Founders - #90 Charlie Munger (Poor Charlie's Almanack)

Starting point is 00:00:00 Warren Buffett is the public face of Berkshire Hathaway and is rightly credited with its tremendous long-term success. But there's another major contributor to the firm's legendary performance record, Charles T. Munger. Although less well-known to the general public than Buffett, he is an equally astute and effective teacher, as Poor Charlie's Almanac, a collection of his best talks, quotes, and ideas, will demonstrate. With Charlie himself as your guide via his, and ideas, will demonstrate. With Charlie

Starting point is 00:00:25 himself as your guide via his speeches and writings, you're about to embark upon an extraordinary journey toward better investing, decision-making, and thinking about the world and life in general. Charlie's unique worldview, what he calls a multidisciplinary approach, is a self-developed model for clear and simple thinking while being far from simplistic itself. Throughout the book, Charlie displays his intellect, wit, integrity, and rhetorical flair while simultaneously reinforcing the virtues of lifelong learning and intellectual curiosity. All right, so that is from the cover, the inside flap of the book that I'm holding in my hand, Poor Charlie's Almanac, the expanded third edition is the, the subtitle is The Wit

Starting point is 00:01:12 and Wisdom of Charles T. Munger. So this book is rather unique compared to some of the other biographies and books that I've covered so far on the podcast, because it's more like a textbook, again, very similar to the 54 shareholder letters. I went over the Warren Buffett shareholder letters. The book is huge. So in addition to containing all the wit and wisdom of Charlie Munger, you could also work out with it or maybe even yield it as a weapon. So it is large and I have a ton of notes. So let's not waste any time. Let's go ahead and jump into it. I want to start with this quote. That's a great quote to start with. It's at the very beginning of the book. And it's Charlie in his own words telling us, he says, acquire worldly wisdom and adjust your

Starting point is 00:01:52 behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group, then to hell with them. So I picked up that quote because one, it gives you an insight into the personality of Charlie Munger. He definitely has the habit of making these pithy statements meant to provoke. But second, I think he's hitting on there's no point in encouraging people to be lifelong learners if what you're learning does not affect your behavior. So I appreciate the fact that he just assumes that, hey, you're doing this learning and obviously you're going to take the ideas and it's going to change the way you act. So the book is arranged in a rather bizarre way, as you could imagine, more less of a narrative, more like a textbook. So I'm just going to pull out some of, I mean, we're here to study the ideas of Charlie Munger,

Starting point is 00:02:38 so it's not going to be like a cohesive experience whatsoever. So I just pulled out a bunch of ideas. I am going to cover his early life, which is more, will sound more like a cohesive experience whatsoever. So I just pulled out a bunch of ideas. I am going to cover his early life, which is more, will sound more like a narrative. But this one was in the, this next highlight of mine was just in the very beginning of the book. And it's something I talk about constantly, that reputation is persuasive. And you're going to realize that when you study Charlie Munger, he has a bunch of ideas that he repeats in different ways because he understands the importance of reputation and redundancy. So it says, Charlie's redundancy in expressions and examples is purposeful. For the kind of deep fluency he advocates, he knows that repetition

Starting point is 00:03:15 is the heart of instruction. So he's going to give you the same idea. The bulk of the book, I'd say half of the book, transcripts edited transcripts of 11 of his most famous talks and you'll what you'll notice is he repeats a lot of the same things but in different contexts i actually think that's extremely helpful because you one that you're more familiar with it because you hear him over and over again but he's also applying it to different domains and different examples which may like he has this idea of like the lattice work of mental models meaning like you can't just hang an idea in your mind and not anchor it to something if you don't anchor to something you're just going to forget it so that's what i think he was doing in all these talks all right

Starting point is 00:03:53 so let me go i'm going to start in charlie's early life he actually met warren buffett after he worked for warren buffett's uncle and he didn't know warren because he's a few years older at the time. So let me just go right to this. He says, Charlie initially crossed paths with the Buffett family during the formative years of his life when he worked at Buffett and Son, an upscale grocery store in Omaha. The boss and part owner was Warren's grandfather. Okay, so not his uncle, his grandfather. His grandfather, Ernest, a strict disciplinarian he scheduled his young workers for 12-hour shifts with no meals or breaks the arduous working conditions in the buffett grocery store had a lasting influence on both charlie and warren so what they're talking about there is warren

Starting point is 00:04:37 a few years after charlie left started working for his grandfather as well and experiences saying a lot of the same thing he was a an advocate of like pressure and tough love to make you obviously stronger he says charlie's teachers so now we're talking a little bit about his elementary and middle school or someplace called junior high so it says charlie's teachers remember a smart kid who was also inclined to be a bit of a wise act now they use the word wise acre which i think is like a midwest term for wise ass he enjoyed challenging the conventional wisdom of teachers and fellow students with his ever-increasing knowledge gained through voracious reading particularly biographies so something that's mentioned a bunch of the times um in this book is the favorite thing for charlie first of all charlie reads

Starting point is 00:05:22 constantly they say his kids uh refer think he's like a book with legs sticking out legs and arms sticking out but his favorite things to read is uh biographies and he's read hundreds and hundreds of them so more on his early life he was he was growing up in omaha nebraska during the great depression so he says the 1930s brought hard times and omaha experienced the severity of the Great Depression. Charlie's observations of the plight of those less fortunate made a lasting impression. Okay, so I want to interrupt what I'm doing there because I thought that was a very important point. And let me go, I'm going to go backwards in the book to the forward that Warren Buffett wrote on Munger to introduce like what he's learned and how to think about Charlie.

Starting point is 00:06:07 And I wanted to tie it together to, cause the book talks to several pages where it goes over like him noticing what's happening when you run out of money. And I, in my personal opinion have studied several people that have lived through the great depression, many of which become founders and investors and entrepreneurs later on in their lives is that it was, it changed the way they thought about how you should preserve your resources.

Starting point is 00:06:29 So it's no surprise to me, now that I've studied Charlie Munger, this is the third book I've read about him and by far the most comprehensive, that his, you know, not his idol is not the right word I'm looking for, but the person he looks up to the most is Benjamin Franklin. So it says, this is now Warren Buffett writing. It says, from 1733 to 1758, Ben Franklin dispensed useful and timeless advice through poor Richard's almanac. Among the virtues extolled were thrift, duty, hard work, and simplicity. So those are a lot of the themes that Charlie's going to, he's going to adapt for his own life. And I would just say, like, we've been talking the last few weeks, especially with David,

Starting point is 00:07:09 Ogilvy has this idea that you should make yourself into a formidable individual. And I think, so what's thrift? Thrift is just another word for frugality. Duty, meaning making sure, like, you're professional. Like, you show up and you do what you're supposed to do. You keep your word. You act with integrity, hard work, and simplicity. So when I think about turning like what's the point of us studying these extreme characters, right? No one's going to write a book about you unless you have these extreme tendencies.

Starting point is 00:07:37 And then the point of me wanting to study and learn from all these people is because I think it's helpful to make myself into a formidable individual. And so when I think about the traits I admire in other people that I want to emulate myself, and I do so right now imperfectly because I'm an imperfect human being, they're very much the same traits that Ben Franklin, Charlie Munger are advocating. And I've seen this advocated by a bunch of the people that I've studied on the podcast. Those are things that I want to have part of like my tool set, for lack of a better word. It's only a handful of attributes, but if you can master those attributes, I think you'll have a good life. Continuing back to Warren, subsequently, two centuries went by in which Ben's thoughts on these subjects were regarded as the last word. Then Charlie Munger stepped forth. Initially a

Starting point is 00:08:23 mere disciple of Ben's, Charlie was soon breaking new ground. What Ben had recommended, Charlie demanded. If Ben suggested saving pennies, Charlie raised the stakes. If Ben said be prompt, Charlie said be early. Moreover, Charlie consistently practiced what he preached it's hugely important that their act

Starting point is 00:08:45 your actions are matching up with your your words it's very hard for us humans to do so ben and his will created two small philanthropic funds that were designed to teach the magic of compound interest so i had heard about this before i went and looked it up so i could explain it to you but he left small sums and it's uh about like $1,000 in his money. Let's say in our money, it would be about $4,400 each, right? And he left it in a fund to be compounded for 200 years. And then the cities of Boston and Philadelphia could get the proceeds. And in his will, I think he dictated it. It might have been for like educational purposes or helping young people out, right?

Starting point is 00:09:22 And so what he was trying to do is show that compound interest is very counterintuitive to us and so what happens this 4,400 to to to convert it to like our dollars this 4,400 each right so we're talking less than 10,000 wind up after 200 years grew to 6.5 million dollars which then the cities of boston philadelphia could use as was outlined in his will so that's what he's talking about this these two this is basically an experiment that would take place after he died which i thought is extremely interesting obviously compound interest is a huge uh important idea to understand if you're going to understand buffett munger or really any growth in any company over a long period of time. They all start, as we've seen on the podcast, they all start out tiny and they grow large if you don't interrupt this compounding of value. So it says,

Starting point is 00:10:15 early on, Charlie decided that this was a subject far too important to be taught through some posthumous project. I know I spelled that uh pronounced that correct uh instead he opted to become a living lesson in compounding eschewing frivolous defined as any expenditures that might sap the power of his example so charlie or warren's talking about like uh they bought well warren bought a private jet for berkshire hathaway and he named it the the indefensible because Charlie thought spending money or flying private was indefensible. And so Warren's poking fun at him here. He says, consequently, the members of Charlie's family learned the joys of extended bus trips while their wealthy friends imprisoned in private jets missed those enriching experiences.

Starting point is 00:10:59 Okay, so I want to go back to Charlie's early life because I do think this idea of, hey, I don't ever, like they call it the margin of safety, which is just saying, hey, we're never going to be short on cash professionally and personally. And I think that's that was that was learned in part not only through Ben Franklin, but personal experience going through the Great Depression. So it's just Charlie learned that by supporting each other, the mongers weathered the worst economic collapse in their nation's history. So his family was able to operate from a relative strong financial position compared to, you know, I think at the time it was 25% to 30% of people that wanted to work were out of work during that. More about his early life, some of the stuff that he was studying. And in this example, Charlie is specifically telling us,

Starting point is 00:11:41 even if we're interested in business, investing, multidisciplinary approaches, lifetime learning, you need to study physics. And this is something I haven't done, telling us even if we're interested in business investing multi-disciplinary approaches uh lifetime learning you need to study physics and this is something i haven't done so i'm gonna have to i'm gonna have to take charlie's advice here he was so he says he was impressed by the process followed by physicists such as albert einstein to address the unknown physics like problem solving was to become a passion for charlie and is a skill he considers helpful in framing the problems of life. He has often stated that anyone who wants to be successful should study physics because its concepts and formulas so beautifully demonstrate the powers of sound theory.

Starting point is 00:12:17 And so he's going to use this word multidisciplinary over and over and over again. All that means is you can't just study one subject. You have to have worldly wisdom. multidisciplinary over and over and over again, all that means is you can't just study one subject. You have to have worldly wisdom. You have to understand that the human default is we're extremely certain even though we live in an extremely uncertain environment. And by having the best ideas from a broad range of subjects, it prepares you to deal with that uncertainty. That uncertainty that he rightly brings up that most people don't even know exists. That most people are way too certain in their thoughts. And that's going to be a recurring theme. All right, more biography.

Starting point is 00:12:51 So now we've moved ahead. He's married for the first time. And it says, despite outward appearances, all was not sunny in Charlie's world. His marriage was in trouble, and he and his wife finally divorced in 1953. Not long thereafter, Charlie learned that his adored son, Teddy, was terminally ill with leukemia. So he goes through what I would argue is the single worst experience that a human can go through, and that's the death of a child. It was a significant burden for 29-year-old Charlie.

Starting point is 00:13:20 In that era, before bone marrow transplants, there was no hope. A friend remembers that Charlie would visit his dying son in the hospital and then walk the streets of Pasadena crying. So it brings us up in later speeches that even if you see your child die of cancer or some kind of disease, that self-pity is not. I mean, it's obviously you're going to mourn, you're going to grieve, you're going to be changed for the rest of your life, but he uses that example.

Starting point is 00:13:44 It's like self-pity is never the answer to your problem. He is trained as an attorney. Interesting enough, he never got an undergrad degree, but he winds up getting accepted into Harvard Law School. So he has a law practice, but he gets remarried. There's like a blended family. There's like, it grows to be like, I don't know, eight or nine kids. He's got an army of kids here.

Starting point is 00:14:08 And so he says, with many new responsibilities charlie worked hard at his law practice even so his earnings were unsatisfactory to him as they were based on accommodation of billable hours and seniority so it talks about he never forgot the sound principles taught by his grandfather another lesson from the great depression to concentrate on the task immediately in front of him and to control spending. Those are two great life skills that if you're going to teach your grandchildren or your children something, concentrate on what's in front of you and control your spending. So he winds up realizing, hey, I'm never going to be wealthy if I'm working by the hour. Even if I could be a high-paid attorney, but it's still billable hours. And he talks later in his speeches that it, listen, this idea where I'm going to have a

Starting point is 00:14:47 quote of 2000, I think it's 2080 or 2040 billable hours a year. Like I would be miserable. I can't work under that. So I had to follow. He talks about the advice he gives you is follow your own drift is the word he uses, which means you are who you are. You know what you're naturally interested in. He could not work in that environment and the his mind was telling him that now he did something that's rare he actually acted on that a lot of people just wallow in in in and suffer in silence so he's saying following on drift so he says what was he interested he was interested in business he realized that he had a lot of clients that were a lot of his law practice clients were businessmen and he's like well you know they're not any smarter than me like they figured out i can do so too so he began investing in stocks and acquired equity

Starting point is 00:15:29 in one of his clients electronics businesses then he has a passion for for architecture so he starts doing the real estate development the venture building condominiums this is near the school caltech was a smashing success and the partners earned a handsome profit of $3,000 on a $100,000 investment. In all cases, he left all of his profits in real estate ventures so that the bigger and bigger projects could become possible. Same thing with Berkshire Hathaway. They take all the profit and they just buy better and better businesses. The successful practice of law was by then a backstop rather than ending objective for Charlie. So it kind of puts a floor on his earnings, right? I'll never go below that, but eventually

Starting point is 00:16:13 I'm going to make enough money that I don't need this anymore. At about that time, he was launching his new law firm. He was carefully crafting his exit plan. Charlie set up an investment partnership. So he starts investing his own money and starts, to a smaller degree, investing other people's money. And that's where we're going to get to the part of the story. Now Charlie's 35 years old, and this is where he meets Warren Buffett. Even though they grew up in the same city, they worked at the same place, they were separated for a few years. So he's invited to a dinner with some friends. Warren shows up because Warren kept getting confused by other people in Omaha.

Starting point is 00:16:45 They kept calling him Charlie. And he's like, I want to know if that's an insult or not, which I thought was hilarious. So it says, as the evening progressed, the two young men, Warren, which 29, and Charlie, then 35, became engrossed in a wide-ranging dialogue covering many aspects of business, finance, and history.

Starting point is 00:17:02 Where one was knowledgeable, the other was just as excited to learn so they always talk about like they're they're almost too much alike and i want to interrupt the biography section of this podcast with so the book like i said is more like a textbook so there's just these these random sections put into the story or into the the pages and this is i just want to pull one out they're doing a q a with warren buffett and he's asked the question what would you say are his meaning charlie's most unusual characteristics and this is his answer he says i would say everything about charlie is

Starting point is 00:17:34 unusual i've been looking for the usual now for 40 years and i have yet to find it charlie marches to his own music it's music like virtually no one else is listening to. So I would say that to try and typecast Charlie in terms of any other human that I could think of, no one would fit. He's got his own mold. I think, again, that's an attribute that I'm certainly trying to do, and I would encourage others to. You have to lean into what makes you unique.

Starting point is 00:18:00 And by doing so, studying a wide range of other high-performing humans is a good way to do that all right they wouldn't have written this book about charlie munger if he wasn't if he like they said if he's not what do you say marching to his own music okay let's go back to his biography oh nope i lied i'm not going back to his biography there's just this one sentence for one of one of charlie's first partners a law firm that he started is actually still in existence today it's widely successful even though his name's still on it even though he's not actively involved in it and then it just talks about like Charlie is a he's an information machine he says this this has to do with my opinion why reading biographies is so helpful Charlie Munger has spent a professional

Starting point is 00:18:38 lifetime studying lives that have worked well and others that have glitches or have experienced failure okay back to the biography charlie left the firm as an active partner after only three years when he left this gives you an idea of his personality when he left he didn't take his share of the firm's capital instead he directed that his share go to the estates of their of his young partner a guy named fred who passed away prematurely and who left behind a wife and children when he died of cancer. I think that's very admirable, obviously. He spent much of this time, after leaving the law practice, building the asset base of his investment partnership. He also spent time working on various real estate developments.

Starting point is 00:19:24 He was investing in stocks partly with his own money and partly with other people's money. Munger kept the overhead cost at close to zero. And before joining Berkshire Hathaway, he had fantastic returns. It was like something like 20% per year or something like that. Oh, this is an interesting thought. I've always said like it's better to be wealthy and anonymous than to seek fame,

Starting point is 00:19:51 like seek wealth through hopefully building products that other people love and enjoy and can make somebody else's life better. I go back to that when I'm talking to people that want to start businesses and don't know how. I'm like, well, the easiest way to think about a business is Richard Branson's definition to me. Like a business is just something that's our product let's say product but he said business a business or product is just something that makes somebody else's life better and when you think of it through those terms like products and businesses can be there it's almost

Starting point is 00:20:17 limitless of what you could do but anyways he talks about i bring this up because he winds up he's on you know the forbes 400 as one of the wealthiest people. He doesn't like that. So it says, while he doesn't mind the wealth, he regrets having his name on any such list. Despite his healthy self-image, meaning he's got a giant ego, Charlie would prefer to be anonymous. So now we're moving through. I'm just going to keep pulling this out. Okay, so this is me repeating myself because I can't get over how much Charlie repeats himself on why you should read biographies.

Starting point is 00:20:52 Now, obviously, that makes me feel good because it feels like I'm on the right path with founders. If you think about it, like Charlie could learn. He has not only he's well-known and respected by almost every single entrepreneur and investor alive today, but he has essentially unlimited assets. So that means he could learn from anybody. He could learn. He could take any class, talk to any person. He has – there's no limits on to how – like when designing his own curriculum for personal development. There's no limit to what he could do. And it's interesting

Starting point is 00:21:26 to me that he chooses to read, that he reads everything, but his favorite is biographies. What does that tell you? Like somebody with limitless or unlimited resources is picking up a book that's $15 that's available to you and I. Like that tells you it has value because his actions say they do. This is Charlie. I'm a biography nut myself. I think when you're trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who develop them. That sounds funny making, so he talks about like being friends and thinking of these people as friends and mentors. He says, that sounds funny making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas i think it

Starting point is 00:22:09 will work better for you in life and work better in education it is way better than just giving the basic concepts see how people apply them they're in their own lives gives you this like anchor he calls lattice work now this is charlie on being a partner, business partner. A partner, I guess this could apply to personal relationships too. A partner ideally is capable of working alone. You could be a dominant partner, a subordinate partner, or an always collaborative equal partner. I've done all three. People couldn't believe that I suddenly made myself a subordinate partner to Warren, but there are some people that it is okay to be a subordinate partner to. I didn't have the kind of ego that prevented it. There are always people who will be better at something than you are. You have to learn to be a follower before you become a leader.

Starting point is 00:22:55 People should learn to play all the roles. One of his favorite thinkers is Cicero, who lived, let's see, about 43 BC. So this is Munger on Cicero, but lived, let's see, about 43 BC. So this is monger on Cicero. But when I read this sentence, it could easily also be monger on monger. So you kind of see that he's not only learned from this person, but he's let that person influence the way he thinks and acts. He says, his, meaning Cicero, but again, this could be monger, his underlying philosophical view was one of deep and realistic cynicism about human nature including a distaste for pure mob rule and demagogues that's something that charlie talks about constantly the idea of

Starting point is 00:23:34 standing away from don't don't latch on to extreme ideologies he says it turns your brain into mush part of the reason some people don't like him is because he criticized he says the state the basic state of the human condition is one of great miscognition saying saying like humans default state is to make bad decisions and have a poor life and it is your job it is your duty to learn the skills and the ideas necessary so you don't wind up in that default state all right so moving ahead there's another lesson. Cicero, learned man that he was, believed in self-improvement so long as breath lasts. So Warren Buffett, Charlie Munger, both talk about the idea that they're going to be learning to the day they die, and they also want to be working to the day they

Starting point is 00:24:16 die. They believe you should find something that you enjoy working on that you want to do it every day of your life. Embedded in this section, I found something that was fantastic. This idea, this explicit idea is he's giving advice to us is shooting for durability. That's something I admire. I've been searching my whole life for is to find a company or an action or an activity or work I could do that I never have to quit. I think like the, the, just like compound interest works in magical ways. I think when you work on one idea or one company for a very, very long time, you reap benefits that so few people actually ever get to because they give up at year five or year eight or year 20 or year 30. It's very, very rare. One of Charlie Munger's sons, and he realized what the attributes of the business that Charlie

Starting point is 00:25:00 admired. So he says he admired both stores because they were durable institutions and because their merchandise was fairly priced. Durability has always been a first-rate virtue in my father's eyes. All right, so now this is Buffett on Charlie's absent-mindedness. So I'm going to read this story. It's rather humorous. I chuckled. So the note I left myself is he has the ability to focus on one thing at the exclusion of everything else. That is a superpower. Again, something else that I found in Charlie that I want to adopt myself, that I have imperfectly adopted this trait into my own life. And I think especially today in the information age, when there's a million distractions sitting around our pocket,

Starting point is 00:25:43 that the ability to focus is a superpower. And I think it's actually going to become more and more important as the information information age progresses. This is now Warren Buffett. This is I was in New York City with Charlie to attend a Salomon Brothers board meeting. We'd come out of the building and we were standing on the sidewalk discussing what had transpired at the meeting, at least that's what I thought we were doing.

Starting point is 00:26:03 For suddenly I realized that I'd been talking to myself for some time. I looked around for Charlie only to see him climbing into the back of a taxi cab headed off to the airport. No goodbye, no nothing. People think it's Charlie's eyes that caused him to miss seeing things.

Starting point is 00:26:19 Charlie lost his vision in one eye many years ago due to complications from a cataract surgery. But it's not his eyes. It's his head. I once sat through three sets of traffic lights and plenty of honking behind us as Charlie discussed some complex problems at an intersection. So obviously you don't want to focus on something

Starting point is 00:26:37 to where you're holding up traffic, but I think the ability to eliminate distractions and focus on what is most important is a fantastic idea for us. This is some perfect advice. Find out where you're best at and keep pounding away at it. This has always been Charlie's basic approach to life. This is Bill Gates on Charlie. He is truly the broadest thinker I've ever encountered. Charlie has the ability to capture knowledge with simple descriptions. When discussing the intelligence of offspring, he refers to the genetic lottery. When discussing venture capitalists who defend stock options, he deems them no better than the

Starting point is 00:27:15 piano player in a whorehouse. When discussing the deleterious effects on efficiency and cost plus contracts, he likes to say even the mule knew when to slow down. I think that's what makes Munger such an effective teacher. It's not like those are all, I mean, some people might consider this a kind of like dry subject matter, right? When he adds in these like these Mungerisms, you laugh. And when you're laughing or you're entertained, you're more likely to learn. I think it's a really smart idea. And I think, again, one that he got from, at least in part, from Franklin. All right, so now here's some Munger quotes. I think it hits on what I just said about finding what you're best at and keep pounding away at it.

Starting point is 00:27:56 I love this as like a life motto. Take a simple idea and take it seriously. He talks a lot about how some of the great businesses were created by doing that. They took a simple idea and they took it to its extreme. They took it deadly seriously. All right, another quote. This is like a paragraph. It's going to be a little longer. Our experience tends to confirm a long-held notion that being prepared on a few occasions in a lifetime to act promptly in scale and doing some simple and logical thing will often dramatically improve the

Starting point is 00:28:25 financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past. That's a good outline. That's a good description of basically Berkshire's MO. It's we're not going to diversify.

Starting point is 00:28:59 We're going to do our homework. So we're going to know a lot about our subject matter. So when the opportunity does come, most of the time we're going to be sitting on our ass on a lot of cash but when the opportunity does come because we've already put in the work it's going to be clearly recognizable it does not so we've identified a huge opportunity which means we're not going to like oh we're going to buy a little part no we're going to go all in as heavy as we can and the reason we can go have heavy all in to such a degree with our resources because we were responsible with those resources and allowed them to accumulate over time. The next page, oh, this is the idea he's learned from this guy named John Muir about thinking

Starting point is 00:29:34 about business as an ecosystem. So he says, I find it quite useful to think of a free market economy as the sort of equivalent of an ecosystem. Just as animals flourish in niches, people who specialize in some narrow niche can do very well, even more true in the age of the internet. In business, this is one of my favorite quotes about his idea that I was just referencing.

Starting point is 00:29:56 In business, we often find that the winning system goes almost ridiculously far in maximizing and are minimizing one or a few variables. Simple idea taken very seriously, like the discount warehouses of Costco. Oh, I like this idea too. We should be thinking about ideas as tools. Plus Munger's lattice work of mental models, which he talks about a lot, but I'm going to introduce you to here.

Starting point is 00:30:22 Charlie likes the analogy of looking at one's ideas and approaches as tools when a better tool an idea or an approach comes along what could be better than to swap it out for your old less useful tool warren i warren and i routinely do this but for most people for but most people forever forever uh forever cling to their old, less useful tools. So you are not your ideas. And if an idea comes along that proves one of the ideas wrong or can improve on it in any way, just ditch it. You're not your ideas. So it says his, meaning Charlie, his models supply the analytical structure

Starting point is 00:30:58 that enables him to reduce the inherent chaos and confusion of a complex investment problem into a clarified set of fundamentals. Especially important examples of these models include the redundancy backup system model for engineering, so that's his idea of having a giant buffer, the compound interest model for mathematics, we've already discussed that, the breakpoint tipping moment model from physics, he calls that Lollapalooza when you have a bunch of different um a bunch of different things happening usually in your favor that's how you get really wealthy or in some cases they can move against you but let's talk about in your favor

Starting point is 00:31:34 that has your compound your benefits non-linear so he calls that that's stolen from his study of physics which is the breakpoint tipping moment it's also called like like, you know what, just a way to think about this. It was popularized the last couple of years by Malcolm Gladwell. His book, The Tipping Point, same thing here. And then the modern Darwinian synthesis model from biology. And then he also studied the cognitive misjudgment models from psychology. So that's the basic, basic, basic outline of Munger's latticework of mental models, which he expounds on quite a bit. So I'm going to talk a little bit more about that.

Starting point is 00:32:09 But before, I have a quote here from Bill Gross of PIMCO, legendary fixed income expert, friend of Charlie and Warren's. And it talks about like he says, Munger and Buffett aren't the only elite investors who use non-business models to superb success. So he talks about the book that rests on my library coffee table is not any of my own or one on investing, but several books by historians. He says, there is no better teacher than history in determining the future. There are answers worth billions of dollars in a $30 history book. So same thing. You should be studying history. Okay, so this is Charlie's advice test. It says, learn for yourself. Only the autodidacts are free.

Starting point is 00:32:50 And Charlie's guiding principles. Charlie painstakingly created his own largely self-taught system. The self-taught statement is no exaggeration. So this is a quote from Charlie. He says, to this day, I've never taken any course anywhere in chemistry, economics, psychology, or business. This is what I was talking about last week where I'm rather skeptical of institutionalized learning

Starting point is 00:33:10 because anything I've sought out and wanted to learn myself because of my own innate desire, I've learned and remembered. Anything somebody like a teacher made me do for a grade or to get out of a class, it just goes in one ear and out the other. It's largely useless. So he says, his clarity is hard won, the product of a lifetime of studying the patterns of human behavior, business systems,

Starting point is 00:33:31 and a myriad of other scientific disciplines. Charlie counts preparation, patience, discipline, and objectivity among his most fundamental guiding principles. So go back to this idea of making yourself a formidable individual. These are more traits that we want to put in our toolbox. Patience, which I don't have any of. Preparation, I do somewhat better on that.

Starting point is 00:33:51 Discipline and objectivity among his most fundamental guiding principles. Those are all great traits for a human being to have. He will not deviate from these principles, regardless of group dynamics, emotional itches, or popular wisdom, that this time is different. When faithfully adhered to, these traits result in one of the best known monger characteristics. Not buying or selling very often. Monger, like Buffett, believes a successful investment career boils down to a handful of decisions. So when Charlie likes a business, he makes a very large bet and typically holds that position for a very long period. Charlie calls it sit on your ass investing and cites its benefits.

Starting point is 00:34:32 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 year. So, again, that's another idea that was covered at length in the Buffett shareholder letters. Oh, okay. Another thing that was covered in the shareholder letters, Buffett and Munger are laser focused on moats. Okay.

Starting point is 00:34:54 So, and what's a moat? Charlie refers to a company's competitive advantage as its moat, the virtual physical barrier it presents against incursions. Superior companies have deep moats that are continuously widened to provide enduring protection. In this vein, Charlie carefully considers competitive destruction forces that, over the long term, lay siege to most companies. Almost every company is going to, I mean, I would say every company in history is eventually going to wither away because of this.

Starting point is 00:35:25 Just some companies last a little longer than others. Munger and Buffett are laser-focused on this issue. I mean, I would say every company in history is eventually going to wither away because of this. Just some companies last a little longer than others. Munger and Buffett are laser focused on this issue. Over their long business careers, they have learned, sometimes painfully, that few businesses survive over multiple generations. Okay, so I kind of just tripped over my own point there. Accordingly, they strive to identify and buy only those businesses with a good chance of beating these tough odds. So one way to think about a moat is if you gave me $20 billion, how could I compete with that company?

Starting point is 00:35:53 One moat they always reference is Coca-Cola because of their dominant position in the beverage industry. Even if you gave somebody a startup $20 billion to compete with Coke, they probably wouldn't be successful, at least not right now. Eventually, obviously, they will wither away, and another company or maybe a series of companies will take their place. But it's extremely hard to do so. So again, there's no such thing as like an indestructible company. We just, some are harder to attack than others.

Starting point is 00:36:22 And so they're looking for ones that are extremely hard to attack, and they're hard to attack if you take the metaphor to its logical conclusion because they have a giant moat outside their castle. Okay, so Charlie says he practices extreme patience combined with extreme decisiveness. That's a quote from Munger. If you look at our top 15 decisions, or excuse me, if you took our top 15 decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles, and when opportunities came along, you pounced on them with vigor. There are worse situations than drowning in cash and sitting, sitting, and sitting.

Starting point is 00:37:01 I remember when I wasn't awash in cash cash and i don't want to go back this is charlie's advice to us pay up for quality and learn from constructive criticism he says if you if seize candies which is one of their most successful investments ever i think they paid like i don't know 20 let's say 25 or 30 million for them and they've made in like profits that have proved since then i think over a billion dollars from seize candies it prints money it's outstanding how much money a candy company can make so it says if seize candies when we were buying it had asked for a hundred thousand dollars more warren and i would have walked that's how dumb we were that's interesting uh way to analyze your past decisions like oh that was really stupid right so? So it says, Ira Marshall said, you guys are crazy. There are some things you should pay up for,

Starting point is 00:37:48 like quality businesses and people. You are underestimating quality. We listened to the criticism and changed our mind. This is a good lesson for anyone. The ability to take criticism constructively and learn from it. If you take the indirect lessons we learn from C's, you could say Berkshire was built on constructive criticism. Now, on the very next page, he has this idea of, like, same line of this. You have to learn from your mistakes, right? And this is a $10 billion mistake.

Starting point is 00:38:20 And this is interesting because I always repeat this favorite quote of mine, that humans score in the abstract, even though there's a lot of things that are abstractions that are extremely important in our lives. So it says, the most extreme mistakes in Berkshire's history have been mistakes of omission. We saw it, but we didn't act on it. They're huge mistakes and we lost billions and we keep doing it. After nearly making a terrible mistake not buying See's candies, we made similar mistakes many times. These opportunity costs don't show up on financial

Starting point is 00:38:53 statements, but they've cost us many billions. That's what I mean about humans scorning the abstract. Since mistakes of omission aren't't visible most people don't pay attention to them so what did charlene warren do we rub our noses in mistakes of omission this whole exchange here was from a from one of the burschers annual meetings they were just they had just gone discussing failing to buy walmart stock at the time because the price had gone up a little bit from the time they wanted to buy in the time they could buy and that mistake as of that day which might be even more now was it cost them over 10 billion dollars so I want to talk I want to interrupt the wit and wisdom of Charlie Munger with this idea I've talked about many times that books are the original links they

Starting point is 00:39:39 lead us from one from other people to from one person to another so on and so forth so there's several books and people profiled in the work of Buffett and Munger that are now like I've immediately started buying the books and gonna like stay down this path for a little bit in the next few weeks so we started with Warren Buffett's Sherwood Letters talks a lot about Charlie Munger obviously in that talks about David Olgrafy so I did David Olgrafy last week did Munger, obviously, in that. It talks about David Olgrafy. So I did David Olgrafy last week, did Munger this week. Next week, I'm doing the book of Jim Clayton, the guy where Warren reads his biography. That's the book I bought, and then buys the guy's company. Well, that obviously is the book we need to read, right?

Starting point is 00:40:14 He learned so much from it. It's so compelling. I wind up buying the company for a couple hundred million dollars. Charlie's also introduced me to several people in the book. One of them is this guy I want to tell you about right now, this guy named Henry Singleton. And he's profiled in this book called The Outsiders. Let me just run down his, tell you a little bit about Singleton real quick, because I find it

Starting point is 00:40:31 fascinating. They call him a business and chess master. Singleton was co-founder of Teledyne and chief executive of the Los Angeles-based conglomerate for three decades. He attended the Naval Academy, then transferred to MIT, where he received a bachelor's, master's, and PhD degrees in electrical engineering. An enormously skilled chess player, he was only 100 points below the grandmaster level and could play without looking at the board. From 1963 to 1990, when he was running the company, Teledyne returned an astounding 20% compound annual return to shareholders. This was a period when the S&P returned 8%. He repurchased 90% of Teledyne's outstanding shares primarily between 1972 and 1984. Singleton built a record as a manager and capital allocator with few peers in modern business history. Sharing Buffett's

Starting point is 00:41:19 admiration for Henry Singleton, Charlie wonders, given the man's talent and record, have we learned enough from him? So when Charlie asked that question, I was like, all right, I need to read the part of this book because he's explicitly saying like this guy is so skilled at life. We should be. He's worthy of more study. Right. And then this is a quote from Warren Buffett on Singleton. Henry Singleton had has the best operating and capital deployment record in American business. If one took the 100 top business school graduates and made a composite of their triumphs, their records would not be as good as Singleton's. So keep an eye out for a podcast in the future, next few weeks with Singleton.

Starting point is 00:41:56 This is Charlie on how to get rich and then also a defense against inflation. So how to get rich. A young shareholder asked Charlie how to follow in his footsteps, and Charlie brought down the house by saying, we get these questions a lot from the enterprising young. It is a very intelligent question. You look at some old guy who's rich and you ask,

Starting point is 00:42:16 how can I become like you except faster? And then this is his answer, his advice. Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step, you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. And at the end of the day, if you live long enough,

Starting point is 00:42:44 most people get what they deserve. And at the end of the day, if you live long enough, most people get what they deserve. And then this is his defense against inflation. And his idea for us is you need to reduce your material needs. Most people will see declining returns due to inflation. One of the great defenses if you're worried about inflation is to not have a lot of silly needs in your life. You don't need a lot of material goods. So that could have easily been said 200 years prior by Benjamin Franklin. Oh, so this is interesting. If you've listened to every single Founders Podcast I've done so far, I've mentioned this guy a few times.

Starting point is 00:43:19 He's the founder of Costco. His name is Jim Senegal. Munger, basically, I think the business he most admires that's not part of Berkshire, so like outside of Coca-Cola and Geico and the rest of these, is Costco. And Jim is one of the co-founders of Costco. Well, let me just read this. So this is Munger on Senegal. You just wouldn't believe how efficient and sophisticated Costco's warehouse operation is. Jim Senegal is a fabulous business operator. He's like a Carnegie, a Rockefeller, or a James J. Hill. Let me pause there. Never heard of James J. Hill. Munger mentioned him several times. Just found his

Starting point is 00:43:55 biography. Just bought his biography. So that's going to come up too. I consider him to be one of the top five retailers of the past century. And why did I buy James Hill's biography? Because Munger, who I admire, just put him in the same sentence as carnegie and rockefeller so we have to study him we have no choice it's not even my decision i have to she says i consider him to be one of the top five retailers of the past century he's that good he works 80 hours a week and sets a terrific example for his entire organization in terms of work ethic integrity, and selflessness. He's a moral leader as well as a practical leader. These are not minor virtues. We have our own living, breathing Sam Walton at Costco. So I think Munger, he used to be, I don't know if he still is, but he used to be on the board

Starting point is 00:44:38 of Costco. And the reason I say, if you listen to my podcast, you know who Jim Senegal is because when I covered the Everything Store, the book on Amazon, I'm Jeff Bezos. Bezos said that his meeting with Senegal was life-changing. They met in like 2000 or 2001. I think it was 2001 after the dot-com bust. I think they met at like a Starbucks or I meant for coffee or whatever the case is. And, you know, Jim just laid out to Jeff what he's learned about business. And shortly thereafter, Jeff had a passion for trying to reduce.

Starting point is 00:45:05 He says like that Jeff has this quote where he's like, there's two types of businesses in the world. One's to try to figure out how to charge more, and one that figures out how to charge less. We're going to be the latter. That comes directly from Jens Sunnigal. The idea Amazon Prime looks extremely similar to Costco makes almost all their money on their membership program.

Starting point is 00:45:22 So, again, these are ideas that Jeff Bezos stole rightfully because he's smart. He's going to obviously study entrepreneurs of the past. People have been successful before he was and take the ideas that are valuable. Okay. So now everything I just read to you and just expounded on came from like the first half of the book. The first half of the book is like this weird collection of just ideas he has. The second half is all these giant talks. And I'm talking like 300, 250 pages of a giant book here. So I obviously would be impossible to read them all, but I'm just going to pull out some quotes and ideas that I really like. Some of these I've actually heard, and it was nice to have heard the speech first and then read it after. I think it helped in my understanding.

Starting point is 00:46:09 But first, he's giving a commencement speech at Harvard in 1986. And I just thought this paragraph was interesting. It says, most graduation speakers choose to lay out a prescription for attaining a happy life, right? So everybody gets up there and they give you their advice on what they've learned. Charlie, using the inversion principle he recommends in the speech, compellingly makes the opposite case by setting forth what a graduate may do to reach a state of misery. So he's like, his idea, if you want to find out his idea of invert, always invert. And so instead of saying, how do I solve this problem? Like, how do I work backwards? Well, it talks about like the example I think he uses is like, if you want to learn, like if your goal is, okay, I want to help the people of India, right? Start with what are the actions I would take if I want, that would hurt the people of

Starting point is 00:46:51 India, right? And it makes you think about the same problem in a vastly different way and then avoid those actions. So he's doing this, he's telling us what to avoid in life. And one of this is he's really big on staying sober. So he says, the four closest friends of my youth were highly intelligent, ethical, humorous types. They were favored in person and background. Two are long dead with alcohol-hate contributing factor. And a third is a living alcoholic, if you call that living. While susceptibility varies, addiction can happen to any of us through a subtle process where the bonds of degradation are too light to be felt and they until they are too strong to be broken and yet

Starting point is 00:47:31 i have yet to meet anyone in over six decades of life whose life was worsened by fear and avoidance of such a deceptive pathway to destruction so he's telling us hey don't don't drink and don't do drugs charlie's more on charlie's keys to a miserable life so he's going to, hey, don't drink and don't do drugs. More on Charlie's keys to a miserable life. He's going to give us, I think there's what, three or four of them here. First, be unreliable. So again, he's saying if you want a miserable life, these are the traits you should do. Obviously, we don't want a miserable life, so we're going to be doing the opposite. First, be unreliable.

Starting point is 00:48:01 Do not faithfully do what you have engaged to do. If you will only master this one habit, you will more than counterbalance the combined effects of all your virtues, howsoever great. So let me pause there. That's a hell of a statement. Just being unreliable will foreclose many opportunities in your life. It doesn't even matter how great you are. He's saying that if you're unreliable, no one's going to be able to trust or work with you. Therefore, you're not going to reap any benefits in the future. If you like being distrusted and excluded

Starting point is 00:48:27 from the best human contribution and company, this prescription is for you. Master this one bad habit and you will always play the role of the hare in the fable, except that instead of being outrun by one fine turtle, you will be outrun by hordes and hordes of mediocre turtles and even some mediocre turtles on crutches see what i mean about like he's taking this really important idea but that visual visualization of the tur the classic fable of the the tortoise and the hare

Starting point is 00:48:57 or turtle and hare whatever you want to call it now and when i'm reading i picture that that like cartoon i watched when i was younger or something like that, right? And then he adds mediocre turtles. Could you imagine if you're unreliable? It doesn't matter how smart and capable you are. Because you're unreliable, you're going to have people that you deem less skilled than you actually do better in life. That's like a little version of personal hell, right? But then the idea that you're going to have mediocre turtles on crutches because you're unreliable, they're still kicking your ass.

Starting point is 00:49:37 My second prescription for misery is to learn everything you possibly can from your own experience, minimizing what you learn vicariously from the good and bad experience of others living in debt. So he's talking about, you know, don't worry about studying what the best and worst of whatever people figured out. Do it only on firsthand experience. See how far you get. That's a good key on why he reads so many biographies because he doesn't want to do this. This prescription is a sure shot producer of misery and second rate achievement. We only get one shot at life.

Starting point is 00:49:57 Do you not want to ever tap into the potential that you have? You're just like, no, no, I'm cool being second rate. You can see the results of not learning from others' mistake by simply looking about you. This gets rather, what's no, I'm cool being second rate. You can see the results of not learning from others' mistake by simply looking about you. This gets rather, what's the word I'm looking for? This is like controversial where he criticizes humans, right? So he says, you can see the results of not learning from others' mistakes by simply looking about you. How little originality there is in the common disasters of mankind.

Starting point is 00:50:21 Drunk driving deaths, reckless driving maimings, incurable venereal diseases, conversion of bright college students into brainwashed zombies as members of destructive cults, business failures through repetition of obvious mistakes made by predecessors, various forms of crowd folly, and so on and so on. So he's saying if people were actually, if the standard default condition of human beings were actually capable of learning from other people or we were are we we actually tried to obtain that skill you wouldn't have people making mistakes that other humans have made in the past already the other aspect of avoiding vicarious wisdom is the rule of not

Starting point is 00:50:59 learning from the best work done before yours there was once a man who assiduously mastered the work of his best predecessors, despite a poor start and a very tough time in analytical geometry. Eventually, his own work attracted wide attention, and he said of his work, if I've seen a little farther than other men, it is because I stood on the shoulders of giants.

Starting point is 00:51:26 So what is he telling us right there? He's telling us two things. Invert, always invert, because that's the whole point of the speech he's doing. And two, learn from your predecessors. Learn from them. You could take an average person that has the knowledge of what worked and didn't work in the past and that applies to their life will get further than the brilliant person that doesn't. My third prescription to you for misery is to go down and stay down

Starting point is 00:51:49 when you get your first, second, or third severe reverse in the battle of life. I mean, you quit. A little bit of adversity, you just gave up. Because there's so much adversity out there, even for the lucky and the wise, this will guarantee that in due course you will be permanently mirrored in misery. My final prescription for you for a life of fuzzy thinking and infelicity is to ignore a story they told me when I was very young about a rustic who said, I wish I knew where I was going to die, then I'd never go there. So now he's talking about, he's actually Johnny Carson,

Starting point is 00:52:26 like the old, this is a lesson about inverting. They learned from Johnny Carson. So, because Carson gave a speech very similar, I should have said this at the beginning, Carson gave a speech very similar to the one Munger's giving at this commencement address. So it says, what Carson did was to approach the study of how to create X by turning that question backward.

Starting point is 00:52:45 That is by studying how to create non-X. The great mathematician Jacobi had exactly the same approach as Carson and was known for his constant repetition of one phrase. Invert, always invert. It is in the nature of things, as Jacoboby knew, that many hard problems are solved only when they are addressed backward. In my opinion, as a certified biography nut, that Charles Darwin would have ranked near the middle of Harvard School graduating class of 1986,

Starting point is 00:53:20 yet he is now famous in the history of science. And so he's asking, like, how did this happen? Like, you have somebody, this is what I was just saying. Like, you could have somebody that's average in terms of, like, where they would have appeared in a graduating class. Yet because of their approach, actually is what led to, like, the differentiation, what led to their outside success. So it says, Darwin's result was due in large measure to his working method, which violated all my rules for misery and particularly emphasized a backward twist in that he always gave priority and attention

Starting point is 00:53:54 to evidence tending to disconfirm whatever cherished and hard-won theory he already had. In contrast, most people early achieve and later intensify a tendency to process new and disconfirming information so that any original conclusion remains intact. So it goes back to his tool, thinking about ideas as tools. Some people are like, this idea is now a part of me. I can't, like, I'm a good person, so this idea is good. Meanwhile, there's new information coming in.

Starting point is 00:54:20 Charles would just get rid of his old idea. So would Munger. And he's saying that most people don't. They get rid of disconfirming information so that any original conclusion remains intact. They become people of whom Philip Wiley observed. You couldn't squeeze a dime between what they already know and what they will never learn. If you minimize objectivity, you ignore not only a lesson from Darwin, but also one from Einstein. Einstein said that his successful theories came from curiosity, concentration, perseverance, and self-criticism. So if you don't engage in self-criticism, I mean, that's essentially like

Starting point is 00:54:58 getting rid of your bad ideas. And by self-criticism, he meant testing and destruction of his own well-loved ideas. Okay, so I just walked over my point again. All right, let's move forward. So this next talk is about worldly wisdom, mental models, etc. So he says, that enables me to start talking about worldly wisdom, a much broader topic that interests me because I think all too little of it is delivered by modern educational systems, at least in an effective way. So he's constantly criticizing academia. He's saying it's not really teaching you. He's teaching you how to master like

Starting point is 00:55:28 one thing when you should be learning from different domains and different subjects. He calls it like the balkanization of academia. It's like the old saying, to the man with only a hammer, every problem looks like a nail. And of course, that's the way the chiropractor goes about practicing medicine. But that's a way the chiropractor goes about practicing medicine. But that's a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you've got to have multiple mental models. One of the mental models you have to learn is probability. If you don't get this elementary but mildly unnatural mathematics of elementary probability into your repertoire, then you go through a long life

Starting point is 00:56:07 like a one-legged man in an ass-kicking contest. You're giving a huge advantage to everybody else, so you have to study probability. He's got more advice for us. Always start with why. If you wrote a letter or directive in the brawn... He's talking about the brawn company and what he learned from them. If you wrote a letter or directive in the bra he's talking about the the braun company and what he learned from them if you wrote a letter or directive in the braun company telling somebody to do something and you didn't tell them why you would get fired you might ask why is this so important well again that's a rule of psychology so you have to study psychology as well if you always tell people why they'll understand it better they'll consider it important, and they'll be more likely to comply. Even if they don't understand your reason, you'll be far more likely to comply.

Starting point is 00:56:52 So from one of the books, one of Charlie's favorite books is by Robert Chialdini. It's called The Psychology of Influence of Persuasion. I read it a long time ago. I think I read it twice, actually. And there's a story in the book that actually illustrates this, where they do an experiment where there's a long line of like the photocopy machine in an office. And if you ask, Hey, can I, can I get ahead of you? That's all. It's just like, Hey, can I cut you in line? They'll say no. But if you say, I, Hey, can I get ahead of you? I have, then you tell the reason why it doesn't even matter what

Starting point is 00:57:21 the reason is. Maybe it's like, Oh, I have a meeting in five minutes. Most people will let you cut ahead of them. And they even tested it by saying, hey, can I cut you in line? I have to make copies. That's not really a reason, but the fact that they understood why, people are more willing to comply. It's like a weird hack of human psychology. All right, so these are ideas and models that Charlie likes most. And then also an indication where we learned from David Ogilvie that if an ad works in one country, it'll probably work in others. This is probably why Ogilvie found that ads worked in multiple countries. So he says the engineering idea of a backup system is a very powerful idea. I mentioned this a little bit earlier.

Starting point is 00:57:57 The engineering idea of breakpoints, that's a very powerful model too. The notion of a critical mass, that comes out of physics. It is also a very powerful model too. The notion of a critical mass, that comes out of physics. It is also a very powerful model. The next most reliable models are from biology and physiology because after all, all of us are programmed by our genetic makeup to be much the same. And so just as a man working with a tool has to know its limitations, a man working with his cognitive apparatus has to know its limitations. The psychology of misjudgment, as I call it, is a terribly important thing to learn. Until he continues, like, why is the psychology of misjudgment so important to study?

Starting point is 00:58:38 He says, terribly smart people make totally bonkers mistakes by failing to pay heed to it. In fact, I've done it several times during the last two or three years in a very important way. You never get totally over making silly mistakes. There's another saying that comes from Pascal that I've always considered one of the really accurate observations in the history of thought. Pascal said, the mind of man at one and the same time is both the glory and the shame of the universe. And that's exactly right. It has this enormous power.

Starting point is 00:59:13 However, it also has these standard malfunctions that often cause it to reach wrong conclusions. It also makes man extraordinarily subject to manipulation by others. For example, roughly half of the army of Adolf Hitler was composed of believing Catholics. Given enough clever psychological manipulation, what human beings will do is quite interesting. And he's going to touch on this idea again where he's going to repeat himself. The economy as an ecosystem. Just as animals flourish in niches, similarly, people who specialize in the business world and get very good because they specialize frequently find good economics that they wouldn't get any other way. This is Munger on Walton, which he mentions a bunch of times. He holds him in high regard. And he says, it's quite interesting to think about Walmart starting from a single store in Arkansas

Starting point is 01:00:08 against Sears with its name, reputation, and all of its billions. How does a guy in Bentonville, Arkansas with no money blow right by Sears? And he does it in his own lifetime. In fact, during his own late lifetime, because he was already pretty old by the time he started out with just one little store. I think it was like 42 or 45, something like that when he started the first Walmart.

Starting point is 01:00:32 He played the chain store game harder and better than anyone else. Walton, this is why I highlighted this part. This one section is particularly interesting. Walton invented practically nothing but he copied everything anybody else ever did that was smart so he just blew right by them all think about you don't even have to innovate if you just master the good ideas of what everybody else already figured out and you actually apply them that puts you ahead of almost every single

Starting point is 01:01:01 other person because it's such a rare technique and rare skill. That's amazing. One of my favorite quotes comes from a founder of AngelList, Naval Rabakant. And he says, what do you do that feels like play to you, but looks like work to others? Build a business around that. I think that's fantastic advice. And Charlie's kind of echoing that here. You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don't, you're going to lose. And that's as close to certain as any prediction that you can make. You have to figure out where you've got an edge. And you've got to play within your own circle of competence.

Starting point is 01:01:47 So here you have Munger kind of poking fun. He really hates this idea of efficient market theory. And well, let me read the paragraph first. He says, it's rather interesting because one of the greatest economists of the world is a substantial shareholder in Berkshire Hathaway and has been from the very early days after Buffett was in control. His textbook always taught that the stock market was perfectly efficient and that nobody could beat it, but his own money went into Berkshire and made him wealthy. So like Pascal and his famous wager, he hedged his bet, which is another way of saying if your actions aren't really lining up with your ideas or your words, you don't actually believe them. So what I took away from that paragraph is you have to, and I say this over and over again,

Starting point is 01:02:31 you have to watch what people do. And you have to make sure that their opinions are tied to a profit and loss statement. That's the only way that it has any kind of value. This guy's, in Munger's opinion, poisoning the minds of generations of people teaching him a theory that he calls bonkers. Yet what does he do with his own money? He gives it to somebody that can beat the market, that Buffett and Munger. So that's a hell of an insult, actually, now that I reread that part. That's pretty damning on that economist. He doesn't name them by name, but I mean, obviously, the guy's got to know who he. But I know that myself, if you can make this very simple concept part of your decision making, you will do very well. The wise ones bet heavily when the world offers them that opportunity.

Starting point is 01:03:13 They bet big when they have the odds. This is something we've heard Munger talk about many times. And the rest of the time they don't. It's just that simple. That is a very simple concept and to me it is obviously right yet practically nobody operates that way when you get a when you get a few you should really load up it's just that simple so the difference between knowing something and actually acting on it no point learning if you're not going to do it and there's something about it that goes against our nature because you see that the standard like the default is that we people are not going to do that. They'll tell you to diversify. They hedge.

Starting point is 01:03:47 They have plan B, C, D, you know, all the way down to plan Z, if you will. Munger and Buffett aren't like that. They have belief in their ability and their ability to learn about what's valuable to a business and to bet heavily on it. So this is Munger who talks about it's super, super important that you need to get the incentives right. As usual in human affairs, what determines the behavior are incentives for the decision maker. From all business, my favorite case on incentives is Federal Express. I love this story.

Starting point is 01:04:18 The heart and soul of its system is having all of its airplane come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can't deliver a product full of integrity to Federal Express customers. And there were a lot of delays. It was always screwed up. They could never get it done on time. They tried everything. Moral persuasion, threats, you name it, and nothing worked. Finally, somebody got the idea to pay all these people not so much an

Starting point is 01:04:46 hour, but so much a shift. And when it's all done, they can go home. Well, their problems cleared up overnight. So getting the incentives right is a very, very important lesson. It was not obvious to Federal Express what the solution was, but maybe now it will hereafter be more often be obvious to you. This is more on Munger's elaborating on bending heavily on the few unique insights that you have. The Berkshire system is not bonkers. It's so damn elementary that even bright people are going to have limited, really valuable insights in a very competitive world where they're fighting against other very bright, hardworking people. So what he's saying is it's obvious. You can't have such a large ego that you're going to outsmart people every time. You

Starting point is 01:05:33 might be able to do this a handful of times in your life. Well, guess what? If you only do it a handful of times in your life, you're fabulously wealthy. And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. Isn't that perfectly obvious? How many of you have 56 brilliant insights in which you have equal confidence? Raise your hands, please. Now, how many of you have two or three insights that you have some confidence in? I rest my case. when he when he puts it like that like it's i didn't say it's no i don't know i almost used the word easy it's not the right word i think it's a lot it's easier to do or at least doable for most people to come up with two or three really good insights

Starting point is 01:06:18 in their lifetime about ways to businesses products services, services, whatever the case is. It's next to impossible. Like you could probably make one good business. Maybe you have, you can invest or make two or three good businesses or have the opportunities to partake in that in your lifetime. But what's the chances you can come up with 50 or a hundred? Charlie's point is extremely low. So why don't you just focus on doing it a few times and doing it really, really well. Oh, so this is the book I'm going to do in two weeks because this is bananas. This is another example of books that are original links. So I've known about Claude Shannon.

Starting point is 01:06:55 His biography came out like two years ago. He's like the inventor of the information age. But I never heard about this book. So it says in this guy named William Poundstone, William Poundstone's book, Fortune's Formula, collects much of the modern evidence on this point in a highly entertaining way moreover the book contains an account of the lollapalooza that's a that's his charlie's term for when a bunch of different factors are all pointing in the same direction it's how you build wealth really fast of the lollapalooza investment record of Claude Shannon,

Starting point is 01:07:31 pioneer scientist in information theory that makes Shannon's methods look much like those of Charlie Munger. So I downloaded the Kindle version and I read the first, like the sample, first I read the description and read the samples. I'm definitely doing this book right away because it's fascinating. But I got that idea from Munger. Okay. So now I got to the point where Munger, he's giving us advice. He's saying, listen, undertake a multidisciplinary approach. And he's going to give us specific ways to do so. I love this quote though, from somebody he learned from this guy named Sir William Olser, who was alive in like the 1800s. This is the very first step towards success in any occupation is to become interested in it. I thought that was fascinating. Okay. So that was just a quote. Let me get into Munger's advice on how to undertake

Starting point is 01:08:08 a multidisciplinary approach. This is Munger talking. I've long believed that a certain system, which almost any intelligent person can learn, works way better than the systems that most people use. What you need is a latticework of mental models in your head, and you hang your actual experiences and your vicarious experience that you get from reading and so forth on this latticework of powerful models. And with that system, things gradually get to fit together in a way that enhances cognition. Your assigned reading for today included

Starting point is 01:08:39 the latest annual letters from Jack Welch and Warren Buffett relating to General Electric and Berkshire Hathaway. So we've done half of our homework here. Jack Welch has a PhD in engineering and Warren plainly could have gotten a PhD in any field he wanted to pursue. Both gentlemen are inverte teachers. That's not how you pronounce that word. Great teachers. Let's just say that. When I urge a multidisciplinary approach that you've got to have the main models from a broad array of disciplines and you've got to use them all, I'm really asking you to ignore jurisdictional boundaries. So he's saying like, don't just pay attention to what you learned and whatever field of study, like look over

Starting point is 01:09:15 the fence and see what they have that they've already learned too. And why you do that? Because the world isn't organized that way. It discourages the jumping of, it discourages the jumping of jurisdictional boundaries. Big bureaucratic businesses discourage it. And of course, academia itself discourages it. So he's telling us, don't do this. Don't discourage it. Your school might be set up like that. Your large corporation you work for might be set up like that, but it's not something that you want to do. All I can say there is that in that respect, academia is horribly wrong and dysfunctional. So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries.

Starting point is 01:09:53 He has this thing, it's like, forget it, I'll do it myself curriculum, I would say. Since your academic structure, by and large, doesn't encourage minds jumping jurisdictional boundaries, you're at a disadvantage because in that one sense, even though academia is very useful to you, you have been mistaught. My solution for you is one that I got from a very early age from the nursery. Nursery rhyme. It's the story of the little red hen. The punchline of the course is, then I'll do it myself, said the little red red hen so if your professors won't give you an appropriate multidisciplinary approach if each wants to overuse his own models and under use the important models and other disciplines you can

Starting point is 01:10:34 correct that folly yourself another person that I was introduced to and I've ordered the book is the founder of Hershey Chocolate. And somebody Munger looks up to and he references a few times. So I'm going to ignore most of that because I'll cover it when I read the book. But there's a story here that I think is a good point that Charlie's saying. It's like there's some things in life that are just hard to copy. They're not going to be at all obvious. So this is Charlie giving us a little story on that. He says, one of my favorite business stories comes from Hershey. They get their flavor because they make their cocoa butter in old stone grinders that they started with in the 1800s in Pennsylvania.

Starting point is 01:11:16 And a little bit of the husk of the cocoa bean winds up in the chocolate. Therefore, they get that odd flavor that people like in Hershey's chocolate. Hershey knew enough when they wanted to expand into Canada to know they shouldn't change their winning flavor. Therefore, they copied their stone grinders. Well, it took them five years to duplicate their own flavor. As you can see, flavors can be quite tricky. And the lesson I took away from there is even your own business there could be things that give you an advantage that other people want to copy and one they might not be able to but two it may even

Starting point is 01:11:52 be kind of a mystery to you now they went up figuring it out but took them five years to get the same flavor just in two different locations so I think that could be applied to a bunch of different ways to to actually have an advantage in your business because if it's so hard for Hershey to copy their own flavor, how hard is it for their competitors to copy their flavor? Oh, this is interesting. Do you have an ideology from which you won't budge? Another lesson in worldly wisdom. Heavy ideology is one of the most extreme distorters of human cognition.

Starting point is 01:12:23 Ideology does some strange things and distorts cognition terribly. If you get a lot of heavy ideology young and then you start expressing it, you are really locking your brain into a very unfortunate pattern, and you are going to extort your general cognition. Why? Because ideology, since it pounds ideas in better than it convinces out, it is a very dangerous thing to do. All right, skipping ahead. This is such a great point. Let me read it to you and then I'll tell you what I took away from it. He says, I don't want you to think that we have

Starting point is 01:12:55 any way of learning or behaving so you won't make a lot of mistakes. I'm just saying that you can learn to make fewer mistakes than other people and how to fix your mistakes faster when you do make them. And to me, his whole point is the way you think and then how you apply that to whatever you're working on. It's like your system should be able to survive even when you make – even with the mistakes you make. Because it's inevitable that humans are going to make mistakes. So you cannot build a business, you can't build a system of thinking that relies on no mistakes being made. There's no such thing as a perfect human being.

Starting point is 01:13:30 So you can't have a perfect system. This is him telling us to master the best of what other people have already figured out. This is a question and answer section. He says, I understand your skepticism about overly ideological people, is what I just mentioned earlier. But is there an ideological component to what you do is there something that you're

Starting point is 01:13:49 irrationally passionate about and then this is monger's fantastic answer he said yeah i'm passionate about wisdom i'm passionate about accuracy and some kinds of curiosity perhaps i have some streak of generosity in my nature and a desire to serve values that transcend my brief life. But maybe I'm just here to show off. Who knows? I believe in the discipline of mastering the best that other people have figured out. I don't believe in just sitting down and trying to dream it up all by yourself. Nobody is that smart. So in almost every talk, Munger is going to talk about you need to study multiple disciplines, you need to study multiple disciplines, you need to study

Starting point is 01:14:30 multiple disciplines over and over and over again. And there's this one paragraph where he's talking about this class at Harvard Business School. And I think this paragraph actually is a great illustration of why that's so important. So the note that I wrote myself is if you don't study multiple disciplines, you won't know the right move to make when the right answer lies outside of your field. So this is a good quick story that illustrates, I think, the importance of Munger's point. He says, this professor gave a test involving two unworldly old ladies, meaning they don't have worldly knowledge, who had just inherited a New England shoe factory making branded shoes and beset with serious business problems described in great detail. So two old

Starting point is 01:15:18 ladies inherit this business. The business is in poor trouble. What are you going to do? The professor then gave the students ample time to answer with written advice to the old ladies. In response to the answers, the professor next gave every student an undesirable grade except for one student who was graded at the top by a wide margin. So only one person came up with the right answer. Everybody else was well off the right answer. What was the winning answer? It was very short and roughly as follows. This business field and this particular business in its particular location presents crucial problems that are so difficult that unworldly old ladies cannot wisely try to solve them through hired help. Given the difficulties and unavoidable agency

Starting point is 01:16:06 costs, the old lady should promptly sell the shoe factory, probably to the competitor who would enjoy the greatest marginal utility advantage. Thus, the winning answer relied not on what the students had most recently been taught in business school, but instead on more fundamental concepts like agency costs and marginal utility lifted from undergraduate psychology and economics. I'm going to repeat this because he repeats it, and I think it's such an important point. There's an old two-part rule that often works wonders in business, science, and elsewhere.

Starting point is 01:16:44 One, take a simple idea and two take it very seriously so this is charlie on the folly of fake diversification so on one end you have like i look like a barbell right so on one end you have the index you have you're owning if you if you have no ability to accurately determine like what's the true value of a business, just go the Vanguard, Jack Bogle route and just own the entire index. So that's on one side. And on the other side, you have the Munger and Buffett method, which is only invest in the few opportunities that you feel you have like a unique advantage

Starting point is 01:17:26 and bet heavily, right? So a handful of companies. You don't own all of them, you own a few. What Munger says, like the reason I say this is Charlie and the Folly of fake diversification, he says, because the other diversification is not either an index or their route. It's like, it's in the middle.

Starting point is 01:17:40 It's like in the messy middle. It doesn't actually make any sense. So he says, I have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough so that index indexization is not the logical mode for equity investment he's like if you're not doing it our way do it just have an index don't like this is absurd i think the orthodox view is grossly mistaken a person or institution with almost all wealth invested long-term in just three fine domestic corporations is securely rich. Long-term results would be superior by reason

Starting point is 01:18:12 of his lower costs, required emphasis on long-term effects, and concentration in his most preferred choices. Which means that third part to me is this isn't going to work unless you do your homework. So you only have a few attempts here, so you have to make sure those attempts are good, which means you concentrate it in your most preferred choices. That assumes that you did the work to figure out what business is actually valuable. I go even further. I think it could be a rational choice in some situations for a family or a foundation to remain 90% concentrated in one equity. Now that sentence,

Starting point is 01:18:54 if you just took that out of context and said it to some random person on the street, they would freak out because you're so indoctrinated about diversification. But if you study how the great fortunes are made, that's exactly how they did it, is extreme concentration and an extremely valuable asset. Buffett has 99% of his net worth in Berkshire. Munger has over 90% of his family's net worth in Berkshire. You have all these people that got fabulously wealthy because they're usually a person or a family. And if you're a hugely successful entrepreneur, like, well, let me give you an example. I don't have to go to history. Jeff Bezos, where's most of his wealth coming from? It's coming from one equity. It's his ownership of Amazon. Like this is completely obvious, but completely opposite of what most people are taught. And even for me, when I first started

Starting point is 01:19:44 studying Munger and Buffett's views on diversification, I mean, I've already adapted but completely opposite of what most people are taught. And even for me, when I first started studying Munger and Buffett's views on diversification, I mean, I've already adapted like more of a barbell strategy in a lot of things in life in general. So I was more open to it, but it felt like wrong. It's just sounded wrong because it was so different from what other people have said in the past. But those other people are not wealthy.

Starting point is 01:20:03 Oh my goodness. I have an insane amount of notes Oh my goodness. I have an insane amount of notes. All right. I have a long note to myself, but I'm going to read that note to you after I read what spawned that note. So this is Charlie talking again about his distaste for efficient market theory. He says, my foregoing acceptance of the possibility that stock value in aggregate can become irrationally high is contrary to the efficient market theory that many of you once learned as gospel from your mistaken professors of yore your mistaken professors were too much

Starting point is 01:20:30 influenced by rational man models of human behavior from economics and too little by foolish man models from psychology and real world experience i remember this part is i'll tell you why this one paragraph is illustrating his his why i think it's wise to to follow his his multidisciplinary approach crowd folly the tendency of humans under some circumstances to resemble lemmings explains much foolish thinking of brilliant men and much foolish behavior like investment management practices of many foundations represented here today he's giving a talk to institutional investors. So he's kind of like shitting on their ideas in front of them. So it says, foolish thinking of brilliant men and much foolish behavior like investment management practices of many foundations represented here today.

Starting point is 01:21:19 It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from practices of the rest of the crowd. So there's a lot to unpack in that one paragraph. One, it is possible academia has taught you wrong. It has taught you wrong detrimental ideas or theory. Two, you are more likely to believe this nonsense if you don't possess broad multidisciplinary worldly wisdom and three he is saying this to a group of investment professionals that make that make mistakes because of a failure to understand their own how their own operations related to the larger system of which they're a part that results in higher fees and waste and four he says humans

Starting point is 01:22:02 are prone to make these those mistakes because we copy and mimic each other that's a lot of ideas that like and i wouldn't have known how to interpret that if i didn't obviously study monger at length and read now three three books about him but that's what i love about this guy is he's able to he's able to synthesize uh such complex different ideas from multiple different fields and then explain to you in like what's the real world application of that and He's giving it and he knows he's knowing the audience that he's speaking to He's like you guys are making these mistakes You're paying more in fees you're copying each other your returns are lower and you're and you're even if you've mastered what you learn in business

Starting point is 01:22:39 And finance because you didn't understand You know psychology or are the idea of like the where like your theories are wrong like you you rely too psychology or the idea of where your theories are wrong. You rely too much on the rational man theory in economics. Well, there's no such thing as a rational man. You would know that if you just talked to people day to day. I don't know. I really appreciated his ability to break that down in such a short amount of time.

Starting point is 01:23:01 A rough rule in life is that an organization foolish in one way in dealing with a complex system is all too likely to be foolish in another. So this fresh in my mind was what David Ogilvie told us in Confessions of an Advertising Man. If you have high standards in one department of your company, that can lead to high standards in other departments. So that's the positive effect of that. Munger is telling us the negative effect. That if we don't know how to deal with complex systems in one way, we're more likely to be, since most of life is a series of complex systems, you're most likely to make that same mistake in others.

Starting point is 01:23:34 So identifying the, one, that you live in a complex environment way beyond your understanding is the first step, but two, understanding that that lesson needs to be applied over and over and over again to different domains and different experiences you have in life love that idea uh the prudential rule is that underlying the the oh oh this this so this is what i mean about him giving these great anecdotes and like stories that really like highlights what he's trying to say here he says the prudential rules that the is that underlying the old advertisement for machine tools so there

Starting point is 01:24:01 used to be this famous ad you've probably seen says, the man who needs a new machine tool and hasn't bought it is already paying for it. Well, that rule also applies, I believe, to thinking tools. If you don't have the right thinking tools and the people you seek to help are already suffering from easily removable ignorance. So to me, it's like if you know that not, if you, if you know that your business needs this tool and you don't buy it, right. I mean, you're already paying for it. Well, if you know that your mind isn't perfect, the way you're making decisions are perfect. Or there's, or another way to think about this is if there's, there's information out there that's useful to you that you haven't gone out and actually actively sought, like you're already, and maybe

Starting point is 01:24:40 it's a reason. Cause, oh, I, you know, I don't want to invest a seven hours, like it might be seven hours to read this book and $20. Well, that's a small price to pay for not having that knowledge. Isn't it better just to invest the time and the money so then you can reap the benefits of that knowledge moving forward for the rest of your life? Certainly, most people would agree with that. But most people would agree with it with words. It's unclear to me how many would actually agree with their actions.

Starting point is 01:25:04 Okay. Oh oh he's got this so i'm moving forward he's a big he really likes this idea of checklists so he comes up with he's giving this talk on to business school graduates and he has this extreme success checklist that i really love so i'm just going to pull out it's like a it's a it's only like four factors extreme success is likely to be caused by some combination of the following factors. A, extreme maximization or minimization of one or two variables. Example, Costco or our furniture and appliance store. So that's Nebraska Furniture Mart, which I covered at length in the Berkshire Hathaway

Starting point is 01:25:38 shareholder letters. But there's that idea again, extreme maximization or minimization of one or two variables. Take a simple idea and take it seriously. B, adding success factors so that a bigger combination drives success, often in nonlinear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often, results are nonlinear. You get a little bit more mass and you get a Lollapalooza result.

Starting point is 01:26:08 And of course, I've been searching for Lollapalooza results all my life, so I'm very interested in models that explain their occurrence. C, an extreme of good performance over many factors. Example, Toyota or Les Schwab. Les Schwab is another person he founded. Let me just read you his Schwab. Les Schwab is another person. He founded, let me just read you his short bio. Les Schwab was born in Bend, Oregon. I'm going to skip over his early life. He starts a small tire shop that he turned from a $32,000 a year business into one that's generating $150,000 annually. And then he starts to build, he starts expanding throughout the Pacific Northwest. And today he has, he started these tire stores that have sales in excess of a billion dollars annually.

Starting point is 01:26:48 So it says an extreme good performance over many factors. And Les is competing with, you know, at the time, many of the major tire manufacturers had their own stores. So he had like the cars are stacked against them because they gave preferential treatment to their own corporate stores. All right. So let's see. D, catching and writing some sort of big weight moving ahead. He's got two ideas here next to each other. One, make yourself worthy and two lifetime learning is a moral duty. Non it's non-negotiable in Charlie's eyes.

Starting point is 01:27:17 So I love this idea about making yourself worthy because we're talking about the idea of making yourself into a formidable individual, right? Um, he, the safest way to try to get what you want is to try to deserve what you want. It is such a simple idea. You want to deliver to the world what you would buy if you were on the other end. By and large, the people who have had this ethos win in life. And they don't win just money and honors. They win the respect and the deserved trust of the people they deal with. The acquisition of wisdom is a moral duty. It's not something you do just to advance in life.

Starting point is 01:27:51 Without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You're going to have to advance in life based on what you learn after you leave here. This is another commencement address. Consider Berkshire Hathaway, one of the best regarded corporations in the world. It may have the best long-term big asset involving investment record in the history of civilization. The skill that got Berkshire through one decade would not have sufficed to get it through the next decade with comparable levels of achievement. Warren Buffett had to be a continuous learning machine. The same requirement exists in lower walks of life. I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning

Starting point is 01:28:36 machines. They go to bed every night a little wiser than they were that morning. And boy, does that habit help, particularly when you have a long run ahead of you. Charlie goes back to Cicero and about studying history. But the lesson I got from what he's about to say here is that you need to study history, but don't stop there. That's just one of the many techniques you have to master. So now this is a quote from Cicero. He says, history is the witness that testifies to the passing of time. It illuminates reality, vitalizes memory, provides guidance in daily life, and brings us tidings of antiquity. To be ignorant of what happened before you were born is to be ever a child.

Starting point is 01:29:20 For what is a man's lifetime unless the memory of past events is woven with those of earlier times? That's the end of the quote from Cicero. And now here's Charlie talking about that. Cicero is famous for saying that a man who doesn't know what happened before him, before he's born, goes through life like a child. That is a very correct idea. Cicero's right to ridicule somebody so foolish is to not know history. But if you generalize Cicero, as I think one should, there are a lot of other things that one should know in addition to history.

Starting point is 01:29:42 And those other things are the big ideas in all disciplines. The way complex adaptive systems work and the way mental constructs work, problems frequently become easier to solve through inversion. So repeating this again, it's obviously very important to them. If you turn problems around into reverse, you often think better. For instance, if you want to help India, this is what I referenced earlier, the question you should consider asking is not, how can I help India? Instead, you should ask, how can I hurt India? You will find what will do the worst damage,

Starting point is 01:30:11 and then you try to avoid it. Perhaps the two approaches seem logically the same, but those who have mastered algebra know that inversion will often and easily solve problems that otherwise resist solution. And in life, just as in algebra, inversion will help you solve problems that you can't otherwise handle. Let me use a little inversion now. What will really fail in life? What do we want to avoid? Some answers are easy. For example,

Starting point is 01:30:38 sloth and unreliability will fail. If you're unreliable, it doesn't matter what your virtues are. You're going to crater immediately. So faithfully doing what you've engaged to do should be an automatic part of your conduct. Of course, you want to avoid sloth and unreliability. Some more advice from Charlie, avoid self-pity. Generally speaking, envy, resentment, revenge, and self-pity are disastrous modes of thought. Self-pity can get pretty close to paranoia. You don't want to drift into self-pity. I had a friend who carried a thick stack of cards, and when somebody would make a comment that reflected self-pity, he would slowly pull out this huge stack of cards, take the top one, and hand it to that

Starting point is 01:31:25 person. The card said, your story has touched my heart. Never have I heard of anyone with as many misfortunes as you. Every time you find yourself drifting into self-pity, just give yourself one of my friend's cards. Self-pity is always counterproductive. It's the wrong way to think. And when you avoid it, you get a great advantage over everybody else because self-pity is a standard response and you can train yourself out of it. See, he references that over and over again. He'll identify the standard default typical human response and then he'll tell you exactly why that's the exact wrong thing you should do. So that's a good way to identify your behavior in others that you may think that you're constantly choosing,

Starting point is 01:32:14 but you might be mimicking from people around you. Like, hey, does this behavior actually make sense? Is it default? Do I see other people around me engaging the same behavior? Yes, I do. Okay, now that doesn't necessarily always mean it's wrong, but I need to make sure I'm working through and actually choosing this action as opposed to just mimicking it. They're very similar. And sometimes you can't tell which actions are ideas you're

Starting point is 01:32:34 choosing, which ones you're just mimicking. Just a few more here. I love this, this idea, maximize non-egality. And I'm probably not pronouncing that correctly, but he says, another idea that I found important is that maximizing non-egality will often work wonders. What do I mean? Well, John Wooden of UCLA presented an instructive example when he was the number one basketball coach in the world. He said to the bottom five players,

Starting point is 01:33:05 you don't get to play, you are practice partners. The top seven did almost all the playing. Well, the top seven learn more, remember the importance of the learning machine, because they were doing all the playing. And when he adopted this non egalitarian system, Wooden won more games than he had won before. I think the game of competitive life often requires maximizing the experience of the people who have the most aptitude and the

Starting point is 01:33:33 most determination as learning machines. And if you want the very highest reaches of human achievement, that's where you have to go. Let me read that part again, too. So he says, I think the game of competitive life often requires maximizing the experience of the people who have the most aptitude and the most determination as learning machines. It's a really interesting idea. All right, here's Munger. Here's a couple of thoughts on incentives for Munger. Almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior, but this is not often so. So again, he's describing the default human condition and how we can overcome that and actually utilize a better idea. For instance, I think I've been in the top 5% of my age cohort almost all my adult

Starting point is 01:34:25 life in understanding the power of incentives, and yet I've always underestimated that power. Never a year passes, but I get some surprises that pushes a little further my appreciation of incentive superpower. So it talks about, he's quoting Ben Franklin in Poor Richard's Almanac. He says, if you would persuade, appeal to interest and not to reason, this maxim is a wise guide to a great and simple precaution in life. Never, ever think about something else when you should be thinking about the power of incentives. Perhaps the most important rule in management is get the incentives right. Incentives are superpowers.

Starting point is 01:35:09 And I love this, this good old school wisdom. He calls this granny's rule. Granny's rule provides another example of reward superpower so extreme in its effects that it must be mentioned. You can successfully manipulate your own behavior with this rule. Granny's rule, to be specific, is the requirement that children eat their carrots before they get dessert. And the business version requires that executives force themselves daily to first do their unpleasant and necessary tasks

Starting point is 01:35:41 before rewarding themselves by proceeding to the pleasant tasks. Given reward superpower, this practice is wise and sound. So do the stuff that you that you're regretting. Do it first thing. Get it over with. It's the stuff that you actually need to do. You know you want to do it but you want to waste time doing something else. So that's a granny's rule. And finally, I'll close on what may be the most important idea. That's hard to say, but it's pretty, no, it may be the most important idea. And it's work on something that you have intense interest in. Another thing that I've found is that intense interest in any subject

Starting point is 01:36:18 is indispensable if you're really going to excel in it. I could force myself to be fairly good in a lot of things, but I couldn't excel in anything in which I didn't have an intense interest. So to some extent, you're going to have to do as I did. If at all feasible, you want to maneuver yourself into doing something in which you have an intense interest. And that sound you just heard was me closing the book. I will leave the story there. There is just so much more in this book. If you find the ideas of Charlie Munger interesting, like I do, and like a lot of people do, I would definitely pick up the book if you want. So this is like a textbook. It is giant, like I said earlier. So I'll leave a link in the show notes if you want to buy it.

Starting point is 01:37:06 It's actually a way to support the podcast at the same exact time because it's an Amazon affiliate link, which means I get a small percentage of the sale at no additional cost to you. Thank you very much for your support. I will talk to you next week.

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Founders - #90 Charlie Munger (Poor Charlie's Almanack)

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