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"The world is not driven by greed. It’s driven by envy.” - Charlie Munger
Charlie Munger is a brilliant investor and Warren Buffett's business partner. He has amazed audiences with his Mental Models, a powerful way of thinking and learning. Warren Buffett says he is the wisest person he knows.
He is the Vice Chairman of Berkshire Hathaway, one of the most prosperous investors in history. He and Buffett have built a $699 billion empire together. His speeches teach us how to make better decisions, be more rational, and achieve success.
These are his 15 principles that guide his success in business and life:
Charlie Munger 15 core mental models:
1. Latticework of Mental Models
“You’ve got to have models in your head and you’ve got to array you experience – both vicarious and direct – onto this latticework of mental models.”
Charlie Munger advocates for the creation of a "latticework of mental models," as he believes that employing diverse mental models can enhance our comprehension of the world.
To illustrate, Munger utilizes the mental model of "opportunity cost" to assess investments, weighing them against alternative potential investments.
By familiarizing ourselves with fundamental concepts from different domains, we can expand our knowledge and make more informed choices, ultimately enriching our lives.
2. Inversion Process
“Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail – through sloth, envy, resentment, self-pity, entitlement, and all the mental habits of self-defeat. Avoid these qualities and you will succeed. Tell me where I’m going to die, that is, so I don’t go there.”
Munger frequently emphasizes the significance of the "inversion process" as a problem-solving technique. This approach entails contemplating the desired outcome and working backward to determine the factors that should be avoided in order to attain it.
For instance, if your goal is to establish a thriving business, you might ask yourself, "What are the factors that could lead to the failure of my business?"
By identifying these potential risks, you can concentrate on mitigating them, thereby increasing your prospects of achieving success.
3. Stay Inside Your Circle of Competence
“It is really important to stay within your circle of competence. If you are not sure what the boundaries of that circle are for you, then you do not have real mastery of your field.”
Munger's philosophy stresses the significance of adhering to your "circle of competence," which entails focusing on areas where you possess deep knowledge while avoiding those where your expertise is limited. By embracing this principle, you can make well-informed decisions and minimize potential risks.
A noteworthy example is Munger and Buffett's deliberate avoidance of investing in technology companies due to their lack of expertise in that field. Their remarkable investment success can be attributed to their commitment to operating within their circle of competence.
Many individuals spend their lives grappling with the consequences of poor decisions. However, the truth is that it is much easier to avoid foolishness than to attempt to be clever. Acknowledge your limited knowledge, and remove ego from the equation.
4. Worldly Wisdom
“You must know the big ideas in the big disciplines and use them routinely — all of them, not just a few. Most people are trained in one model — economics, for example — and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail.”
Munger urges us to acquire “worldly wisdom,” which means learning from various disciplines and knowing the basic rules that shape the world. This way, we can enhance our decision-making and problem-solving abilities.
For instance, Munger has learned from psychology, philosophy, maths, economics, physics, and biology to gain a better perspective of the world. This wide-ranging knowledge has helped him spot patterns and make links that others might overlook.
Study mental models. Build a toolkit. Treat your mind like your greatest asset.
5. Multidisciplinary Approach
“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.”
Munger places great importance on adopting a multidisciplinary approach, which is closely tied to his concept of worldly wisdom. He advocates for the integration of ideas and principles from diverse fields to gain a more profound understanding of complex issues.
An example of this is Munger's frequent reference to the concept of "feedback loops" from the realm of physics. Through this lens, he has been able to identify investment prospects and steer clear of potential pitfalls by recognizing how certain actions can lead to unintended consequences.
By employing a multidisciplinary perspective, you can improve your ability to navigate and analyze intricate situations effectively.
6. Identify Folly and Avoid It
“Knowing what you don’t know is more useful than being brilliant.”
“It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Munger's mental models help us identify and avoid human folly. He believes that by recognizing common mistakes and biases, we can make better decisions in our personal and professional lives.
For example, Munger often talks about confirmation bias, which is the tendency to seek out information that confirms our existing beliefs.
By being aware of this bias, we can actively seek out opposing viewpoints and make more objective decisions.
7. Learning from Mistakes
“One of the best ways to learn from mistakes is to learn from the mistakes of others. Learning from others' mistakes is cost-free.”
“We recognized early on that very smart people do very dumb things, and we wanted to know why and who, so we could avoid them.”
Munger stresses the value of learning from our mistakes. By examining our shortcomings and figuring out what caused them, we can refine our decision-making method and prevent repeating the same mistakes later.
For example, after suffering a huge investment setback early in his career, Munger revised his strategy and created the mental models that have contributed to his success.
8. Herd Mentality
“Mimicking the herd invites regression to the mean.”
Munger's philosophy emphasizes the importance of independent thinking and making well-informed decisions based on careful analysis rather than blindly following the herd.
By avoiding the herd mentality, individuals have the potential to achieve better outcomes and avoid being dragged down by the average or mediocre results that can occur when everyone is doing the same thing.
9. Opportunity Cost
“Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter out buying opportunities.”
Charlie Munger incorporates the concept of opportunity cost into his mental models, recognizing its fundamental role in decision-making. Opportunity cost refers to the value of the best alternative foregone when making a choice. By taking into account opportunity cost, we can make more informed decisions as it enables us to assess the trade-offs involved.
For instance, when evaluating investment opportunities, Munger and Buffett assess the potential returns from alternative investments. If they determine that an investment has a lower potential return compared to other options, they may choose to pass on it in favor of more promising opportunities. This approach allows them to allocate their resources efficiently and maximize their overall returns.
Understanding and factoring in opportunity costs contribute to better decision-making and overall success in various aspects of life.
10. Repetition
“The fundamental algorithm of life – repeat what works.”
Munger's philosophy is rooted in the idea of learning from experience and avoiding unnecessary risks. Rather than reinventing the wheel, he encourages individuals to study the methods and strategies that have been successful in various domains, whether it's in investing, business, relationships, or personal development. It's all too simple to complicate achievement. However, whatever you do generates feedback. Smart individuals pay attention. Do less when something goes wrong. When something works out, do it a lot more.
11. Be Consistent for long time
“You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long time.”
Munger highlights a crucial perspective on achieving success. He suggests that brilliance is not a prerequisite for long-term success, but rather a modest degree of wisdom that surpasses the average. By consistently making slightly wiser decisions than others over an extended period, one can gradually build an advantage and achieve remarkable outcomes.
Rationality and patience. It isn’t a sexy approach, but the results sure as hell are.
12. Learning
“Those who keep learning, will keep rising.”
By emphasizing the importance of ongoing education and intellectual development, Munger highlights the dynamic nature of life's journey. He suggests that individuals who actively seek new knowledge, acquire diverse skills, and remain open to learning opportunities will consistently experience upward progress.
Knowledge is an asset that compounds over time. The more you know, the better you think. Better choices, great consequences. Schedule time to study.
13. Predictive Insider trading
An idiot can diversify a portfolio on a computer. But the whole trick of the game is to have a few times when you know something is better than average and invest only where you have that extra knowledge. If that gets you a few opportunities, that’s enough.”
Munger's investing theory is based on the breadth of your knowledge of the business, not the amount of shares you own. He contends that wise investing necessitates in-depth understanding of the firm, its business model, financial situation, industry, and managerial calibre. Your choices will be better if you are more knowledgeable about the investments you are making.
14. Right Consensus
“The right culture, the highest and best culture, is a seamless web of deserved trust — not much procedure, just totally reliable people correctly trusting one another.”
He believes that honesty, integrity, and trust are essential for building a strong culture in any organization or society. When people are trustworthy and have integrity, there is less need for complex regulations and procedures. This creates an environment where everyone can thrive, because people are more likely to cooperate and work together towards common goals.
15. Primal Desires
“You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy.”
Munger possesses profound insights into handling emotions, particularly when it comes to financial matters. It is common for fear and greed to sway our decision-making process, but genuine success lies in managing these emotions effectively. The capacity to stay composed and logical during challenging times is essential for attaining lasting prosperity.
Key Takeaways
Develop a comprehensive understanding of the world by constructing a network of mental models.
Utilize the inversion process to uncover potential pitfalls and approach problem-solving by working backward.
Make informed decisions and mitigate risks by operating within your circle of competence.
Expand your knowledge and gain worldly wisdom by studying diverse disciplines and grasping fundamental principles.
Approach complex problems with a multidisciplinary mindset to attain deeper insights.
Enhance decision-making by identifying and avoiding common human follies and biases.
Leverage mistakes as opportunities for growth and improvement through learning.
Avoid copying others and try to be original from bias and group thinking.
Consider the value of the best alternative forgone when making decisions, using opportunity cost to guide informed choices and evaluate trade-offs.
If something works very good, then don’t change it and keep using it for long term.
Consistency always pays in the long run.
Learning is the only meta skill which cannot become obsolete.
A framework that relies on complex procedures is inferior to a culture that is founded on openness and trust.
For dealing with hardship and finding long-term success, emotional stability, tolerance, and discipline are essential.
Control emotions in finance. True success requires calm rationality, especially in adversity for long-term achievement.
Conclusion
To conclude, Charlie Munger’s mental models have played a key role in his extraordinary success. We can enhance our decision-making and problem-solving skills by emulating his thought processes through the mental models he applies. Following his method can assist us in dealing with life’s challenges and achieving our personal and professional goals. How we think determines whether we succeed or fail.
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