Poor Charlie’s Almanack (By Charlie Munger)

Takeaway No 1.

Charlie Munger’s investing checklist:-

Charlie Munger has a very structured mind and so is this method when it comes to investing. He says that “No wise pilot, no matter how great his talent and experience, fails to use his checklist” and this goes for investing as well. So here it is, Charlie Munger’s checklist for investing.

1. Risk: All investments should begin by measuring risks. Use a margin of safety and more risk requires additional compensation. Avoid big mistakes and permanent capital loss.
2. Independence: Only in fairytales are the emperors told they are naked. Think for yourself. You can stay objective and rational while listening to Wall Street. Understand that people always agreeing with you doesn’t make your analysis correct. Notice people disagreeing with you and make it wrong. Mimicking the herd will give you the results of the herd.
3. Intellectual humility: Acknowledging what you don’t know is where you should begin with. Stay within your circle of competence. Identify and think through evidence that goes against your own view. Above all, never fool yourself and remember that no one is as good at it as you are.
4. Allocation: Proper allocation of capital is the investor’s No.1 job. Remember that there is always an Opportunity Cost. Don’t fall in love with investment and stay skeptical.
5. Patience: Resist the human biased act. Compound interest is the eighth wonder of the world and never interrupt it unnecessarily. The process is where you live. So remember to enjoy it along with the results. Guard against the effects of hubris and boredom.
6. Decisiveness: When proper circumstances present themselves, act with decisiveness and conviction. Be fearful when others are greedy and be greedy when others are fearful. Opportunity doesn’t come often, so seize it when it does. Stay prepared as opportunities can only be identified by those who are.

Takeaway No 2.

Become a Swiss army knife:
Investing and anticipating a company’s future cash flow is in a way, just a form of problem-solving. One that requires a multi-disciplinary approach. Companies are oftentimes like complicated organisms. On the internal side, you have products, people, processes, incentives, culture, leaders, and so forth. On the external side, you have an ecosystem with laws and regulations, competitors, suppliers, bias, and macro trends. All this boils down to a rather complex situation with a lot of variables that will affect the company’s future cash flow.

In order to understand this puzzle, you will need to equip your mind with a mental version of a Swiss army knife. Have you heard about the Man with Hammer Syndrome? In essence, if a person only has a hammer in his toolbox, he will deal with every problem. He will do this even though the problem might actually be a screw and as well requiring a screwdriver. In investing, you don’t want to be the man with the hammer to become a successful investor.

You will need a toolbox that includes many different tools that are readily available at your disposal. All investing requires a sound understanding. Like, understanding what type of investments will perform well under periods of high inflation, which you can learn about in my summary of the university of Berkshire Hathaway, but you will also need to understand history, psychology, politics, mathematics, engineering, biology, business, law statistics, and so on.

Not understanding at least the basics of these different subjects will force you to undertake hidden risks, unknown unknowns and disables your potential as an investor. A great way to excel in these major fields is to read a lot. Charlie Munger puts it this way, “In my whole life, I have known no wise people who didn’t read all the time”. Just go to Amazon, enter the different categories, find the best books in a variety of subjects, and then turn the reading lamp on. Charlie Munger concludes just as multiple factors shape almost every system, multiple models from a variety of disciplines, applied with fluency are needed to understand that system.

 Takeaway No 3.

Learn from other people’s mistakes:

In poor Charlie’s Almanack, Charlie Munger presents a recipe for misery. If you are into that, one of the ingredients for great misery is to learn everything you possibly can from your own mistakes instead of learning from other people’s experiences, both living and dead.

You can see the results of not learning from other people’s mistakes by simply looking around you.

It’s a normal tendency for people and companies to fall into bankruptcy due to financial leverage. By ignoring the lessons that other people already have learned, you will, for sure become miserable. If you instead start with learning from others, preferably from the masters within the field you wish to accelerate in, you will find yourself making headway much faster than walking on every mine by yourself.

Yes, it might be less accelerating, diversifying into 10 different stocks, then going all in, with a microcap company, but you will most likely end up with a much more solid result. So study history, what made great people great, and look around you. Climb the shoulders of giants.

Charlie Munger and Warren buffet climbed the shoulders of Benjamin Graham and Phillip Fisher, and then proceeded from there and look where it got them. Their company, Berkshire Hathaway is now the sixth most valuable stock market company in the entire world. “I have seen a little further than other men it’s because I stood on the shoulders of giants” – Sir Isaac Newton.

Takeaway No 4.

Lollapalooza:-

Charlie Munger is known to have coined the term Lollapalooza effect. With this, he means an outcome that is extraordinary, where one plus one equals three. A Lollapalooza effect is created when an outcome is much bigger than the sum of its parts, one positive effect, and harnesses the power of the next one and on and on and on. You want to invest with a possibility for such self-reinforcing loops.

For example, one of the greatest brands in history was created through a Lollapalooza effect by combining the factors of a great product, two powerful stimulants, clever marketing, ease of availability, and social proofing. Which brand do you think it is? It’s Coca-Cola. Not only has Coca-Cola completely dominated the market of soft drinks, but it’s also the most widely distributed physical product in the entire world. How can this be? It’s just a regular soft drink. The result is an effect of a great product with both the desirable taste and stimulus from sugar and caffeine.

Though it was a first-mover, this was combined with an excellent marketing  strategy. That has triggered the psychological systems inherent in humans. Charlie Munger puts it this way “The brain of man yearns for the type of beverage held by the pretty woman he can’t have”. Then there’s the ease of availability in stores and the social proof attached to the brand.

All these systems at work pulling in the same direction have created the Lollapalooza effect for Coca-Cola and an incredible moat to keep competitors from nagging on Coca-Cola’s market share. However, Charlie points out that identifying where and when these Lollapalooza effects can happen is difficult because it requires a multi-disciplinary approach. You will need not only to have a good understanding of the economics, business, and the industry you are interested in but will also need a good understanding of basics in subjects like psychology, statistics, and business law. This is the secret sauce that can help you find stocks that will skyrocket.

Takeaway No 5.

Start with the don’ts: The fifth most important takeaway from Charlie Munger’s ‘Poor Charlie’s Almanac’ is to start with the don’ts. When amateurs play tennis, the winners usually don’t win by shooting the fastest or the most skilled shots. Instead, when amateurs play tennis, it’s usually the person who shoots the fewest shots in the net and misses the court the least amount of times that wins. Simply put you win by playing it safe.

The loser is usually the person who tries to hit hard and advance shots. According to Charlie, this also holds for life in general and more importantly for investing. Trying to be consistently not stupid and staying within your circle of competence is better than trying to be very intelligent.

If you want to be a successful investor, you will have to pick markets, industries, and companies where you can create and sustain an informational edge so that you know the ins and outs better than the rest of the investing crowd.

One important part of this process is to limit yourself so that you know what your circle of competence is. In the process of finding a way, you can create this edge. You should start on the other end by choosing which markets and industries to avoid.

For example, I have tried to avoid companies based outside of Sweden, companies that don’t yet make a profit, banks, and insurance companies to mention a few. It all comes down to the way you can create yourself an edge so that you can bet heavily when an opportunity shows its face.

By avoiding areas that are not within your circle of competence, you can better understand and control your risk. Charlie Munger and his partner in crime, Warren buffet stayed out of technology companies for a very long time. They’ve missed out on a lot of opportunities because of this, but more importantly, they avoided making a lot of mistakes. For example, they sailed quite smoothly through the dot-com bubble. This is an important part of any investing process. I now want to ask you this, which companies do you avoid today?

Starting with the don’ts is one of Charlie Munger’s favorite mental models. He has been often quoted saying, “All I want to know is where I’m going to die so that I’ll never go there”. Again, this model can be used when I’m playing tennis or chess when finding a suitable spouse, or choosing an education or job. By simply removing the worst alternatives and thus playing in a way so that you don’t lose, you will be a big winner in investing and in life in general.

NOTE: This article is inspired by the Swedish Investor’s interpretation of the book. We thank him for all the awesome work he has done.