Charlie Munger — The Tao of Charlie Munger

I find in human nature that we are all lazy and want to take the shortest path, the path of least resistance. If wisdom is more profitable than silver and more valuable than gold, then it makes sense to get that wisdom quickly from people that have proven to be wise over a long period of time. Warren Buffett, Mohnish Pabrai, and Bill Gates have all described Charlie Munger being the wisest person in the world. That doesn’t mean he is the wisest, but certainly has wisdom that I don’t have. Charlie Munger has once said that wisdom makes for a better life in all facets of life. If that’s the case, let’s take a look at the book Tao of Charlie Munger, by David Clark.

-knowing what you don’t know is more useful than being brilliant

-in my whole life, I have known no wise people who didn’t read all the time — none, zero

-don’t sell anything you wouldn’t buy. Don’t work for anyone you don’t respect or admire. Work only with people you enjoy.

-his short story as told by David Clark; worked many odd jobs and also came from rich family, had connections to get into Harvard and met immigrants in his town so had open mind about things and read a lot. Found being a lawyer couldn’t make money fast and before those other different jobs. Influenced by Warren Buffett and 1 million made from real estate, created his own investment fund and got other people to trust him to make money. Like Buffett, bought blue chip stamp, which had both huge free cash flow and a big float ($100m in 1960s) to buy more companies. Big bets on arbitrage situations like Pabrai mentioned to allow him to profit big time, infrequent bets and heavy massive bets, including borrowing on top of it. Tried different things too, but kept doing different things, including poker. Importance of good friends. Met Buffett through friends, instant, strong connection. Charlie Munger came up with it’s much better to buy wonderful businesses at a fair business transaction at a reasonable price rather than seeking an outstanding deal at the expense of fairness.

-The aspiration for rapid wealth accumulation can be quite perilous

-knowing what you don’t know is more useful than being brilliant

-Many peoples strive for intelligence, while my goal is simply to avoid foolishness. Yet, this is more challenging than commonly perceived (avoid errors of omission)

-the weakness in selling stocks when they get to intrinsic value is that they may have further room to grow, especially in a bull market. Therefore, unless stocks are extremely overvalued, one should not sell and hold shares. To avoid loss, don’t buy stocks that have very high P/E, are new, or lose money. Buying dividend shares significantly decreases risk.

-selling less leads to less tax liability and trading fees. Time serves as an ally to exceptional enterprises but works against mediocre ones

-Acknowledging what you don’t know is the dawning of wisdom

-buy mis priced gambles, for companies that will be way better in 10 years than now

-diversification preserves wealth, concentration builds wealth

-when the odds are in your favour, bet and bet heavily

-financial crisis equals opportunity

-having cash is king, even if subject to low or no returns, as one crash can wipe out all of and then some of your returns

-it’s good when other people are demoralized because it makes it easier for me to succeed while they wallow in pity and fear of the stock market

-I succeeded because I have a long attention span; patience is needed both holding stocks and in holding cash

-EBITDA is nonsense; all of those must be calculated. Net income is thus important

-What looks good on the outside may be seriously rotten in the inside (financial companies in 2008)

-Intelligent individuals are not immune to professional setbacks caused by overconfidence; long term capital management used leverage in bond trades and went bankrupt when Russia defaulted in domestic bonds. Super smart people and leverage together often ends in disaster; dumb people and leverage also ends in disaster

-hedge funds have an incentive to leverage and make risky bets. If they don’t, they underperform and other funds get more money and fees. If they fail, they get fees and you lose. So they win either way with more money and fees therefore. John Meriwether would repeatedly open funds and bankrupt them, and open new ones and repeat the cycle.

-Patience is the investor’s ally, yet many individuals struggle with the idea of waiting

-don’t be so worried about minimizing taxes

-Facing an uncommon isolated incident is far more manageable than being surrounded by an unending expanse of perfect misery.

-move only when you have the advantage; have the discipline to bet only when the odds are in your favour. Warren Buffett sold in the late 60s and stayed in cash for four or five years, which allowed him to profit big time. Charlie Munger did not and lost half his wealth and shut down his fund

-great companies do not have to be sold at intrinsic value; one could hold them if in a rising bull market

-one should recognize reality, especially when one doesn’t like it

-it’s the strong swimmers who drown

-there is so much dementia in life, particularly in finance

-if people weren’t wrong so often, we wouldn’t be rich

-are you willing to wait for years, before buying a stock at an undervalued price? Patience is a virtue

-by and large I don’t think too much of finance professors. It is a field with witchcraft.

-I don’t think anyone should buy a bank if they don’t have a feel for the bankers. Banking is a business that is a very dangerous place for an investor. Without deep insight, stay away. Banks financial statements are so convoluted that even those converting them don’t know

-knowing business books, business models, CEOs character and leadership, accounting, economics, federal reserve bank, annual reports is what is necessary to make a good investment

-know when technology is going to help you and when it’s going to kill you

-patience and pounce are both necessary when the opportunities arise

-the stock market is a sea of endless opportunity for those who put in the time

-banks will always need adult supervision

-if a democracy cannot control financial institutions, eventually the people vote a despot who will

-In the realm of capitalism, the absence of failure is akin to a religion void of the concept of hell

-one of the reasons the United States will not default on its debt is it can keep printing money to pay the debt for the government. However, for European countries, they must rely on the ECB, European Central Bank

-inflation benefits banks and insurance as they get more money without more cost. Plus, inflation is the friend of asset owners, the enemy of cash and bonds

-both have oil and import oil to have a lack of dependency

-People have become lazy as they have lost the fear of not working; we have our basic needs all met

-bankers are out of control

-the worlds derivatives market is worth $1.2 quadrillion, and no one knows what it is or it’s impact

-Buffett and Minger bought 500 million of petrochina and sold later for 3.5 billion, even though Chinese government owns 88% of it. It’s an advantage to buy government owned as they are going to steer company well, but could be disadvantage if they mess around

-money should be spent or invested

-when you mix raisins with turds, you still have turds

-businesses that go to the extreme for cost cutting, are a winning system. Such as geico getting rid of middle man insurance agent, and Costco not using bags but it’s boxes purchased goods in bulk, saving $45 million a year

-buying a business with a higher growth rate, even at a higher stock price or P/E multiple, is better than a slow growth company at a lower multiple

-buy cash flow machines

-not many companies survive long term; the ones that do, have strong pricing power

-a good business throw up easy decision after the other. Bad businesses throw up painful decisions one after the other. Businesses with intense competition in competitive industries cannot thrive. Only stay with good businesses with a wide moat.

-in general bet on the quality of the business rather than the manager. But, with a good manager, bet in them.

-think of how to incentivize people as it greatly influences behavior. E.g. pay by the job than by the hour as that increases speed. By the hour decreases speed as then people will have more work to do and therefore pay.

Charlie Munger never got into AIG and GE as it had too much debt used to invest. It eventually was unsustainable and Munger was proven right as they had swollen balance sheets from debt

-avoid companies with high debt equity ratios. Leverage and envy is a lethal combination.

-A master plan should always be changing, taking into account changing conditions as the world is always changing, so do not stay static

-Charlie and Warren take a hands-off approach to managing people, except for a letter every two years about reputation

-cars are like commoditized features; they compete on price, very difficult competition, difficult to make money

-if the dominant player is large enough and has a loyal customer base, it has a wide moat

-liquidity is often an investor worst enemy

-The tortoise emerged victorious over the hare through its gradual and consistent progress, day after day

-the best way to get a good spouse is to deserve a good spouse. How? By being a good spouse yourself.

-know the big ideas in all the big disciplines and use all of them routinely

-Charlie’s 3 career tips: don’t sell anything you wouldn’t buy, don’t work for anyone you don’t respect or admire, work only with people that you enjoy being around

-I try to get rid of people who answer questions confidently when they don’t have any knowledge

-in order to learn from mistakes, you must admit the mistake and take responsibility for mistakes, examine why you failed, and what to do differently in the future

-many people fail to handle psychological denial

-if you want to succeed, extreme specialization is the way to succeed, rather than trying to understand the world

-it’s been my experience in life that if you keep reading and thinking, you won’t have to work

-overspending can make you miserable (like Mozart), but understanding and investing wisely can help you along the road to riches

-any year that passes where you didn’t get rid of an old idea is a wasted year. Out with the old, in with the new. Businesses are always changing.

-Catechism; summary of a doctrine, usually religious but doesn’t have to be. “Navigating interactions with trustworthy peoples proves incredibly valuable, while it’s prudent to distance oneself from those who bring negativity. This principle should be taught and embraced widely. However, it’s important to acknowledge that many individuals exhibit toxic traits and should be avoided by those seeking wisdom”

-there is not one solution fits all

-warrens investing skills went way up after 65

-secret to wisdom is to concentrate, and read, especially of different people, not multitasking on phones

-if we fix problems and are nice to people, we have fewer problems. In the trades, people with problems are going to bring the business, which is why Charlie got out of law

-sometimes not knowing is better, to live a stress-free life

-positive reinforcement is the way to do it. Be what you want, highlight positive qualities

-incentive caused biases are plenty; make sure to get multiple opinions for the same topic

-the best armour of old age is a well-spent life preceding it

-In the context of marriage, the focus should not solely be on finding someone attractive and virtuous. Instead, seek a partner with modest expectations and a contented, adaptable disposition

-“if you get Warren Buffett for 40 years and the bastard finally dies on you, you don’t really have a right to complain”

-Coke is a solid value investment

-learn at least a little everyday; it will help you tremendously in the long run

-don’t let one tragedy spread and become more, choose to make life better

-I think people who multitask pay a huge price

-Charlie’s second wife, Nancy Munger, brought him extreme happiness, or felicity even

-the highest form you can reach is a seamless web of deserved trust, with reliable people correctly trusting one another

-“if a marriage contract has 47 pages, you should not enter”

-we shouldn’t be timid about getting married when we find the right partner

-“I failed my way to success”

-Louis Vincenti’s rule (Charlie and Warren looked up to him): “tell the truth, and you won’t have to remember your lies”

-if you know a little about a lot of things in life, you’ll be wise and will do well in life

-have an opinion where you can state why it is better than other sides, to know the counter argument

-small businesses usually stay small business, whereas most big businesses become mediocre and fail one day

Disclaimer

This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.

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