- Started: [[2025-01-03]] # New words - Stentorian - (of a person's voice) loud and powerful. - "a stentorian roar" - denouement - the outcome of a situation, when something is decided or made clear. - "I waited by the eighteenth green to see the denouement" - Balkanization - “Balkanization or Balkanisation is **the process involving the fragmentation of an area, country, or region into multiple smaller and hostile units**. It is usually caused by differences in ethnicity, culture, religion, and geopolitical interests. Territorial history of the Balkans from 1796 to 2008.” ## Further reading - The books of Roger Fisher. - Harvard classmate of Munger. - “In any event, through increased use of take what you wish, many softscience disciplines reduced folly from man-with-a-hammer tendency. For instance, led by our classmate Roger Fisher, the law schools brought in negotiation, drawing on other disciplines. Over 3 million copies of Roger's wise and ethical negotiation book have now been sold, and his life's achievement may well be the best, ever, from our whole class.” (P187) - I asked AI what else I should read. Here were some that caught my eye: - Mental models - "Seeking Wisdom: From Darwin to Munger" by Peter Bevelin - "The Great Mental Models" series by Shane Parrish (Farnam Street) - "Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts" by Annie Duke - "Thinking, Fast and Slow" by Daniel Kahneman - Psychology and Human Nature - "Influence: The Psychology of Persuasion" by Robert B. Cialdini - "Predictably Irrational" by Dan Ariely - Science, Mathematics, and History - "The Selfish Gene" by Richard Dawkins - "The Signal and the Noise" by Nate Silver # Notes & Highlights ## Introduction > “I wanted to get rich so I could be independent, like Lord John Maynard Keynes.” – Charlie Munger (P24) --- > A special note: 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. (P25) --- One thing that’s clear early on, is that like a lot of wealthy people, he had plenty of luck. His family were well-off – though hard workers. And they all leant on each other for financial help and career’s. --- Munger was a spendthrift, counting his pennies. But he was also charitable. When he left his law firm he didn’t take his share of the firms capital. He left it to the estate of his young partner, Fred Warder, who had died of cancer and left behind a wife and children. (P36) --- I was surprised to see Munger was a fan of Marks & Spencer: > When we bought a brown tweed coat at Marks & Spencer in London, Father said, "This will always keep its crease." He admired both stores [Brooks Brothers] because they were durable institutions and because their merchandise was too, and fairly priced. (P50) --- Munger’s hero was Benjamin Franklin. Because of his work ethic and curious mind. (P54) --- Warren Buffett once said “Charlie can analyse and evaluate any kind of deal faster and more accurately than any man alive. He sees any weakness in 60 seconds.” He does this via his many (up to 100) mental models. “When properly collected and organised, his multiple mental models provide a context, or latticework, that leads to remarkable insights…” One model isn’t enough. Because as John Muir observed about inter-connectedness, “when we try to pick out anything by itself, we find it hitched to everything else in the universe.” (P55) --- Munger’s main principles are preparation, patience, discipline, and objectivity. And he doesn’t deviate from that, no matter what. (P58 b) --- > At the 2004 Berkshire Hathaway annual meeting, a young shareholder asked Buffett how to succeed in life. After Buffett shared his thoughts, Charlie chimed in: "Don't do cocaine. Don't race trains. And avoid AIDS situations." Many would dismiss his seemingly flippant answer as merely humorous (which it certainly was), but in fact it faithfully reflects both his general views on avoiding trouble in life and his particular method for avoiding missteps in investing. > > Often, as in this case, Charlie generally focuses first on what to avoid—that is, on what not to do-before he considers the affirmative steps he will take in a given situation. "All I want to know is where I'm going to die, so I'll never go there" is one of his favorite quips. In business, as in life, Charlie gains enormous advantage by summarily eliminating the unpromising portions of the chessboard, freeing his time and attention for the more productive regions. Charlie strives to reduce complex situations to their most basic, unemotional fundamentals. Yet, within this pursuit of rationality and simplicity, he is careful to avoid what he calls physics envy, the common human craving to reduce enormously complex systems (such as those in economics) to one-size-fits-all Newtonian formulas. Instead, he faithfully honors Albert Einstein's admonition: "A scientific theory should be as simple as possible, but no simpler." Or, in his own words: "What I'm against is being very confident and feeling that you know, for sure, that your particular action will do more good than harm. You're dealing with highly complex systems wherein everything is interacting with everything else." (P55-56) --- These are two of the key mental models: > “Personally, I've gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain, at a subconscious level, is automatically doing these things which, by and large, are useful but which often misfunction? One approach is rationality, the way you'd work out a bridge problem: by evaluating the real interests, the real probabilities, and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions, many of which are wrong.” - Charlie Munger (P58) --- > “I’m not genius. I’m smart in spots, and I stay around those spots.” - Thomas Watson Sr. (P59) --- Note: Page 64-67 have a very good, bullet-point overview of Munger’s thinking. --- ## Talk One. Harvard School Commencement Speech Unlike most commencement speeches, which give prescriptions on how to be happy. Munger followed Johnny Carson’s lead by inverting it and giving advise on how to be miserable – so it could then be avoided. Carson on how to be miserable: 1. Ingest chemicals in an effort to alter mood or perception 2. Envy 3. Resentment Munger begins by saying of the four of his closest young friends two were lost to alcohol – one via death, the other via the life of being an alcoholic. “Addiction can happen to any of us through a subtle process where the bonds of degradation are too light to be felt until they are too strong to be broken. And yet, I have yet to meet anyone, in over six decades of life, whose life was worsened by fear and avoidance of such a deceptive pathway to destruction.” Next he says unreliability is a way to be miserable. If you like being distrusted and excluded by others, be unreliable. He mentions to never lose sight that if you’ve had a happy life, you’ve only had a happy life *thus far*. Solon said “no man’s life should be accounted a happy one until it is over.” Then he extols the virtues of learning from others. It’s a sore mistake to learn and live merely from your own experiences. By learning from those who have come before you you have a leg-up. Life is full of adversity, even for the privileged and the lucky. If you can’t continue after your “first, second or third severe reverse in the battle of life”, then you’re set for misery. Finally, he recommends to reverse the problem. “Invert, always invert.” And to do all these you need to be willing to constantly challenge your most closely held beliefs and ideas – and challenge them more than the others. He said Charles Darwin achieved what he did because his working method “emphasised a backward twist in that he always gave priority attention to evidence tending to disconfirm whatever cherished and hard-won theory he already had.” (P74-80) --- ## Talk Two: A lesson on elementary, worldly wisdom as it relates to investment management and business I was pleased to see this barb against chiropractors: > What are the models? Well, the first rule is that you've got to have multiple modelsbecause if you have just one or two that you're using, the nature of human psychology is such that you'll torture reality so that it fits your models, or at least you'll think it does. You become the equivalent of a chiropractor, who, of course, is the great boob in medicine. 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 chiropractor goes about practicing medicine. But that's a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you've got to have multiple models. (P85) --- He recommends learning about permutations and combinations (Fermat/Pascal). People can learn it easily. It’s applying it automatically and naturally that’s tough to do. But it’s vital to get this “elementary, but mildly unnatural, mathematics of elementary probability into your repertoire… One of the advantages of a fellow like Buffett is that he automatically thinks in terms of decision trees and elementary math of permutations and combinations.” --- > “Pascal said, "The mind of man at one and the same time is both the glory and the shame of the universe." And that's exactly right. It has this enormous power. However, it also has these standard misfunctions that often cause it to reach wrong conclusions. It also makes man extraordinarily subject to manipulation by others. For example, roughly half of the army of Adolf Hitler was composed of believing Catholics. Given enough clever psychological manipulation, what human beings will do is quite interesting.” (P90) --- One of the problems with big companies is the bureaucracy appears. And you get little fiefdoms, and territoriality arrives (which is grounded in human nature). Employees don’t think about the company as a whole or about the product, they think about just their team. As far as their concerned it’s their job to get a task out of their in-basket and into another teams in-basket. At that point their work is done. But it’s not done until the company delivers that service/product. > “They also tend to become somewhat corrupt. In other words, if I've got a department and you've got a department and we kind of share power running this thing, there's sort of an unwritten rule: "If you won't bother me, I won't bother you, and we're both happy." So you get layers of management and associated costs that nobody needs. Then, while people are justifying all these layers, it takes forever to get anything done. They're too slow to make decisions, and nimbler people run circles around them.” Businesses should focus on the economies of scale of being a big company, whilst avoiding bureaucracy – a very hard task. “General Electric has fought bureaucracy with amazing skill. But that's because they have a combination of a genius and a fanatic running it. And they put him in young enough, so he gets a long run. Of course, that's Jack Welch.” (P93-94) History is full of companies that had domination, brand recognition and economies of scale, and *still* went bust. Often because their bureaucracy meant they weren’t nimble and they couldn’t adapt fast enough. Bureaucratic systems rarely reward people who put their hand up and suggest new ideas. So an upstart with that same idea comes along and demolishes them. (P96-97) --- Pavlovian Association is where you tell someone something they don’t want to hear and they have an automatic unpleasant reaction of antipathy. You need to train yourself out of this. Because if you’re high enough up, you can destroy the business this way. People will learn that you don’t like hearing what you don’t want to hear, so they won’t tell you. You’ll be surrounded by yes-men and live in a “little cocoon of unreality”. (P94-95) --- Walmart rose to the top by acting like a prizefighter. It didn’t go straight to challenging Sears and Roebuck. It started by out-competing the smaller grocery stories and worked its way up to a ‘fight’ with the champions. (P96) --- One problem Munger couldn’t solve: why some competitive industries result in ‘toxic’ competition (to the business) where the margins become non-existent. And other have competition, but still maintain healthy margin. He uses the example of airlines and cereal. Airlines produce almost no shareholder value, as their margins are so small. But cereals have a healthy 15-40% margin, despite being crowded and competitive. (P97) --- > “Anytime anybody offers you anything with a big commission and a 200-page prospectus, don’t buy it. Occasionally, you’ll be wrong. However, over a lifetime, you’ll be a long way ahead – and you will miss a lot of unhappy experiences that might otherwise reduce your love for your fellow man.” (P112) --- > “Ben Graham was so academic that when he graduated from Columbia, three different academic departments invited him into their PhD programs and asked him to start teaching immediately as part of the PhD program: literature, Greek and Latin classics, and mathematics.” (P123) --- ## Talk Three Munger highly recommends playing contract bridge. (P125) --- Captain Cook noticed Dutch ships got less scurvy. And that they ate sauerkraut. But he know the English hated the ‘krauts’ and wouldn’t want any changes to their diet. So he only fed it to the officers at first, and let the other sailors see that. Then ‘as a treat’ he gave it to all sailors once a week. From then on they would eat sauerkraut as often as they could. Munger uses this an example of persuasion for a reputable reason. (P133) --- ‘Serpico effects’ is where enough people are profiting from doing wrong (say wide-spread stealing within a company) then they’ll turn on you if you try and blow the whistle. (P134) --- Captain Cook noticed Dutch ships got less scurvy. And that they ate sauerkraut. But he know the English hated the ‘krauts’ and wouldn’t want any changes to their diet. So he only fed it to the officers at first, and let the other sailors see that. Then ‘as a treat’ he gave it to all sailors once a week. From then on they would eat sauerkraut as often as they could. Munger uses this an example of persuasion for a reputable reason. (P133) --- ‘Serpico effects’ is where enough people are profiting from doing wrong (say wide-spread stealing within a company) then they’ll turn on you if you try and blow the whistle. (P134) --- ## Talk Four. Practical thought about practical thought? (July 20, 1996) This talk put in practise some of the psychological tricks that Munger has alluded to elsewhere. He used Coca-Cola as a case-study. ### Things mentioned **Operant Conditioning** Behaviours are reinforced or punished depending on the consequences of the behaviour. A reinforcement is giving a lollipop to a child after they’ve tidy their room. A punishment is giving a speeding ticket for going too fast in your car. **Classical Conditioning** This is where two stimuli’s become associated. For example, a bell rings, a dog expects food, and salivates. **How are they different?** Operant conditioning is an activity taken up voluntarily (with the frequency changing based on the outcome). Whereas classical conditioning can be done on someone without their consent. **Social Proof** Where people look to others for guidance on what is correct, desirable, or correct. “Monkey see, monkey do.” It comes in many forms. ‘Experts’, celebrities and friends advertising their usage or approval. Via awards and stamps of excellence. When crowds do the same thing. For example, when you choose a busy restaurant over an empty one as it seems more desirable. Why does it work? - Uncertainty. When people are unsure, they look for guidance from others. - Herd mentality. Following the herd feels safer. - Trust in numbers. If many people approve of something, it creates a perception of quality. - Belonging. People want to fit in. --- Munger says that Aristotle says that the best way to avoid people envying you is simply to deserve your success (P172) --- ## Talk Five. No notes. ## Talk Six. Investment practices of leading charitable foundations No notes really. He basically advises investment managers at charitable foundations to focus 1) lowering costs. 2) don’t use complex instruments and over diversification to merely match index funds. Instead, have a concentrated portfolio of only a few stocks. He also advises not to invest outside of the US. ## Talk Seven