciprocate favors and disfavors has long been noticed as extreme."

Munger's quote indicates the powerful and often extreme human impulse to return favors and disfavors, shaping interactions and relationships.

Excessive Self-Regard Tendency

  • Companies and individuals can suffer from excessive self-regard, leading to poor decisions.
  • Recognizing and avoiding this tendency is crucial for long-term success.
  • Steve Jobs' career is cited as an example of how excessive self-regard can lead to both failure and success.

"Geico got to thinking that because they were making a lot of money, they knew everything."

This quote by Charlie Munger exemplifies how success can lead to overconfidence and subsequent failure if not checked.

Social Proof Tendency

  • Humans often mimic the behavior of others, especially when uncertain.
  • This herd mentality can lead to disastrous business decisions, such as the oil and fertilizer company acquisitions.

"Big shot businessmen get into these waves of social proof."

Munger's quote illustrates how even successful businesspeople can fall prey to following trends without sufficient rationale.

Twaddle Tendency

  • Charlie Munger criticizes the proliferation of unnecessary and complicated concepts in finance and business.
  • Simplicity is key, even though it may not be as marketable or popular in literature.
  • Munger values reading biographies over trendy business books for genuine insights.

"It's obvious that if a company generates high returns on capital and reinvests at high returns, it will do well."

This quote from Munger dismisses overly complex ideas in favor of straightforward business principles.

The Right Stuff

  • The chapter discusses traits and ideas that Munger and Buffett consider essential for success in investing and entrepreneurship.
  • Patience, discipline, rationality, and independence of mind are highlighted as key attributes.
  • The importance of understanding probability is emphasized for making informed decisions.

"Success means being very patient but aggressive when it's time."

Charlie Munger's quote encapsulates the balance between patience and decisive action as a component of success.

Munger's Unique Definition of Being Disciplined

  • Munger emphasizes the significance of discipline in avoiding unnecessary actions just to feel busy.
  • He believes in the power of resisting the urge to act out of restlessness and the importance of judgment and self-control.
  • Munger suggests that intelligent people can reduce life's risks through disciplined behavior.

"We've got great flexibility and a certain discipline in terms of not doing some foolish things just to be active. Remember, that goes against human nature discipline in avoiding just doing any damn thing, just because you can't stand inactivity."

This quote underlines the value of discipline in not yielding to the human tendency to act impulsively, highlighting the importance of restraint.

Honesty as a Competitive Advantage

  • Munger views honesty and fairness, especially towards those with less power, as a long-term competitive advantage.
  • He suggests that a reputation for integrity can be more profitable than short-term gains achieved through dishonesty.
  • Munger admires the simplicity and correctness of moral theories that advocate for strength without tyranny.

"Generally speaking, when Berkshire has the power, we try to be more than fair to the minority who don't have the power and who depend on us."

This quote reflects Munger's philosophy on the ethical use of power and fairness in business, which contributes to Berkshire's trustworthy reputation.

Long-Term Orientation and Compounding

  • Munger recognizes the importance of enduring short-term discomfort for long-term gains in business.
  • He highlights the challenge of initial wealth accumulation and the importance of financial stability.
  • Munger emphasizes the significance of understanding and utilizing the power of compound interest in various aspects of life.

"Almost all good businesses engage in pain today, gain tomorrow activities."

This quote encapsulates Munger's belief in the necessity of making sacrifices in the present to achieve greater success in the future.

The Role of Passion in Success

  • Munger and Trent Griffin argue that passion is crucial for success, potentially more so than intelligence.
  • Passion drives individuals to invest time and effort into their work, leading to an informational edge and greater achievements.
  • They note the unfortunate reality that many people work in jobs they do not care for, which hampers their potential for greatness.

"Berkshire is full of people who have a peculiar passion for their own business. I would argue passion is more important than brain power."

This statement highlights the value Munger places on passion over intellect in contributing to a business's success.

The Importance of Being Studious

  • Munger believes that being passionate naturally leads to a desire for learning and knowledge acquisition.
  • He emphasizes the importance of continuous learning and ignorance removal as key to wisdom.
  • Munger encourages a lifelong commitment to self-improvement through reading and curiosity.

"In my whole life, I've known no wise people who didn't read all the time. None. Zero."

Munger's quote underscores the strong correlation he sees between wisdom and the habit of constant reading.

Frugality as a Virtue

  • Munger and Trent Griffin stress the importance of frugality in both personal and business finances.
  • They believe that careful spending and avoiding waste are essential for long-term success and wealth accumulation.
  • Historical figures like Benjamin Franklin are cited as role models for their frugal habits.

"We don't have an isolated group of managers surrounded by servants. Berkshire's headquarters is a tiny little suite."

This quote reflects the frugal culture at Berkshire Hathaway, which Munger believes contributes to the company's success.

Risk Aversion and Financial Stability

  • Munger advocates for a conservative approach to risk, emphasizing the importance of creditworthiness and liquidity.
  • He believes in having multiple layers of protection against financial risk as part of a company's culture.

"You can easily see how risk-averse Berkshire is. In the first place, we try to behave in such a way that no rational person is going to worry about our credit."

Munger's quote illustrates Berkshire's commitment to maintaining a strong financial foundation to mitigate risk.

Capital Allocation and Management in Business

  • Munger and Buffett prioritize capital allocation and compensation systems while delegating other management responsibilities.
  • They believe that many CEOs lack the necessary skills for effective capital allocation, which is crucial for maximizing shareholder return.
  • Avoiding the "institutional imperative" is key to Berkshire's culture and success.

"One major fundamental aspect of any business is management. Munger and Buffett are famous for delegating almost all authority and responsibility to Berkshire subsidiaries to run their own business."

The quote explains the management philosophy at Berkshire, highlighting the centralization of capital allocation and compensation systems.

The Curse of Scale and Bureaucracy

  • Munger warns about the negative effects of scale, which can lead to inefficient and unmotivated bureaucracies.
  • He advocates for supporting smaller companies and entrepreneurs to avoid the pitfalls of large corporate structures.

"The constant curse of scale is that it leads to big, dumb bureaucracy."

This quote by Munger conveys his belief that as companies grow larger, they often become less efficient and innovative.

Decision Making and Opportunity Costs

  • Munger emphasizes the importance of making decisions based on opportunity costs, considering alternatives rather than isolated choices.
  • He believes intelligent decision-making requires understanding the trade-offs involved in any given situation.

"Intelligent people make decisions based on opportunity costs. In other words, it's your alternatives that matter."

Munger's quote highlights the importance of weighing options and considering the cost of foregone opportunities when making decisions.

Building and Widening Moats

  • Munger believes in the necessity of creating and expanding competitive advantages, or "moats," for a business to thrive.
  • He stresses the importance of moat-widening skills, such as the ability to raise prices without losing customers.
  • Munger encourages an ownership mentality among managers and a focus on aligning risks and benefits.

"One must keep their eye on the ball of widening the moat to be a steward of the competitive advantage that came to you."

This quote encapsulates Munger's advice for business managers to constantly strive to strengthen their company's competitive position.

Economies of Scale and Scope

  • Supply side economies of scale occur when a company's average costs decrease as production increases.
  • Intel is cited as a business that benefits from economies of scale.
  • Charlie Munger notes that some businesses naturally lead to the dominance of a single firm due to economies of scale.
  • Jack Welch's strategy for General Electric was to be number one or two in every field or exit the market, focusing on maximizing shareholder wealth.
  • Economies of scope allow a company to produce various products or services efficiently by sharing resources across markets.
  • To benefit from economies of scope, a business must not run as isolated units and leverage its established market presence to sell additional products.

"In some businesses, the very nature of things cascades toward the overwhelming dominance of one firm. It tends to cascade to a winner take all result." This quote by Charlie Munger explains how certain markets naturally lead to a single firm becoming dominant due to economies of scale.

"If it is cost efficient for a company to produce several different products or services, a company can also benefit from supply side economies of scope." Tren Griffin speaks on how companies can gain advantages by efficiently offering a variety of products or services, known as economies of scope.

Demand Side Economies of Scale (Network Effects)

  • Demand side economies of scale, also known as network effects, occur when a product or service becomes more valuable as more people use it.
  • Examples include Craigslist, eBay, Twitter, and Facebook.
  • American Express is mentioned for its network effect within the Berkshire portfolio.
  • Network effects can expand a company's moat over time.

Brand Power and Moats

  • A brand is considered an informational advantage that conveys a lot about a company with minimal information.
  • Charlie Munger views brands as a method to convey a lot of information quickly and efficiently.
  • Munger also discusses the psychological advantage of scale through social proof, where people are influenced by the actions and approvals of others.
  • Warren Buffett and Charlie Munger use the ability to raise prices without losing customers as a test for the strength of a brand-based moat.
  • Coca Cola's strong brand is highlighted as an example of a brand with untapped pricing power.

"A brand is just an informational advantage." Charlie Munger defines a brand as a way to convey significant information about a company efficiently, which is a competitive advantage.

"Everyone is influenced by what others do and approve." Munger discusses social proof as a psychological factor contributing to a brand's strength and market dominance.

Berkshire Hathaway's Moat

  • Berkshire Hathaway's moat includes tax efficiency, low overhead, and being the private buyer of first resort.
  • The company's reputation for integrity and honesty provides access to unique opportunities.
  • Berkshire is also known for its permanent capital and maintaining significant cash reserves.
  • The ability to raise prices without affecting demand is a sign of a strong moat.
  • Companies like McDonald's, Walmart, Estée Lauder, Mary Kay, and Microsoft are recognized for creating significant moats.

"Berkshire is tax efficient." This quote emphasizes Berkshire Hathaway's strategy of holding investments long-term to benefit from compounding and tax efficiency.

"Berkshire has a corporate headquarters with a mere 25 people on a single floor of an office building." This quote from the New York Times highlights Berkshire Hathaway's low overhead, contributing to its competitive moat.

Mental Models and Decision Making

  • Mental models are frameworks for thinking and decision-making.
  • The podcast discusses the importance of understanding how successful individuals think and applying those principles to one's own decisions.
  • Mark Andreessen uses a mental model of Peter Thiel to guide his decisions.
  • The concept of asking "What would Charlie Munger do?" is used as an example of applying mental models in practice.

"What would Charlie Munger do?" This quote suggests using the thought process of successful individuals, like Charlie Munger, as a mental model for decision-making.

"Mark Andreessen was giving a talk, and he's one of the people I'm interested in how he thinks." The speaker discusses how adopting the mental models of influential thinkers like Mark Andreessen can impact one's own decision-making process.

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