The Mental Models of Charlie Munger

Welcome to VRD nation. In today’s video, you will learn a very powerful tool for making decisions in your life. It can be in any context, be it trading, a career or whatever you can think of, you can make informed decisions based on this model.

It’s a very powerful model and it is called Inversion. Before I get there, I will just give you guys a little bit of a background so that you have a broader context. Now Charlie Munger, for those of you who don’t know is a legendary investor and Warren Buffett’s partner in Berkshire Hathaway.

Now both of these billionaire investors have been friends and partners for several decades. Two, of course, Warren Buffett is more famous. It is because he has this charming, outgoing kind of personality, but what most people do not know is that Charlie Munger also has a cult following of his own because he has a very unique perspective towards investing in success and life.

He is a very well-read and experienced man. I’ve been following Charlie Munger for quite some time and have read several books about him and also have watched hundreds of his interviews. So over the years, what I’ve done is I have noted down several things that I learned from Charlie and I will explain what I have learned.

It’s very organic and informal. Now, one of the things Charlie Munger has talked about extensively on several occasions is the concept of mental models. Now, what are mental models?

Well, mental models are different ways of thinking. We can see the same situation from different points of view. For example, there is a glass half-filled. A pessimist will look at the class and say it’s half-empty and an optimist will look at the same glass and say it’s half full and a physicist looking at the same glass will say, technically speaking, that the glass is always full.

The situation is therefore the same, but our mental models are different. We have a choice to make and to pick the model of thinking that helps us achieve the best results in life. Being a pessimist doesn’t help, but being an optimist does.

In the same way, Charlie Munger says that several mental models have helped him to become immensely successful, not just in investing, but also in life. So today I’m going to talk about a mental model that Charlie Munger famously calls inversion. What is an inversion? It is the mindset of looking for exactly the opposite of what you want to achieve.

For example, you want to get a promotion in your current job. So instead of asking that, how can I get the promotion, you should ask, what can I do that I will not get that promotion? I know that some of you might be wondering why on earth will I ever ask that question?

It doesn’t make any sense. Why will I go in the opposite direction? Let me first explain using Charlie’s example and then I will give you my interpretation of that. Before Charlie became a billionaire investor, young Charlie was a weather forecaster in the United States air force and his job was to guide the pilots, where to go based on the weather conditions and other factors and so the pilots were dependent on the ground staff for getting the right directions.

So young Charlie, instead of asking how could he safely navigate these pilots, used to ask, what are the chances that I can get these pilots killed. He, hence, used to ask the opposite question. Charlie then concluded that if he had to kill the pilots there were two options of getting them killed.

Number one was to steer them to a place that is so far away that they could not come back in time to refuel. If they ran out of fuel in the middle of the ocean, they of course would get killed. The second way to get them killed was to steer them to a place where the weather conditions were really bad.

If it was a cold place that a plane was not able to navigate, then, of course, that would get the pilots killed. So once he knew how he could get the pilot skilled, he also knew how to keep the pilots safe. All he had to do was just the reverse of these two things. He always had to make sure that the pilots were within a safe, refuelling distance.

Not that hard and again, number two, always avoid the ICU. As long as you can do these 2 things, the pilots will be safe. This in essence was the principle of inversion. You ask an opposite question and once you have your answer, you reverse it.

Charlie, of course, used this mental model for making some very, high profile billion-dollar decisions. He, however, was not the first one to use the mental model of inversion. This model has been used by famous philosophers and mathematicians. The ancient, stoic philosophers, regularly conducted exorcism and premeditation of evils using these methods.

That sounds a little creepy, but these philosophers believed that by imagining the worst-case scenario ahead in time, they could overcome the fear of negative experiences and make better plans to prevent them. Many mathematicians too used the principle of inversion and one of them was a famous German mathematician known as Carl Jacoby.

Carl was able to solve complex mathematical problems by following a static which he called invert always invert. He would write down the opposite of the problem he was trying to solve and found that the solution often came to him more easily.

Now, let me give you guys my interpretation of this mental model and how that can be applied in our life. A good way to apply this model in our own life is to do some role-playing. Here’s how I do it. I imagine him to be my bad advisor and let’s call him Mr Evil. So this is VRD and this is Mr Evil.

Although Mr Evil is his VRD advisor, has a deep desire to see VRD fail and he will do anything possible to advise VRD that would lead him to failure. For example, if VRD wants to become wealthy, automatically Mr Evil will be advising him in such a way that VRD stays poor and lives hand to mouth.

What kind of advice will Mr Evil then give to VRD? For example, don’t save, what is the point of saving? Just enjoy your life. Why are you worried about tomorrow? Live in the present. You have this money and so enjoy your life. Forget about tomorrow. Number two, lead a lavish lifestyle. You deserve that luxury vacation and deserve that bigger house and a bigger car.

If you are worried about how you will fund all this, don’t worry and just take loans. What is the problem? You have all these different banks out there who are giving loans and since you have a job, take that salary and just pay the EMI’s.

What is the big deal? If we are to start thinking about investing, Mr Even will say investing is so boring. Why don’t you do something fun? Take leverage. Bet on stocks going up and down, make money faster. These are all the ideas that my dear advisor, Mr Evil will give me.

After the role-play, I’m back to being VRD. Now I know the ways I can get financially destroyed and I have the list of all the things that I should not be doing. All I have to do is work back. Instead of spending excessively, I have to save excessively and instead of leading a lavish lifestyle, I have to lead a sustainable lifestyle and instead of taking high-interest loans, I should avoid taking loans.

In case I have taken some loans, my priority should be to settle them first. Instead of saying that investing is boring, I have to acknowledge that investing is what works in the long run and instead of taking higher leverage, I have to understand that I should only be trading with the capital that I can afford.

I just took a simple example to illustrate how the model of inversion works in real life. What this model will do is help you avoid making bad decisions. That in itself is a great achievement, to begin with. Charlie Munger once said that it is remarkable, how long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent. Hence, this in essence is the crux of the mental model of inversion. Give it a shot because if it is good enough for Charlie Munger and me, I’m sure it is good enough for you guys also.