A Lesson on Elementary, Worldly Wisdom Summary
“Why should I listen to Charlie Munger? I’ve never heard of him before…”
In the investment world Charlie Munger is a legend.
Munger, now in his 90s is Vice Chairman of Berkshire Hathaway.
When it comes to managing and creating wealth there’s no room for error, and unlike many fly-by-night operators that use dodgy, unethical and extremely risky strategies (much like the approach some people take in the fitness industry) to get ahead Munger is quite the opposite.
He believes in having a set of frameworks, rules and guidelines for decision making not only in his investments but in every day life because he knows the way our brains are wired.
The success Munger has obtained and the decades upon decades of experience Charlie Munger has is more than enough of a reason as to why anyone and everyone should take advice from this man.
Munger avoids the limelight more-so than his business partner, Warren Buffet but it goes without saying when he speaks publicly we should listen…
The rest of the time he allows the results he amasses to do the talking.
My Notes From Charlie Munger’s Worldly Wisdom Speech
You MUST Use Mental Models
The first rule is that you can’t really know anything if you just remember the isolated facts and try to bang ’em back. if the facts don’t hang together on a latticework of theory, you don’t have them in a very usable form.
You’ve got to have mental models in your head. And you’ve got to array your experience – both vicarious and direct – on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. well, they fail in school an life. You’ve got to hang experience on a latticework of models in your head.
Without multiple mental models we’ll bend information to meet the one model that we do have as “To the man with only a hammer, every problem looks like a nail.”
The Rule Of the Five W’s
When allocating work you must always use the Five W’s. At the Braun Company if any correspondence did not adhere to the five W’s the sender was often fired!
The five W’s include:
- Who is going to do….
- Where are they going to do it?
- Why are they doing it and…
- When is it required?
This isn’t a trivial task just to make communication longer or more arduous, this information adheres to one of our cognitive biases.
When we understand why we need to do something we”ll understand its importance, be more accountable and more likely to succeed doing it.
e.g. if you were told to push a red button twice every hour you’d likely do it for a few hours and then stop, if you were told to push a red button twice every hour for 2 weeks because it helped purge the spread of a disease through your town you’d be sitting there eagerly waiting for the time to press it next!
Don’t Allow Others to Play Magic Tricks On You
The perceptual apparatus of man has shortcuts.
Our brain has limited circuitry so to speak and as a result it automatically takes shortcuts.
An individual that understands the cognitive biases of our brain is able to trick us into seeing and adhering to things that aren’t necessarily there (or at least not the true perception) as a magician does to his captivated audience.
By understanding the psychology of human misjudgement you’ll be giving yourself the edge to avoid falling victim while also having the knowledge to influence others (use this ethically!).
In Business Consider Niche & Size Of Scale (For Both Investing & Building A Company)
Daily newspapers and giant companies like Coca Cola have the advantage of scale, they’re huge and as such have several key advantages that keeps the proverbial ‘moat’ around their castle.
They’re able to advertise to a scale that others are not -for example when the television came out it was without a doubt the most effective, profitable method of advertising but only the companies that have already built that titan-like scale could afford to advertise on it to propel their business even further!
When it comes to advertising these products also advertise themselves due to social proof.
We see someone else using a product or performing a certain action and we replicate it, this is part of our hard-wired way of fitting in with society.
If you walk around town and see everyone drinking a can of Coca Cola you’re likely to buy one too, you won’t walk into your supermarket and buy a Pepsi as it doesn’t have the social proof you’ve seen for the other beverage.
This is where microniches come in – you may not be able to compete with a big newspaper company like the new york times, but you can start and compete a publication on a microscale which can be extremely profitable. People that ride motorbikes and enjoy doing backflips for fun probably won’t be fussed when it comes to buying the newspaper… but if you can offer them a monthly magazine packed with content including articles, guides and interviews related to motorcross they’ll likely be ready to throw their money at you!
Figure Out Your Aptitudes
Every person has a circle of competence.
It’s hard to move your circle from where it already is so you must figure out where your circle is and what you’re good at based on these aptitudes.
If you’re competing against others in an area that doesn’t fit your aptitude it’s going to hard (and in some fields impossible) to gain any form of success.
If you don’t have a knack for tennis it’s probably not worth pursuing professionally… but if you’re able to public speak relatively well then hey, you may have very well found your mark!
As Munger says you must “Figure out where you’ve got an edge. And you’ve got to play with your own role of competence.”
Limit Your Punches
Imagine you’ve got a card with 20 punches in it, that’s how you have to view your actions when it comes to business & investing.
Don’t be so quick to jump into any and every opportunity that you see, as if it appears too good to be true as the old saying goes it likely is…
You must be patient when it comes to finding the right business, the right stock to invest in but once you’ve uncovered it it’s time to be impatient and take swift action.
There is where your mental models will come into the equation – you must know how to identify the great opportunities as you’ve got a limited number of actions as per your card.
As Charlie Munger says “The winner has to bet very selectively.”
Understand The Most Powerful Cognitive Bias (The Reward Tendency)
When it comes to getting things done the reward tendency bias is #1.
The reward bias is far more powerful than moral suasion, threats, you name it…
If you’ve got to get things done in a set time frame or to a certain amount/level you’re a fool if you’re not harnessing the power of the reward bias.
This is why all good salesmen work for commission – by putting in the work finding leads, acquiring clients and making sales they’re rewarded with a percentage of the sale in the form of commission.
The Federal Express finally understood the power of the reward bias and paid their employees (who were constantly working too slowly) by the shift as opposed to by the hour as per tradition.
The reward? The quicker they get the work done the sooner they can go home.
This doesn’t sound like a breakthrough by any means but it was more than enough for the Federal Express to restore it’s delivery times to where they should’ve been all along!
Want To Know More About Charlie Munger’s Cognitive Biases & How To Dominate Life?
I recently purchased Charlie Munger’s flagship book, Poor Charlie’s Almanack – a book filled with hundreds of pages of wisdom from a billionaire and master of mindset and mental frameworks to improve your life..
This book cost me $65 USD. To most this will seem absurd…
“$65 for a book?! What a waste of money”
…these are the same people that spend hundreds of dollars on junk food and alcoholic beverages on Friday and Saturday night.
Delay The Instant Gratification
Don’t adopt the epicurean mentality of “eat, drink and be merry for tomorrow we die.”
You must think long term, you must delay the instant gratification we’re so used to experiencing in this life and invest for tomorrow (stoicism).
“Don’t invest in things that’ll rust, rot or depreciate, invest in things that’ll be worth more later or make you be worth more later”.
The information in this book is worth well over $65 if read and implemented, the information on investing and cognitive biases is worth its weight in gold.
But remember, It’s the application of knowledge that counts, not just the acquisition (read it and take action!)