Value Investing

Charles Munger – 5 Ultrasimple Notions For Successful Investing

One of my favorite investing books is – Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, by Janet Lowe. The book is a great insight into Munger’s life, philosophy, and investing journey. One passage in the book which is of particular interest to investors is Munger’s five ultrasimple general notions that he finds helpful in solving problems. These were taken from Munger’s July 20, 1996 informal talk titled – Practical Thought about Practical Thought? These notions are invaluable in the world of investing. Here’s an excerpt from the book:

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In a long career I have assimilated various ultrasimple general notions that I find helpful in solving problems. Five of these helpful notions I will now describe.

1. My first helpful notion is that it is usually best to simplify problems by deciding big “no-brainer” questions first.

2. The second helpful notion mimics Galileo’s conclusion that scientific reality is often revealed only by math, as if math was the language of god. Galileo’s attitude also works well in messy practical life. Without numerical fluency, in the part of life most of us inhabit, you are like a onelegged man in an ass-kicking contest.

3. The third helpful notion is that it is not enough to think problems through forward. You must also think in reverse, much like the rustic who wanted to know where he was going to die so that he’d never go there. Indeed, many problems can’t be solved forward. And that is why the great algebraist, Carl Jacobi, so often said: “invert, always invert.” And why Pythagoras thought in reverse to prove that the square root of two was an irrational number.

4. The fourth helpful notion is that the best and most practical wisdom is elementary academic wisdom. But there is one extremely important qualification: you must think in a multidisciplinary manner. You must routinely use all the easy-to-learn concepts from the freshman course in every basic subject. Where elementary ideas will serve, your problem solving must not be limited, as academia and many business bureaucracies are limited, by extreme balkanization into disciplines and subdisciplines, with strong taboos against any venture outside assigned territory. Instead, you must do your multidisciplinary thinking in accord with Ben Franklin’s prescription in Poor Richard: if you want it done, go. If not, send.”

If, in your thinking, you rely entirely on others, often through purchase of professional advice, whenever outside a small territory of your own, you will suffer much calamity. And it is not just difficulties in complex coordination that will do you in. You will also suffer from the reality evoked by the Shavian character who said: “in the last analysis, every profession is a conspiracy against the laity.”

Indeed, a Shavian character, for once, understated the horrors of something Shaw didn’t like. It is not usually the conscious malfeasance of your narrow professional adviser that does you in. Instead, your troubles cone from his subconscious bias. His cognition will often he impaired, for your purposes, by financial incentives different from yours. And he will also suffer from the psychological defect caught by the proverb: to a man with a hammer, every problem looks like a nail.”

5. The fifth helpful notion is that really big effects, lollapalooza effects, will often come only from large combinations of factors. For instance, tuberculosis was tamed, at least for a long time, only by routine combined use in each case of three different drugs. And other lollapalooza effects, like the flight of an airplane, follow a similar pattern.