OtherWarren 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 speeches and writings,you are 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 displaces intellect, wit, integrity, and rhetorical flair,while simultaneously reinforcing the virtues of lifelong learning and intellectual curiosity.Alright, 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, the subtitle is The Wit 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 in 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, it'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 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 learnersif 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,
[2:22]
David Senraand 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, less of a narrative, more like a textbook.We're here to study the ideas of Charlie Munger, 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 will sound more like a narrative,but 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 waysbecause he understands the importance of repetition 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 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, is transcripts,edited transcripts of 11 of his most famous talks,and 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, one, you're more familiar with itbecause you hear it over and over again, but he's also applying it to different domainsand different examples, which he has this idea of the lattice work of mental models,meaning you can't just hang an idea in your mind and not anchor it to something.If you don't anchor it to something, you're just going to forget it.So that's what I think he was doing in all these talks.All right, so 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 lifewhen 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.The arduous working conditions in the Buffett grocery storehad a lasting influence on both Charlie and Warren.So what they're talking about there is Warren, a few years after Charlie left,started working for his grandfather as well and experienced a lot of the same thing.
[4:31]
OtherHe was an advocate of pressure and tough love to make you, obviously,want to be a better person.So he was a good advocate of pressure and tough love.He was a good advocate of pressure and tough love.He was an advocate of 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,some places called junior high.So it says,Charlie's teachers remember a smart kid who was also inclined to be a bit of a wise ass.Now they use the word wiseacre, which I think is like a Midwest term for wiseass.He enjoyed challenging the conventional wisdom of teachers and fellow studentswith his ever-increasing knowledge gained through voracious reading,particularly biographies.So something that's mentioned a bunch of the times in this book is the favorite thing for,first of all, Charlie reads constantly.They say his kids think he's like a book with legs sticking out,legs and arms sticking out.But his favorite things to read is biographies,and he's read hundreds and hundreds of them.So more on his early life,he was growing up in Omaha, Nebraska during the Great Depression.So he says,And Omaha experienced the severity of the Great Depression.Charlie's observations of the plight of those less fortunate made a lasting impression.So I want to interrupt what I'm doing there because I thought that was a very important point.And I'm going to go backwards in the book to the forward that Warren Buffett wrote on Mungerto introduce what he's learned and how to think about Charlie.And I wanted to tie it together to,because the book talks,there's 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 changed the way they thought about how you should preserve your resources.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,his,not his idol,it's 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,says from 1733 to 1758,Ben Franklin dispensed useful and timeless advice through poor Richard's almanac.
[6:55]
David SenraAmong 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,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,you're,you're professional.Like you,you show up and you do what you're supposed to do.You,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 extremetendencies.And then the point of me wanting to study and learn from all these people isbecause 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 toemulate 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 in thepodcast.Those are things that I want to have part of like my tool set for lack of abetter 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.
OtherSubsequently,two centuries went by in which Ben's thoughts on these subjects were regardedas the last word.Then Charlie Munger stepped forth.Initially a 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 your actions are matching up with your words.It's very hard for us humans to do so.Ben and his will created two small philanthropic funds that were designed toteach 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 like $1,000 in his money.Let's say in our money,it'd be about $4,400 each,right?He left it in a fund to be compounded for 200 years.Then the cities of Boston and Philadelphia could get the proceeds.
[9:16]
QuestionerIn his will,I think he dictated it.It might have been for educational purposes or helping young people out,right?
OtherSo what he was trying to do is show that compound interest is verycounterintuitive to us.So what happens,this $4,400,to convert it to our dollars,this $4,400 each,right?So we're talking less than $10,000,wind up after 200 years,it grew to $6.5 million,which then the cities of Boston,Philadelphia could use as was outlined in his will.So that's what he's talking about.These two,this is basically an experiment that would take place after he died,which I thought was extremely interesting.Obviously compound interest is a huge,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,we,they all start out tiny and they grow large.If you don't,if you don't interrupt this compounding of value.So it says early on,Charlie decided that this was a subject far too important to be taughtthrough some posthumous project.I know I spelled pronounced that correct.Instead,he opted to become a living lesson in compounding issuing frivolousdefined as any expenditures that might sap the power of his example.So Charlie,Warren's talking about like they bought,well,Warren bought a private jet for Berkshire Hathaway and he named it theindefensible because Charlie thought spending money or flying private wasindefensible.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,while their wealthy friends imprisoned in private jets,miss those enriching experiences.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,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 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 positioncompared to,you know,I think it would,at the time it was 25 to 30% of people that wanted to work were out of workduring that more about his early life.
[11:35]
QuestionerSome of the stuff that,that he was studying.And in this example,Charlie is specifically telling us,even if we're interested in business,investing multidisciplinary approaches,a lifetime learning,you need to study physics.And this is something I haven't done.So I'm going to have to,I'm going to have to take Charlie's advice here.He was,so it 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 as a skill,he considers helpful in framing the problems of life.He has often stated that anyone who wants to be successful should study physicsbecause it's concepts and formulas.So beautifully demonstrate the powers of sound theory.And so he's going to use this word multidisciplinary,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.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 experiencethat a human can go through,and that's the death of a child.It was a significant burden for 29-year-old Charlie.In that era,before bone marrow transplants,there was no hope.A friend remembers that Charlie would visit his dying son in the hospitaland then walk the streets of Pasadena crying.So it brings us up in later speechesthat even if you see your child die of canceror some kind of disease,that self-pity is not.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.Self-pity is never the answer to your problem.He is trained as an attorney.Interesting enough,he never got an undergrad degree,
[13:52]
Otherbut he winds up getting accepted into Harvard Law School.So he has a law practice,but he gets remarried.There's a blended family.It grows to be eight or nine kids.He's got an army of kids here.And so he says,with many new responsibilities,Charlie worked hard at his law practice,even so his earnings were unsatisfactory to himas they were based on a combinationof billable hours and seniority.So he talks about he never forgotthe sound principles taught by his grandfather,another lesson from the Great Depression,to concentrate on the taskimmediately in front of himand to control spending.Those are two great life skillsthat if you're going to teach your grandchildrenor your children something,concentrate on what's in front of youand control your spending.So he winds up realizing,hey, I'm never going to be wealthyif 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,listen, this idea where I'm going to have a quotaof 2,000, I think it's 2,080 or 2,040billable hours a year,I would be miserable.I can't work under that.So I had to follow.The advice he gives you is follow your own driftis 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 his mind was telling him that.Now he did something that's rare.He actually acted on that.A lot of people just wallow and suffer in silence.So he's saying follow your own drift.So he says, what was he interested in?He was interested in business.He realized that he had a lot of clientsthat were out of his law practice clientswere businessmen.And he's like, well, you know,they're not any smarter than me.They figured it out.I can do so too.So he said he began investing in stocksand acquired equity in one of his clients'electronics businesses.Then he has a passion for architecture,so he starts doing real estate development.The venture building condominiums,this is near the school Caltech,was a smashing success,and the partners earned a handsome profitof $3,000 on a $100,000 investment.In all cases, he left all of his,this is going to be his standard MO here.In all cases, he left all of his profitsin real estate venturesso that the bigger and bigger projectscould become possible.Same thing with Berkshire Hathaway.They take all the profit,and they just buy better and better businesses.
[16:04]
OtherThe successful practice of lawwas by then a backstoprather than an ending objective for Charlie,so it kind of puts a floor on his earnings.I'll never go below that,but eventually I'm going to make enough moneythat 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 moneyand starts, to a smaller degree,investing other people's money.And that's where we're going to getto 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 by a few years.So he's invited to a dinner with some friends.Warren shows up because Warren kept gettingconfused by other people in Obaha.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, who was 29,and Charlie, then 35,became engrossed in a wide-ranging dialoguecovering many aspects of business,finance, and history.Where one was knowledgeable,the other was just as excited to learn.So they always talk about,they're almost too much alike.And I want to interrupt the biography sectionof this podcast with,so the book, like I said,is more like a textbook.So there's just these random sectionsput into the story,or into 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 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 Charliein 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,and by doing so,studying a wide range of other high-performing humansis a good way to do that.All right,they wouldn't have written this book about Charlie Mungerif he wasn't,like they said,if he's not,what did he say,marching to his own music.Okay,
[18:14]
Otherlet's go back to his biography.
OtherOh,nope,I lied.I'm not going back to his biography.There's just this one sentencefor one of Charlie's first partners.The law firm that he startedis actually still in existence today.It's widely successful,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 has to do with,in my opinion,why reading biographies is so helpful.Charlie Munger spent a professional lifetimestudying lives that have worked welland others that have glitchesor have experienced failure.Okay,back to the biography.Charlie left the firm as an active partnerafter 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 sharego to the estates of his young partner,this guy named Fred,who passed away prematurelyand who left behind a wifeand childrenwhen he died of cancer.I think that's very admirable,obviously.He spent much of his time,after leaving the law practice,building the asset base of his partnership,of his investment partnership.He also spent time workingon various real estate developments.He was investing in stockspartly with his own moneyand partly with other people's money.Munger kept the overhead costat close to zero.Before joining Berkshire Hathaway,he had fantastic returns.It was like something like 20% per yearor something like that.Oh,this is an interesting thought.I've always saidit's better to be wealthy and anonymousthan to seek fame.Seek wealth through, hopefully,building productsthat other people love and enjoyand can make somebody else's life better.I go back to thatwhen I'm talking to peoplethat want to start businessesand don't know how.I'm like,well,the easiest way to think about a businessis Richard Branson's definition to me.A business is just somethingor a product.Let's say product,but he said business.A business or a productis just somethingthat makes somebody else's life better.When you think of it through those terms,products and businessesit's almost limitlessof what you could do.Anyways,he talks about,I bring this upbecause he winds up,he's on the Forbes 400as one of the wealthiest peopleand he doesn't like that.He says,while he doesn't mind the wealth,he regrets having his nameon any such list.Despite his healthy self-image,meaning he's got a giant ego,
[20:36]
OtherCharlie would prefer to be anonymous.
David SenraNow we're moving through. I'm just going to keep pulling this out. This is me repeating myself because I can't get over how much Charlie repeats himself on why you should read biographies. Now obviously that makes me feel good because it feels like I'm on the right path with founders. If you think about it, Charlie could learn. He has, not only is he well known and respected by almost every single entrepreneur and investor alive today, but he has essentially unlimited assets. That means he could learn from anybody. He could learn, he could take any class, talk to any person. There's no limits when designing his own curriculum for personal development. There's no limit to what he could do. It's interesting to me that he chooses to read. He reads everything, but his favorite is biographies. What does that tell you? Somebody with unlimited resources is picking up a book that's $15 that's available to you and I. That tells you it has value because his actions say they do.
CharlieThis 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 developed them.
David SenraThat sounds funny making, so he talks about 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'll 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 in their own lives. Gives you this anchor. He calls it lattice work. Now this is Charlie on being a partner, business partner.
CharlieA 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. People should learn to play all the roles.
David SenraOne of his favorite thinkers is Cicero who lived, let's see, about 43 BC. So this is Munger on Cicero,
[23:06]
Otherbut when I read the sentenceit could easily also be Munger on Munger.So you kind of see thathe's not only learned from this person,but he's let that person influencethe way he thinks and acts.He says, his, meaning Cicero,but again this could be Munger,his underlying philosophical viewwas one of deep and realistic cynicismabout human nature,including a distaste for pure mob ruleand demagogues.That's something that Charlie talks about constantly.The idea of staying away from,don't latch on to extreme ideologies.It turns your brain into mush.Part of the reason some people don't like himis because he criticizes,he says the state,the basic state of the human conditionis one of great miscognition.Saying like, humans default stateis to make bad decisions and have a poor life.And it is your job, it is your dutyto learn the skills and the ideas necessaryso you don't wind up in that default state.Alright, so moving ahead.This is another lesson from Cicero.Cicero, learning man that he was,believed in self-improvementso long as breath lasts.So Warren Buffet, Charlie Munger,both talk about the ideathat they're going to be learninguntil the day they die,and they also want to be workinguntil the day they die.They believe you should find somethingthat you enjoy working onthat you want to do every day of your life.Embedded in this section,I found something that was fantastic.This idea, this explicit idea,if 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 actionor an activity or work I could dothat I never have to quit.I think just like compound interest worksin magical ways,I think when you work on one ideaor one company for a very, very long time,you reap benefits that so few peopleactually ever get tobecause they give up at year 5or year 8 or year 20 or year 30.It's very, very rare.He's one of Charlie Munger's sons,and he realized what the attributesof the business that Charlie admired.So he says he admired both storesbecause they were durable institutionsand because their merchandisewas fairly priced.Durability has always beena first-rate virtue in my father's eyes.All right, so now this is Buffetton Charlie's absent-mindedness.So I'm going to read this story.It's rather humorous.I chuckled.That's the note I left myself.He has the ability to focus on one thingat the exclusion of everything else.
[25:27]
QuestionerThat 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 in our pocket, that the ability to focus is a superpower, and I think it's actually going to become more and more important as the information age progresses.
WarrenThis is now Warren Buffett. He says, I was in New York City with Charlie to attend a Salomon Brothers board meeting. We had 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, 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. 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 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.
QuestionerThis 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.
OtherThis 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 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. Some people might consider this a kind of dry subject matter. When he adds in 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 at least in part from Franklin.
QuestionerAll right, so now here's some Munger quotes.
[27:49]
QuestionerI think it hits on what I just saidabout finding all your best atand keep pounding away at it.I love this as a life motto.Take a simple ideaand take it seriously.He talks a lot about howsome of the great businesseswere 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.Here it says,In the financial world,sometimes the lifespanrequired by the companyto function wellto a period of a lifetimeto act promptly in scaleand doing some simple and logical thingwill often dramatically improvethe financial results of that lifetime.A few major opportunitiesclearly recognizable as suchwill usually come to onewho continuously searches and waitsusing resources availableas a result of prudence and patiencein the past.That's a good outline.That's a good description of Berkshire's M.O.We're not going to diversify.We're going to do our homework.We're going to know a lot about our subject matterso 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.So we've identified a huge opportunityand we're not going to buy a little part.No, we're going to go all in as heavily as we can.And the reason we can go heavy all into such a degree with our resourcesis because we were responsible with those resourcesand allowed them to accumulate over time.The next page...Oh, this is the ideahe's learned from this guy named John Muirabout thinking aboutbusiness as an ecosystem.He says, I find it quite useful to think ofa free market economyas a sort of equivalent of an ecosystem.Just as animals flourish in niches,people who specializein 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 ideathat I was just referencing.In business, we often find that the winning systemgoes almost ridiculously farin maximizing and or minimizingone or a few variables.Simple idea taken very seriouslylike the discount warehouses of Costco.I like this idea too.We should be thinking about ideas as tools.Plus Munger's lattice workof mental models, which he talks about a lot,but I'm going to introduce you to here.Charlie likes the analogy of looking at one's ideas
[30:25]
Otherand approaches as tools.When a better tool, an idea or an approach,comes along, what could be betterthan to swap it out for your old, less useful tool?Warren and I routinely do this,but most peopleforever clingto their old, less useful tools.You are not your ideas.If an idea comes alongthat proves one of the ideas wrongor can improve on it in any way,just ditch it.You're not your ideas.His, meaning Charlie,his models supply the analytical structurethat enables him to reduce the inherent chaosand confusion of a complex investment probleminto a clarified set of fundamentals.Especially important examplesof these models includethe redundancy backup system modelfor engineering.That's his idea of having a giant buffer.The compound interest modelfor mathematics.The breakpoint tipping momentmodel from physics.He calls that Lollapalooza,when you have a bunch of differentthings happeningusually 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.Non-linear.That's stolen fromhis study of physics,which is the breakpoint tipping moment.There's a way to think about this.It was popularized the last couple of yearsby Malcolm Gladwell in his book, The Tipping Point.Same thing here.The modern Darwinian synthesis modelfrom biology.He also studied the cognitive misjudgment modelsfrom psychology.That's the basic outlineof Munger's latticework of mental models,which he expounds on quite a bit.I'm going to talk a little bit more about that,but before,I have a quote here from Bill Gross of PIMCO,a legendary fixed income expert,a friend of Charlie and Warren's,and it talks about,he says, Munger and Buffett aren't the onlyelite investors who use non-business modelsto superb success.He talks about, the book that rests on my librarycoffee table is notany of my own or one I'm investing,but several books by historians.He says, there is no better teacherthan history in determining the future.There are answers worth billionsof dollars in a $30history book.Same thing. You should be studying history.This is Charlie's advice,learn for yourself, only the autodidactsare free, and Charlie's guiding principles.Charlie painstakingly createdhis own largely self-taught system.The self-taught statement isno exaggeration.This is a quote from Charlie. He says, to this day,I've never taken any course anywhere in chemistry,economics, psychology, or business.
[33:05]
QuestionerThis is what I was talking about last week whereI'm rather skeptical ofinstitutionalized learning becauseanything I've sought out and wanted to learn myselfbecause of my owninnate desire, I've learned andremembered. Anything somebody like a teachermade me do for a grade or to getout of a class, it just goes inone ear and out the other. It's largely useless.
OtherSo he says, his clarity is hard won.The product of a lifetime ofguiding the patterns of human behavior,business systems, and a myriad ofother scientific disciplines. Charlie counts preparation,patience, discipline,and objectivity among his most fundamentalguiding principles. So go back to this idea ofmaking 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 dosomewhat better on that. Discipline and objectivityamong 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, emotionalitches, or popular wisdom, thatthis time is different.When faithfully adhered to, thesetraits result in one of the best known Mungercharacteristics. Not buyingor selling very often.Munger, like Buffett,believes a successful investmentcareer boils down to a handful of decisions.So when Charlielikes a business, he makes a verylarge bet and typically holdsthat position for a very long period.Charlie calls itsit-on-your-ass investing andcites its benefits.You're paying less to brokers, you're listening toless nonsense, and if it works,the tax system gives you an extra one,two, or three percentage points peryear.So again, that's another idea that was coveredat length in the Buffett shareholder letters.Oh, okay, another thingthat was covered in the shareholder letters.Buffett and Munger are laser-focusedon moats.What's a moat? Charlierefers to a company's competitive advantage asits moat, the virtualphysical barrier it presentsagainst incursions.Superior companies have deepmoats that are continuously widened toprovide enduring protection.In this vein, Charlie carefullyconsiders competitive destruction forcesthat, over the long term,lay siege to most companies.Almost every company is going to...I would say every company in historyis eventually going to wither away because of this.Just some companies last a little longer than others.Munger and Buffett are laser-focused
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Otheron this issue. Over their long businesscareers, they have learned, sometimes painfully,that few businesses surviveover multiple generations. Okay, so I kind of just trippedover my own point there. Accordingly,they strive to identify and buyonly those businesses with agood chance of beating these tough odds.
So one way to think about a moatis, if you gave me $20 billion,how could I compete with that company?
One moat they always referenceis Coca-Cola.
Because of their dominant positionin 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 willwither away, and anothercompany, or maybe a series of companies,will take their place. But it's extremely hardto do so. So again,there's no such thing as anindestructible company.
Some are harder to attack than others. So they're lookingfor ones that are extremely hard to attack, and they're hardto attack if you take the metaphorto its logical conclusion, because they have a giant moatoutside their castle. Okay, soCharlie says he practices extremepatience combined with extreme decisiveness.
That's a quote from Munger.
If you look at our top 15decisions, if you took outour top 15 decisionsout, we'd havea pretty average record.
It wasn't hyperactivity, but ahell of a lot of patience.
You stuck to your principles, and whenopportunities came along, youpounced on them with vigor.
There are worse situations than drowning incash and sitting, sitting, andsitting. I rememberwhen I wasn't awash in cash, andI don't want to go back. This isCharlie's advice to us. Pay up forquality, and learn from constructivecriticism.
If See's Candies, which isone of their most successful investments ever, I think theypaid like, I don't know, let's say$25 or $30 million for them, and they've madein profits that have accrued sincethen, I think over a billion dollars fromSee's Candies. It prints money. It'soutstanding how much money a candycompany can make. So it says, if See'sCandies, when we were buying it, had asked for$100,000 more, Warrenand I would have walked.
That's how dumb we were. That's an interestingway toanalyze your past decisions. Like, oh, that was really stupid,right? So it says, IraMarshall said, you guys are crazy.
There are some things you should pay up for,like quality, businesses, and people.
You are underestimating quality.
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OtherWe 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 learned from See's, you could say Berkshire was built on constructive criticism.
OtherNow, 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. 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've made similar mistakes many times. These opportunity costs don't show up on financial statements, but they've cost us many billions. That's what I mean about humans scoring in the abstract. Since mistakes of omission aren't visible, most people don't pay attention to them.
OtherWhat did Charlene Warren do? We rub our noses in mistakes of omission. This whole exchange here was from one of Berkshire's annual meetings. They had just gotten 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 and the time they could buy. And that mistake, as of that day, which might be even more now, it cost them over $10 billion.
OtherI want to interrupt the wit and wisdom of Charlie Munger with this idea that I've talked about many times, that books are the original links. They lead us from one person to another, so on and so forth. 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 going to stay down this path for a little bit in the next few weeks. We started with Warren Buffett's Shareholder Letters. Talks a lot about Charlie Munger, obviously, and then talks about David Ogilvy. So I did David Ogilvy 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? He learned so much from it and is so compelled that he winds up buying the company for a couple hundred million dollars.
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QuestionerCharlie's also introduced me to several peoplein 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 hisand tell you a little bit about Singleton real quickbecause I find it fascinating. They call hima business and chess master.Singleton was co-founder of Teledyneand chief executive of the Los Angelesbased conglomerate for three decades.He attended the Naval Academy, then transferredto 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 Grandmasterlevel and could play without looking at the board.From 1963to 1990, when he was running the company,Teledyne returned an astounding 20%compound annual returnto shareholders.This was a period when the S&P returned8%. He repurchased90% of Teledyne's outstandingshares, primarily between 1972 and 1984.Singleton built a recordas a manager and capital allocatorwith few peers in modernbusiness history. Sharing Buffett'sadmiration for Henry Singleton,Charlie wonders, given the man'stalent and record, have we learnedenough from him? So when Charlie asked that question,I was like, alright, I need to read the part of thisbook, because he's explicitly sayingthis guy is so skilledat life, he's worthy of morestudy, right? And then this is a quote from WarrenBuffett on Singleton. Henry Singletonhas the best operatingand capital deployment record in Americanbusiness. If one took the100 top business school graduates and made acomposite of their triumphs, theirrecords would not be as good as Singleton's.So keep an eye outfor a podcast in the future, nextfew weeks with Singleton.This is Charlie on how to get rich,and then also a defenseagainst inflation.So how to get rich. A young shareholderasked Charlie how to follow in his footsteps, and Charliebrought 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 guywho's rich and you ask, how can I becomelike you, except faster?And then this is hisanswer, his advice. Spend eachday trying to be a little wiser than you werewhen you woke up. Dischargeyour duties faithfully and well.Step by step you getahead, but not necessarilyin fast spurts.But you build discipline by preparingfor fast spurts.
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OtherSlug it out one inch at a time, day byday, and at the end of the dayif you live long enough, mostpeople get what they deserve.
David SenraAnd then this is his defense againstinflation, and his idea for usis you need to reduce your materialneeds. Most people willsee declining returns due to inflation.One of the great defenses if you're worriedabout inflation is to not have a lot ofsilly needs in your life.You don't need a lot ofsilly needs in your life.You don't need a lot ofmaterial goods.So that could have easily been said200 years prior by Benjamin Franklin.Oh, so this isinteresting.If you've listened to every single Founders Podcast I'vedone so far, I've mentioned this guy a fewtimes. He's the founder of Costco. His nameis Jim Sinegal. Mungerbasically, I thinkthe business he most admires that'snot part of Berkshire, so likeoutside of Coca-Cola and Geico and the rest of theseis Costco, and Jim isone of the co-founders of Costco.Well, let me just read this. So this isMunger on Sinegal.You just wouldn't believe how efficientand sophisticated Costco's warehouseoperation is. Jim Sinegalis a fabulous business operator.He's like a Carnegie, a Rockefeller,or a James J. Hill. Let mepause there. Never heard of James J. Hill.Munger mentioned him several times.Just found his biography. Just bought his biography.So that's going to come up too. I consider himto be one of the top five retailersof the past century. And why did I buy James Hill'sbiography? Because Munger, who Iadmire, just put him in the same sentence as Carnegieand Rockefeller. So we have to study him. We have no choice.It's not even my decision. I have to.So he says, I consider him to be one of the top five retailersof the past century. He's that good.He works 80 hours a week and sets aterrific example for his entire organizationin terms of work ethic, integrity,loyalty, and selflessness.He's a moral leader as well as apractical leader. These are notminor virtues.We have our own living, breathingSam Walton at Costco.So I think Munger,he used to be, I don't know if he still is, buthe used to be on the board of Costco.And the reason I say, if you listen to my podcast, you know whoJim Sinegal is because when I coveredThe Everything Store, the book on Amazon, I'm Jeff Bezos.Bezos said that his meetingwith Sinegal 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 likea Starbucks or they met for coffee or whatever
[44:57]
Questionerthe case is. And you know, Jimjust laid out to Jeff what he's learned about business.And shortly thereafter, Jeffhad a passion for trying to reduce...He says that Jeff has this quote where he's like, there's twotypes of businesses in the world. One's to try to figure outhow to charge more and one that figureshow to charge less. We're going to be the latter.That comes directly from Jim Sinegal.The idea of Amazon Primelooks extremely similar toCostco makes almost all their moneyon their membership program. So again,these are ideas that Jeff Bezos stolerightfully because he's smart.He's going to obviously study entrepreneursof the past, people that have been successful before hewas, and take the ideas thatare valuable. Okay, so noweverything Ijust read to you and just expounded oncame from like the first half of the book. The first half of the bookis like this weird collection of justideas he has. The secondhalf is all these gianttalks. And I'm talking like 300-250pages of a giant book here.So obviouslyit would be impossible to read them all, but I'm just going to pull out somequotes and ideas that I really like.Some of these I've actually heard.And it was nice to have heardthe speech first and then read it after.I think it helped in my understanding.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 aprescription for attaining a happy life.So everybody gets up there and they give you their advice onwhat they've learned. Charlie, usingthe inversion principle he recommendsin the speech, compellingly makesthe opposite caseby setting forth what a graduate maydo to reach a state of misery.So he's like, his idea, if you wantto find out his idea of invertand soinstead of saying, how do I solve this problem?How do I work backwards? When he talks aboutthe example I think he uses is like, if you want tolearn, like if your goal is, okay,I want to help the people of India, right?Start with, what are the actionsI would takethat would hurt the people ofIndia, right? And it makes you think aboutthe same problem in a vastly different way and then avoid thoseactions. So he's doing this,he's telling us what to avoidin life. And one of this is he's reallybig on staying sober.So he says, the four closest friends of my youthwere highly intelligent, ethical,humorous types.
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OtherThey were favored in person and background.Two are long deadwith alcohol and a contributing factor.And a third is a living alcoholic,if you call that living.While susceptibility varies,addiction can happen to any of usthrough a subtle process where the bonds ofdegradation are too late to be feltuntil they are too strongto be broken.And yet, I have yet to meet anyonein over six decades of lifewhose life was worsened byfear and avoidance of such a deceptivepathway to destruction. So he's telling us,hey, don't drink and don'tdo drugs.More on Charlie's keys to a miserablelife. So 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 amiserable life, these are the traits you should do.We don't want a miserable life, so we're going to be doing the opposite.First, be unreliable.Do not faithfully do what you haveengaged to do.If you will only master this one habit,you will more than counterbalance the combinedeffects of all your virtues,howsoever great.So let me pause there.That's a hell of a statement. Just being unreliablewill foreclose many opportunitiesin your life. It doesn't even matter how great you are.He's saying that if you're unreliable, no one'sgoing to be able to trust or work with you. Therefore, you're not going to reap anybenefits in the future. If you like beingdistrusted and excluded from the best human contributionand company, this prescriptionis for you. Master thisone bad habit, and you willalways play the role of thehare in the fable, exceptthat instead of being outrun by one fineturtle, you will be outrunby hordes and hordes ofmediocre turtles,and even some mediocre turtles oncrutches. See what I meanabout, like, he's taking this really important idea, butthat visualization ofthe classic fable of theturtle and hare,whatever you want to call it. Now, whenI'm reading it, I picture 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'tmatter how smart and capable youare, because you're unreliable, you're going to have peoplethat you deem less skilled thanyou actually do better in life.That's like a little versionof personal hell, right? But thenthe idea that you're going to have mediocre turtleson crutches, because you'reunreliable, they're still kicking your ass.My second prescription for misery is to
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Otherlearn 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 first hand experience. See how far you get.
OtherThat'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. 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' mistakes by simply looking about you.
OtherThis gets rather, what's the word I'm looking for? This is like controversial, where he criticizes humans, right?
OtherSo 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. 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 actually tried to obtain that skill, you wouldn't have people making mistakes that other humans have made in the past already.
OtherThe other aspect of avoiding vicarious wisdom is the rule of not 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.
OtherSo 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.
OtherMy third prescription to you for misery is to go down and
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Otherstay down when you get your first,second, or third severe reversein the battle of life.Meaning you quit. With a little bit ofadversity you just gave up. Because thereis so much adversity out there, even forthe lucky and the wise, this will guaranteethat in due course you willbe permanently mirrored in misery.My final prescriptionfor you for a life of fuzzythinking and infelicityis to ignore a story they toldme when I was very young abouta rustic who said,I wish I knew where I was going to diethen I'd never go there.
OtherSo now he's talking about,he's actually, Johnny Carson, like the old,this is a lesson aboutinverting. Hey, learn fromJohnny Carson. So,because Carson gave a speech verysimilar, I should have said this at the beginning, Carson gave a speechvery similar to the one Munger is givingat this commencement address. So it says,what Carson did was to approach the study of how to createX by turning that questionbackward. That is by studying how tocreate non-X.The great mathematicianJacobi had exactly the sameapproach as Carson and wasknown for his constant repetition ofone phrase, invertalways invert.It is in the nature of things,as Jacobi knew, that many hardproblems are solved only whenthey are addressed backward.In my opinion,as a certified biography nut,that Charles Darwinwould have ranked near the middle of HarvardSchool graduating class of 1986,yet he is nowfamous in the history of science.And so he'sasking, how did this happen?This is what I was just saying.Averagein terms of where they would haveappeared in a graduating class,yet because of their approach,actually is what led tothe differentiation, what led to theiroutside success. So it says, Darwin's resultwas due in large measure to hisworking method, which violatedall my rules for miseryand particularly emphasized a backward twistin that he alwaysgave priority and attention to evidencetending to disconfirm whatevercherished and hard-won theory he already had.In contrast,most people early achieveand later intensify atendency to process new anddisconfirming information so thatany original conclusion remains intact.So it goes back to his tool, thinking about ideas astools. Some people are like, this idea isnow a part of me. I'm a goodperson, so this idea is good.Meanwhile, there's new information coming in.Charles would just get rid of his old idea.So would Munger. And he's saying thatmost people don't.
[54:27]
OtherThey get rid of disconfirming informationso that any original conclusion remains intact.They become people of whomPhilip Wiley observed,you couldn't squeeze a dime between whatthey already know and what they will neverlearn.If you minimize objectivity, you ignorenot only a lesson from Darwin,but also one from Einstein.Einstein said that his successfultheories came from curiosity,concentration, perseverance,and self-criticism.So if you don't engage in self-criticism,that's essentially like getting ridof your bad ideas. And by self-criticism,he meant testing and destructionof his own well-loved ideas.So I just walked over my point again.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 mebecause I think all too little of it is deliveredby modern educational systems,at least in an effective way.He's criticizing academia.He's saying it's not really teaching you.He's teaching you how to master one thing,when you should be learning from different domainsand different subjects.He calls it 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 chiropractorgoes about practicing medicine.But that's a perfectly disastrous way to thinkand 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 learnis probability.If you don't get this elementary,but mildly unnatural,mathematics of elementary probabilityinto your repertoire,then you go through a long lifelike a one-legged manin 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 directiveHe's talking about the Braun Companyand what he learned from them.If you wrote a letter or directivein the Braun Company telling somebody to do somethingand 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 more important,and they'll be more likely to comply.Even if they don't understandyour reason,you'll be far more likely to comply.
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OtherOne of Charlie's favorite booksis by Robert Cialdini.It's called The Psychology of Influenceof Persuasion. I read it a long time ago.I think I've read it twice, actually.There's a story in the book that actually illustrates thiswhere they do an experiment wherethere's a long line at the photocopy machinein an office,and if you ask, hey, can I get ahead of you?That's all.It's just like, hey, can I cut you in line?You say, hey, can I get ahead of you?Then you tell the reason why.It doesn't even matter what the reason is.Maybe it's like, oh, I have a meeting in five minutes.Most people will let you cut ahead of them.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.Alright, so these areideas and models that Charlie likes most,and then also an indicationwhen we learn from David Ogilvie thatif an ad works in one country, it'll probably work in others.This is probably why Ogilvie found thatads worked in multiple countries.So he says, the engineering idea of a backup systemis a very powerful idea. I mentioned this a little bit earlier.The engineering ideaof breakpoints, that's a verypowerful model, too.The notion of a critical mask,or mass, that comes out of physics.It is also a very powerful model.The next most reliablemodels are from biology and physiologybecause, after all, all of usare programmed by our genetic makeupto be much the same.And so justas a man working with a tool has to knowits limitations, a man workingwith his cognitive apparatushas to know its limitations.The psychology ofmisjudgment, as I call it, is aterribly important thing to learn.So he continues, like, why isthe psychology of misjudgment so important to study?He says, terribly smart people make totally bonkersmistakes by failing to payheed to it. In fact, I've done itseveral times during the last two or three yearsin a very important way. You neverget totally over making sillymistakes. There's anothersaying that comes from Pascalthat I've always considered one of the really accurateobservations in the history of thought.Pascal said,the mind of man at oneand the same timeis both the gloryand the shame of the universe.And that's exactly right.It has this enormous power.However, it also has these standardmisfunctions thatoften cause it to reach wrong conclusions.
[59:19]
OtherIt also makes manextraordinarily subject to manipulationby others. For example,roughly half of the army ofAdolf Hitler was composed ofbelieving Catholics.Given enough clever psychologicalmanipulation, what human beingswill do is quite interesting.
OtherAnd he'sgoing to touch on this idea again, where he's going to repeathimself, the economyas an ecosystem.Just as animals flourishin niches, similarly, people whospecialize in the business worldand get very good because they specializefrequently find good economicsthat they wouldn't get any other way.This isMunger on Walton,which he mentions a bunch of times. He holds himin high regard. And he says it's quiteinteresting to think about Walmart startingfrom a single store in Arkansasagainst Sears with its name,reputation, and all of its billions.How does a guy inBentonville, Arkansas, with no moneyblow right bySears?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 startedout with just one little store.I think he was like 42 or 45, something like that,when he started the first Walmart.He played the chain store gameharder and better than anyone else.This iswhy I highlighted this part.This one section is particularly interesting.Walton invented practicallynothing, but he copiedeverything anybody elseever did that was smart.So he just blew right bythem all.Think about it. You don't even have to innovate. If you just masterthe good ideas of what everybody else already figuredout and you actually apply them, that puts youahead of almost every single other person, because it's such arare technique and rare skill.That's amazing.One of my favorite quotes comes from the founder of AngelList,Nival Ravikant, and he says,What do you do that feels like playto you, but looks like workto others? Build a businessaround that. I think that's fantasticadvice, and Charlie'skind of echoing that here. You have tofigure out what your own aptitudes are.If you play games where other peoplehave the aptitudes and you don't,you're going to lose, and that'sas close to certain as any prediction that youcan make. You have to figureout where you've got an edge,and you've got to play withinyour own circle of competence.So hereyou have Munger kind ofpoking fun. He really hates thisidea of efficient markettheory, andwell, let me readthe paragraph first. He says, It's ratherinteresting because one of the greatest
[1:01:57]
Othereconomists of the world is a substantialshareholder in Berkshire Hathawayand has been from the very earlydays after Buffett was in control.
His textbook always taughtthat the stock market was perfectlyefficient and that nobody could beat it,but his own money went intoBerkshire and made him wealthy.
So like Pascal and his famouswager, he hedged his bet,which is another way of saying if your actions aren't reallylining up with your ideasor your words, you don't actuallybelieve them. So what I tookaway from that paragraph is youhave to, and I say this over and over again,you have to watch what people do,and you have to make sure that their opinions are tiedto a profit and loss statement.
That's the only way it has any kind of value.
This guy is, in Munger'sopinion, poisoning the minds of generationsof people teaching him a theorythat he calls bonkers, yet what doeshe do with his own money?
He gives it to somebody that canbeat the market, that Buffett and Munger.
So that's ahell of an insult, actually, nowthat I re-read that part. That'spretty damning on that economist.
He doesn't name them by name, but I mean, obviouslythe guy's got to know who he is.
I know I left myself, if you can make this very simple conceptpart of your decision-making, you will do very well.
The wise ones bet heavilywhen the world offers them that opportunity.
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.
This is a very simple concept,and to me, it is obviously right.
Yet,practically nobody operates thatway. When you geta few, you should really load up.
It's just that simple. So the difference betweenknowing something and actually acting on it.
No point in learning if you're not going to do it.
And there's something about itthat goes against our nature, because you seethat the standard, like the default, is thatpeople are not going to do that. They'll tell youto diversify, they hedge, they have plan B,plan C, plan D, all the way down toplan Z, if you will. Munger and Buffettaren't like that. They have belief in theirability, and their ability to learn aboutwhat's valuable to a businessand to bet heavily on it.
So this is Munger who talks aboutit's super, super important thatyou need to get the incentives right.
As usual in human affairs,what determines the behavior are incentivesfor the decision-maker.
[1:04:13]
CharlieFrom all business, my favorite caseon incentives is Federal Express. I lovethis story. The heart and soulof its system is having all of its airplanecome to one place in the middle of the nightand shift all the packages from plane to plane.If there are delays, the whole operationcan't deliver a product fullof integrity to Federal Express customers.And there were a lot of delays.It was always screwed up. They could neverget it done on time. They triedeverything. Moral persuasion,threats, you name it, and nothingworked. Finally,somebody got the idea to pay allthese people not so much an hourbut so much a shift.And when it's all done, they cango home. Well, their problemscleared up overnight. So gettingthe incentives right is a very, veryimportant lesson. It was not obviousto Federal Express what the solution was.But maybe nowit will hereaftermore often be obvious to you.This ismore on Munger'selaborating on betting heavilyon the few unique insights that you have.The Berkshire systemis not bonkers. It's so damnelementary that even bright people aregoing to have limited, reallyvaluable insights in a very competitiveworld where they're fighting againstother very bright, hardworking people.It's obvious.You can't have such a large ego that you're going to outsmartpeople every time. You might be able to do this a handfulof times in your life. Well, guess what? If you only do it a handfulof times in your life, you're fabulously wealthy.And it makes sense to load up on the very fewbrilliant insights you have instead ofpretending to know everything abouteverything at all times.Isn't that perfectlyobvious? How many of youhave 56 brilliant insights inwhich you have equal confidence?Raise your hands, please.Now, how many of you have two or three insightsthat you have some confidence in?I rest my case.
WarrenAnd so whenhe puts it like that, like it's...I didn't say it's...I used the word easy. It's not the right word.I think it's a lot...it's easierto do or at leastdoable for most people to come up withtwo or three really good insightsin their lifetime aboutways to...businesses,products, services, whatever the case is.It's next to impossible.You could probably make one goodbusiness. Maybe you have...you caninvest or make two or three goodbusinesses or have the opportunities topartake in that in your lifetime.What's the chance that you can come up with 50 or 100?Charlie's pointis extremely low.
[1:06:43]
QuestionerSo why don't you just focus on doing it a few times and doing it really, really well.
OtherOh, so this is the book I'm going to do in two weeks. This is bananas. This is another example of books at original length. So I've known about Claude Shannon. 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 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, pioneer scientist in the 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 sample. First I read the description and read the samples. I was like, oh, 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 let's 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 Osler, 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 a multidisciplinary approach. This is Munger talking.
CharlieI'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 lattice work of powerful models. And with that system, things gradually get to fit together in a way that enhances cognition.
OtherYour assigned reading for today included 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 Ph.D. in engineering and Warren Plainly could have gotten a Ph.D. in any field he wanted to pursue.
[1:08:51]
OtherBoth gentlemen areinvariate teachers.That's not how you pronounce that word. Great teachers,let's just say that. When Iurge a multidisciplinary approachthat you've got to have the main modelsfrom a broad array of disciplines and you'vegot to use them all, I'm really askingyou to ignore jurisdictionalboundaries. So you're sayingdon't just pay attention to what youlearned in whatever field of study. Lookover the fence and see what they have that they've alreadylearned too. And why youdo that? Because the world isn't organized that way.It discourages the jumping ofjurisdictional boundaries.Big bureaucratic businesses discourageit. And of course, academiaitself discourages it. So he's telling usdon't do this. Don't discourage it.Your school might be set up like that. Your large corporationyou work for might be set up like that.But it's not something that you want to do.All I can say is thatin that respect,academia is horribly wrong and dysfunctional.So if you want to be a goodthinker, you must develop a mind that canjump the jurisdictional boundaries. He has this thing, it's likeforget it, I'll do it myselfcurriculum, I would say. Since youracademic structure by and large doesn't encourageminds jumping jurisdictional boundaries,you're at a disadvantage because in that onesense, even though academia is very useful toyou, you have been mistaught.My solution for youis one that I got from a very earlyage from the nursery.Nursery rhyme. It's the story of theLittle Red Hen. The punchlineof the course is thenI'll do it myself, said theLittle Red Hen. So ifyour professors won't give you an appropriatemultidisciplinary approach,if each wants to overuse hisown models and underuse the important modelsin other disciplines, you cancorrect that folly yourself.Anotherperson that I was introduced to, and I'veordered the book, is the founder of HersheyChocolate. Andsomebody monger looks up to, and hereferences a few times, but ISo I'm going to ignore most of thatbecause I'll cover it when I read the book, butthere's a story herethat I think is a good pointthat Charlie's saying. It's likethere's some things in life that are just hardto copy. They're not going to be at all obvious.So this isCharlie giving us a little story on that.He says, one of my favorite business stories comes fromHershey. They get their flavor becausethey make their cocoa butter inold stone grinders that they started
[1:11:14]
Otherwith in the 1800s in Pennsylvania.And a little bit of the husk of thecocoa bean winds up in the chocolate.Therefore, they get that oddflavor that people like in Hershey's chocolate.Hershey knewenough whenthey wanted to expand into Canada to know theyshouldn't change their winning flavor.Therefore, they copied their stonegrinders. Well, it took themfive years to duplicate theirown flavor. As youcan see, flavors can be quitetricky. And thelesson I took away from there is even in yourown business, there could be things that giveyou an advantage that other people want tocopy. And one, they might not be able to. But two,it may even be kind of a mystery toyou. Now, they wind up figuring it out,but it took them five years to get the same flavorjust in two different locations. SoI think that could be applied to a bunch of different waysto actually have an advantagein your business. Because if it's so hard for Hersheyto copy their own flavor, how hard is itfor their competitors to copy their flavor?Oh, this is interesting. Doyou have an ideology from which youwon't budge? Another lessonin worldly wisdom. Heavyideology is one of the most extremedistorters of human cognition.Ideology doessome strange things and distortscognition terribly. If you get alot of heavy ideology young,and then you start expressing it, you'rereally locking your brain into a veryunfortunate pattern. And you're goingto extort your general cognition.Why?Because ideology, since itpounds ideas in betterthan it convinces out, it isa very dangerous thing to do.Alright, skipping ahead.This is such a great point. Let me read it to you and then I'll tell youwhat I took away from it.He says, I don't want you to think that we haveany way of learning or behaving so youwon't make a lot of mistakes.I'm just saying that you can learn tomake fewer mistakes than other peopleand how to fix your mistakes fasterwhen you do make them. And to me,his whole point is the way you thinkand then how you apply that to whateveryou're working on.Your system should be able to surviveeven with the mistakesyou make. Because it'sinevitable that humans are going to make mistakes.So you cannot build a business,you can't build a system of thinking that relieson no mistakes beingmade. There's no such thing as a perfecthuman being. So you can't have a perfect system.This is him telling us tomaster the best of what other people already figured out.
[1:13:36]
QuestionerI 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 irrationally passionate about?
CharlieYeah, 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.
OtherSo 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 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 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 costs, the old ladies should promptly sell the shoe factory,
[1:16:08]
Otherprobably to the competitorwho would enjoy the greatestmarginal utility advantage.Thus, the winning answerrelied not on what the students hadmost recently been taught in business school,but instead on morefundamental concepts,like agency costs and marginalutility, lifted fromundergraduate psychologyand economics.I'm going to repeat thisbecause he repeats it, and I think it's such an important point.There's an old two-part rulethat often works wonders in business,science, and elsewhere.One, take a simple idea,and two, take it very seriously.
QuestionerSo this is Charlie on the follyof fake diversification.So on one end, you haveI look like a barbell, right?So on one end, you have the index.If you have no abilityto accuratelydetermine what's the truevalue of a business, just gothe Vanguard-Jack Vogel routeand just own theentire index, right?So that's on one side.On the other side, you have the Mungerand Buffett method,which is onlyinvest in the fewopportunities that you feel you havea unique advantage and bet heavily,so a handful of companies.You don't own all of them. You own a few.What Munger says,the reason I say this is Charlie on the follyof fake diversification is because the other diversificationis not either an index or their route.It's in the middle. It's in the messy middle.It doesn't actually make any sense.He says, I have more than skepticismregarding the orthodox view that hugediversification is a must for thosewise enough so that indexcessation is not thelogical mode for equity investment.He's like, if you're not doing it our way, do it, just have an index.This is absurd.I think the orthodox view is grosslymistaken. A person or institutionwith almost all wealth invested longterm in just three finedomestic corporations is securely rich.Long-term resultswill be superior by reason ofits lower costs, requiredemphasis on long-term effects,and concentrationin his most preferred choices.That third part to me isthis isn't going to work unless you do yourhomework.You only have a fewattempts here,so you have to make sure those attempts are good,which means youconcentrate it in your most preferred choices.That assumes that you didthe work to figure out what business is actually valuable.I go even further.I think it could be a rational choicein some situationsfor a family or a foundationto remain 90%concentrated in oneequity.That sentence, if you just took that out of context
[1:18:56]
Questionerand said it to some random person on the street, they would freak out because you're so indoctrinated about diversification. If you study how the great fortunes are made, that's exactly how they did it. It is extreme concentration in 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. If you're a hugely successful entrepreneur, I'll give you an example. I don't even 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. This is completely obvious, but completely opposite of what most people are taught. Even for me, when I first started studying Munger and Buffett's views on diversification, I've already adapted more of a barbell strategy and a lot of things in life in general. I was more open to it, but it felt wrong. It sounded wrong because it was so different from what other people have said in the past. Those other people are not wealthy. Oh my goodness. I have an insane amount of notes. I have a long note to myself, but I'm going to read that note to you after I read what spawned that note. 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 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. I'll tell you why this one paragraph is illustrating his why I think it's wise to follow 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. It is sad that today each institutional investor apparently fears
[1:21:24]
Questionermost of all that itsinvestment practices will be differentfrom practices of the restof the crowd. So there's a lot to unpackfrom that one paragraph. One,it is possible academia has taught you wrong.It has taught you wrong detrimentalideas or theory. Two,you are more likely to believe this nonsenseif you don't possess broadmultidisciplinary worldly wisdom.And three, he is saying thisto a group of investment professionalsthat make mistakes becauseof a failure to understandhow their own operations related to thelarger system of which they're a part.That results in higher feesbeing erased. And four,he says humans are prone to makethose mistakes because we copyand mimic each other. That's a lotof ideas that, like, and I wouldn'thave known how to interpret that if I didn'tobviously study Munger at length and readthree books about him. Butthat's what I love about this guy.He's able to synthesizesuch complexdifferent ideas from multipledifferent fields and then explain to youwhat's the real world application of that.And he's giving it, and he's knowingthe 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 arelower. And you're,even if you've mastered what you learned in business andfinance because you didn't understandpsychology orthe idea of whereyour theories are wrong. You relytoo much on the rational mantheory in economics. Well, there's nosuch thing as a rational man. You would know that if youjust talked to people day to day. I don't know.I really appreciated his ability tobreak that down in such a shortamount of time.A rough rule in life is that an organizationfoolish in one way in dealing witha complex system is all too likelyto be foolish in another.This, fresh in my mind, was what DavidOgilvie told us in Confessionsof an Advertising Man. If you have highstandards in one department of your company,that can lead to high standards in other departments.So that's the positive effect of that. Mungeris telling us the negative effect.That if we don't know how to deal withcomplex systems in one way,we're more likely to be, since most of lifeis a series of complex systems,you're most likely to make that same mistakein others. So identifying theone, that you live in a complex environmentway beyond your understanding, is the firststep, but two, understanding that that lessonneeds to be applied over and over and over again to different
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Otherdomains and different experiences you have in life. Love thatidea. The prudential rule isthat underlying the... so this is what I mean abouthim giving these great anecdotes andstories that really highlights what he's trying to sayhere. He says the prudential ruleis that underlying the oldadvertisement for machine tools, so there used to be thisfamous ad, you'veprobably seen it, it says, the man who needsa new machine tool and hasn't bought itis already paying for it.
OtherWell that rule also applies, I believe, tothinking tools. If you don'thave the right thinking toolsand the people you seekto help are already suffering from easilyremovable ignorance.So to me, it's like if you're not,if you know that your business needs this tooland you don't buy it, right, it means you're alreadypaying for it. Well if you know that your mind isn'tperfect, the way you're making decisions isn't perfect,another way to think about this is if there'sinformation out there that's useful to you that youhaven't gone out and actually activelysought, like you're already... and maybe it's a reason because, oh,I don't want to invest a seven hour, likeit might be seven hours to read this book and $20.Well, that's a small price to payfor not having that knowledge. Isn't it betterjust to invest the time and the money sothen you can reap the benefits of that knowledgemoving forward for the rest of your life? Certainly.
OtherMost people would agree with that.But most people would agree with itwith words. It's unclear to mehow many would actually agree with their actions.Okay.
OtherSo I'm moving forward.He's a big, he really likes this ideaof checklists. So he comes upwith, he's giving this talk tobusiness school graduates and he has this extremesuccess checklist that I really love. So I'm just goingto pull out. It's like a,it's only like four factors.Extreme success is likely tobe caused by some combination of the followingfactors. A.Extreme maximization orminimization of one or two variables.Example, Costcoor our furniture and appliance store. So that's NebraskaFurniture Mart, which I covered at lengthin the Berkshire Hathaway shareholder letters.But there's that idea again. Extrememaximization or minimization of oneor two variables. Take a simpleidea and take it seriously. B.Adding success factors so that abigger combination drives success.Often in nonlinear fashion.As one is reminded by theconcept of breakpoint and the concept
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Charlieof critical mass in physics.Often results are nonlinear.You get a little bitmore mass and you get aLollapalooza result.And of course, I've been searching forLollapalooza results all my life.So I'm very interested in models thatexplain their occurrence.
OtherC. An extremeof good performance overmany factors. Example,Toyota or Les Schwab. Les Schwabis another person. He foundedLet me just read you his short bio.Les Schwab was born in Ben Oregon.Skip over his early life.He starts a small tire shop that he turnedfrom a $32,000 a year business into one that'sgenerating $150,000 annually.And then he starts to build,starts expanding throughout the Pacific Northwest.And today he hasstarted these tire stores that havesales in excess of a billion dollars annually.So it says an extremeof good performance over many factors.And Les is competing with, you know, at the timemany of the major tire manufacturershad their own stores. So he hadcars stacked against them because they gave preferentialtreatment to their own corporate stores.Alright, so let's see.
CharlieD. Catchingand riding some sortof big weight.Moving ahead, he's got two ideashere next to each other. One, make yourself worthy.And two, lifetime learning is a moralduty. It'snon-negotiable in Charlie's eyes.So I love this idea about making yourself worthy because we're talking aboutthe idea of making yourself into a formidableindividual, right?He says, the safest way to try to get what you wantis to try to deserve what you want.It is such a simple idea.You want to deliver to the world whatyou would buy if you were on the other end.By and large, the people who havehad this ethos win in life.And they don't win just moneyand honors. They win the respectand the deserved trust of the peoplethey deal with.The acquisition of wisdom is a moralduty. It's not something you do just toadvance in life. Withoutlifetime learning, you peopleare not going to do very well.You are not going to get very far in lifebased on what you already know.You're going to have to advance in life based on what youlearn after you leave here. This is another commencement address.Consider Berkshire Hathaway,one of the best regarded corporationsin the world. It may havethe best long-term, big assetinvolving investment record in the historyof civilization. The skillthat got Berkshire through one decadewould not have sufficed to get it through the nextdecade with comparable levels of
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Otherachievement. Warren Buffetthad to be a continuous learning machine.The same requirement exists inlower walks of life.I constantly see people rise in lifewho are not the smartest, sometimesnot even the most diligent, but theyare learning machines. Theygo to bed every night a little wiserthan they were thatmorning. And boy, does thathabit help, particularly when youhave a long run ahead of you.Charlie goes back to Ciceroand about studying history. But the lessonI got from what he's about to say here is that you need to study history,but don't stop there. That's just oneof the many techniques you have to master.So now this is a quote from Cicero.History is the witness that testifiesto the passing of time. It illuminatesreality, vitalizes memory,provides guidance in daily life, andbrings us tidings of antiquity.To be ignorant of what happened before youwere born is to be ever a child.For what is a man'slifetime unless the memory of past eventsis woven with those of earlier times?That's the end of the quote from Cicero.And now here's Charlie talking about that.
CharlieCicerois famous for saying that a man who doesn't know what happened before he's born goes throughlife like a child. That is a verycorrect idea. Cicero's rightto ridicule somebody so foolishis to not know history.But if you generalize Cicero, as Ithink one should, there are a lot of otherthings that one should know in addition to history.And those other things are the bigideas in all disciplines.The way complex adaptive systemswork, and the way mentalconstructs work, problemsfrequently become easier to solve throughinversion. He's repeating this again.It's obviously very important to him. If you turnproblems around into reverse, you often think better.For instance, if you want to helpIndia, the questionyou should consider asking is not, how can Ihelp India? Instead, you should ask,how can I hurt India? You will findwhat will do the worst damage, and then you try toavoid it. Perhaps the two approachesseem logically the same.But those who have mastered algebra know thatinversion will often and easilysolve problems that otherwise resistsolution. And in life,just as in algebra, inversionwill help you solve problems that you can't otherwisehandle. Let me use alittle inversion now. Whatwill really fail in life?What do we want to avoid?Some answers are easy. For example,sloth and unreliabilitywill fail. If you'reunliable, it doesn't matter what your
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Othervirtues are. You're going to craterimmediately. So faithfullydoing what you've engaged to do shouldbe an automatic part of your conduct.Of course, you wantto avoid sloth and unreliability.Some more advicefrom Charlie. Avoid self-pity.Generally speaking,envy, resentment, revenge,and self-pity are disastrous modesof thought. Self-pitycan get pretty close to paranoia.You don't want to drift into self-pity.I had a friend who carried a thickstack of cards, and whensomebody would make a comment that reflectedself-pity, he would slowly pullout this huge stack of cards,take the top one, and hand it to that person.The card said,Your story has touched my heart.Never have I heard of anyonewith as many misfortunes as you.Every time you findyourself drifting into self-pity,just give yourself one of myfriend's cards. Self-pityis always counterproductive.It's the wrong way to think.And when you avoid it, youget a great advantage over everybody else.Because self-pityis a standard response,and you can train yourselfout of it. See, he references thatover and over again. He'll identifythe standard, default,typical human response,and then he'll tell you exactly why that's theexact wrong thing you should do.That's a good way to identify yourbehavior in others.You may think that you're constantly choosing,but you might be mimicking from people around you.Does this behavior actually make sense?Is it default? Do I see other people around me engagingin the same behavior?Yes, I do. Now, that doesn't necessarilyalways mean it's wrong, but I need to make sureI'm working through and actually choosingthis action as opposed to just mimicking it.They're very similar, and sometimesyou can't tell which actionsare ideas you're choosing and which ones you're just mimicking.Just a few more here.I love this.This idea.Maximizenon-egality.I'm probably not pronouncing that correctly,but it says, another idea that I foundimportant is that maximizingnon-egality will often work wonders.What do I mean?Well, John Wooden of UCLApresented an instructive examplewhen he was the number one basketball coach in the world.He said to thebottom five players,you don't get to play. You are practice partners.The top seven didalmost all the playing.The top seven learned more,remembered the importance of the learning machine,because they were doing all the playing.And when he adopted thisnon-egalitarian system,Wooden won more games
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Otherthan he had won before.I think the game of competitive lifeoften requires maximizingthe experience of the peoplewho have the most aptitudeand the most determination as learning machines.And if you wantthe very highestand if you want the very highest reachesof 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 lifeoften requires maximizing the experienceof the people who have the most aptitudeand the most determination as learning machines.That's a really interesting idea.Alright, here's Munger.Here's a couple thoughts on incentives for Munger.Almost everyone thinks he fully recognizeshow important incentives and disincentivesare in changing cognition and behavior.But this is not often so.So again, he's describingthe default human conditionand how we can overcome thatand actually utilizea better idea.For instance, I think I've been in the top 5%of my age cohort almost all my adult lifein understanding the power of incentives,and yet I've always underestimated that power.Never a year passes,but I get some surprisesthat pushes a little furtherin my appreciation of incentive superpower.So he talks about,he's quoting Ben Franklin and Paul Richards' Almanac.He says,if you would persuade, appeal to interestand not to reason.This maxim is a wise guideto a great and simple precaution in life.Never, ever think about something elsewhen you should be thinkingabout the power of incentives.Perhaps the most important rule in managementis get the incentives right.Incentives are superpowers.And I love this,this good old school wisdom.He calls this Granny's Rule.Granny's Rule provides another exampleof reward superpowerso extreme in its effectsthat it must be mentioned.You can successfully manipulateyour own behavior with this rule.Granny's Rule, to be specific,is the requirementthat children eat their carrotsbefore they get dessert.And the business version requiresthat executives force themselves dailyto first do their unpleasantand necessary tasksbefore rewarding themselvesby proceeding to the pleasant tasks.Given reward superpower,this practice is wiseand sound.So do the stuff 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,that's the Granny's Rule.And finally, I'll close onwhat may be the most important idea.It's hard to say,
[1:36:08]
Charliebut 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 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.
David SenraI 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. 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. 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 sale at no additional cost to you. Thank you very much for your support. I will talk to you next week.