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Poor Charlie's Almanac

Charlie Munger

“There is no better teacher than history in determining the future. There are answers worth billions of dollars in a $30 history book.”
“Instead, he opted to become a living lesson in compounding, eschewing frivolous (defined as ‘any’) expenditures that might sap the power of his example.”
“The quotes, talks, and speeches presented here are rooted in the old-fashioned Midwestern values for which Charlie has become known: lifelong learning, intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, willingness to test one’s own beliefs, and many more.”
Repeated many, many times and borrowed from Jacobi: “Invert, always invert.”
Charlie’s son dies when Charlie is 29: “A friend remembers that Charlie would visit his dying son in the hospital and then walk the streets of Pasadena crying.” Having a kid now, I can’t imagine how awful it must have been and am amazed at those who get through the grief of losing a child.
“Father’s ability to Chinese wall off the most intrusive distractions from whatever mental task he was engaged in… accounts as much as anything for his success.”
“Charlie has made himself into a grandmaster of preparation, patience, discipline, and objectivity… successful investing is simply a by-product of his carefully organized and focused approach to life.”
“It is better to remember the obvious than to grasp the esoteric.”
“Reliability is essential for progress in life… while quantum mechanics is unlearnable for a vast majority, reliability can be learned to great advantage by almost anyone.”
Some interesting bits about Carl Braun who could build oil refineries on time with great efficiency. More on him here
“If you wrote a letter or directive in the Braun Company telling somebody to do something and you didn’t tell them why, you could get fired. In fact, you would get fired if you did it twice.”
“The psychology of misjudgment, as I call it—is a terribly important thing to learn. There are about 20 little principles… Terribly smart people make totally bonkers mistakes by failing to pay heed to it.”
“If you’re building a great circular tank, obviously, as you build it bigger, the amount of steel you use up in the surface goes up with the square as the cubic volume goes up with the cube. As you increase the dimensions, you can hold a lot more volume per unit area of steel.”
On specialisation (Charlie’s talking about a travel magazine): “We’d have a travel magazine for business travel, so somebody would create one that was addressed solely at corporate travel departments… they didn’t have to waste the ink and paper mailing out stuff that corporate travel departments weren’t interested in reading. It was a more efficient system… Occasionally, scaling down and intensifying gives you the big advantage. Bigger is not always better.”
Sam Walton was pretty old when he started his first store. On Sam Walton’s rise: “You can say, ‘Is this a nice way to behave?’ Well, capitalism is a pretty brutal place. But I personally think the world is better for having Walmart. I mean you can idealise small town life, but I’ve spent a fair amount of time in small towns. And let me tell you - you shouldn’t get too idealistic about all those businesses he destroyed. Plus, a lot of people who work at Walmart are very high grade, bouncy people who are raising nice children. I have no feeling that an inferior culture destroyed a superior culture.”
On the efficiency of looms in textiles: “He knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles… In all cases, the people who sell the machinery - and by and large, even the internal bureaucrats urging you to buy the equipment - show you projections with the amount you’ll save at current prices with the new technology. However, they don’t do the second stage of the analysis, which is to determine how much is going to stay home and how much is just going to flow through to the customer… So you keep buying things that will pay for themselves in three years. And after 20 years of doing it, somehow you’ve earned a return of only about 4% per annum.”
“One of the greatest economists of the world is a substantial shareholder in Berkshire Hathaway and has been from the very early days, after Buffett was in control. His textbook always taught that the stockmarket was perfectly efficient and that nobody could beat it.”
“it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times.”
“Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it. In fact, anytime anybody offers you anything with a big commission and a 200 page prospectus, don’t buy it.”
Check out William Poundstone’s “Fortune’s Formula.” here
Advice for the young: “Slug it out one inch at a time, day by day, and at the end of the day - if you live long enough - like most people, you will get out of life what you deserve.”
“Some of the worst dysfunctions in business come from the fact that they balkanize reality into little individual departments, with territoriality and turf protection and so forth. So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries. You don’t have to know it all. Just take in the best big ideas from all these disciplines.”
“Ideology does some strange things and distorts cognition terribly. If you get a lot of heavy ideology young, and then you start expressing it, you are really locking your brain into a very unfortunate pattern. And you are going to distort your general cognition.”
On incentives: “It’s very, very important to create human systems that are hard to cheat. Otherwise, you’re ruining your civilization, because these big incentives will create incentive-caused bias and people will rationalize that bad behavior is okay. Then, if somebody else does it, now you’ve got at least two psychological principles: incentive-caused bias plus social proof. Not only that but you get Serpico effects: If enough people are profiting in a general social climate of doing wrong, then they’ll turn on you and become dangerous enemies if you try and blow the whistle. It’s very dangerous to ignore these principles.”
More on incentives: “Take the workers’ compensation system in California. Stress is real. And its misery can be real. So you want to compensate people for their stress in the workplace. It seems like a noble thing to do. But the trouble with such a compensation practice is that it’s practically impossible to delete huge cheating. And once you reward cheating, you get crooked lawyers, crooked doctors, crooked unions, etc. participating in referral schemes. You get a total miasma of disastrous behavior. And the behavior makes all the people doing it worse as they do it. So you were trying to help your civilization, but what you did was create enormous damage, net. So it’s much better to let some things go uncompensated - to let life be hard - than to create systems that are easy to cheat.”
“In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke. You’ve made an enormous commitment to something. You’ve poured effort and money in. And the more you put in, the more the whole consistency principle makes you think, ‘Now it has to work. If I put in just a little more, then it’ll work.‘”
“You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. But there are also cases where you have to recognize that you have no wisdom to add and that your best course is to trust some expert.”
Jack Welch answering a q. about Apple “Jack, what did Apple do wrong?” - “I don’t have any special competence that’d enable me to answer that question.”
“I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.”
On influencing: “Appealing to interest is likely to work better as a matter of human persuasion than appealing to anything else. That, again, is a powerful psychological principle with deep biological roots.”
On law firms ‘screaming’ about legal bills and legal complexity: “what causes the screams has, so far, been a godsend for the law firms. The big law firms have had a long updraft. And they now tend to kind of cluck like an undertaker in a plague. An undertaker, of course, would look very unseemly if he were jumping up and down and playing his fiddle during the plague. So law firm partners say, ‘Oh, isn’t it sad —all this complexity, all this litigation, all this unfairness.‘”
“If I were running the civilization, compensation for stress in workers’ comp would be zero-not because there’s no work-caused stress, but because I think the net social damage of allowing stress to be compensated at all is worse than what would happen if a few people who had real work-caused stress injuries went uncompensated.

I like the Navy system. If you’re a captain in the Navy and you’ve been up for 24 hours straight and have to go to sleep, and you turn the ship over to a competent first mate in tough conditions and he takes the ship aground, clearly through no fault of yours, they don’t court-martial you, but your naval career is over. You can say, ‘That’s too tough. That’s not law school. That’s not due process.’ Well, the Navy model is better in its context than would be the law school model.”
“I’ve always taken a fair amount of time to do what I really wanted to do, some of which was merely to fish or play bridge or play golf. Each of us must figure out his or her own lifestyle. You may want to work 70 hours a week for 10 years to make partner at Cravath and thereby obtain the obligation to do more of the same. Or you may say, ‘I’m not willing to pay that price.’ Either way, it’s a totally personal decision that you have to make by your own lights.”
“In the last analysis, every profession is a conspiracy against the laity.”
“After all, a competing product, if it is never tried, can’t act as a reward creating a conflicting habit. Every spouse knows that.”
Think about envy: “We must avoid the bad effects from envy, which is given a prominent place in the Ten Commandments because envy is so much a part of human nature.”
“The Darwinian approach, with its habitual objectivity taken on as a sort of hair shirt, is a mighty approach indeed. No less a figure than Einstein said that one of the four causes of his achievement was self-criticism, ranking right up there alongside curiosity, concentration, and perseverance.”
Read Roger Fisher - Getting to Yes details.
Dr. Johnson: “Truth is hard to assimilate in any mind when opposed by interest”.
Beware of careful procedures leading to overconfidence in outcomes.
“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.”
“The ethical rule is from Samuel Johnson, who believed that maintenance of easily removable ignorance by a responsible officeholder was treacherous malfeasance in meeting moral obligation.”
“If you would persuade, appeal to interest and not to reason.”
“Berkshire’s whole record has been achieved without paying one ounce of attention to the efficient-market theory in its hard form, and not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance and morphed into such obscenities as the capital asset pricing model, which we also paid no attention to… One of the worst examples of what physics envy did to economics was cause adoption of hard-form efficient-market theory.”
“His trouble is his craving for false precision… so economics should always emulate physics’ basic ethos, but its search for precision in physics-like formulas is almost always wrong in economics.”
In what circumstances can you raise the price and get more sales? Charlie gives the example where you pass a proportion of the higher price to a broker, who is then incentivised to sell more for you: “You’re bribing the broker to betray his client and put the client’s money into the high-commission product. This has worked to produce at least a trillion dollars of mutual fund sales.”
“I’ll go further: I say economic systems work better when there’s an extreme reliability ethos. The traditional way to get a reliability ethos, at least in past generations in America, was through religion. The religions instilled guilt. We have a charming Irish Catholic priest in our neighborhood, and he loves to say, “Those old Jews may have invented guilt, but we perfected it.” This guilt, derived from religion, has been a huge driver of a reliability ethos, which has been very helpful to economic outcomes for man.”
“It is not always recognized that to function best, morality should sometimes appear unfair, like most worldly outcomes. The craving for perfect fairness causes a lot of terrible problems in system function. Some systems should be made deliberately unfair to individuals because they’ll be fairer on average for all of us. Thus, there can be virtue in apparent non-fairness. I frequently cite the example of having your career over in the Navy if your ship goes aground, even if it wasn’t your fault. I say the lack of justice for the one guy who wasn’t at fault is way more than made up by a greater justice for everybody when every captain of a ship always sweats blood to make sure the ship doesn’t go aground.”
Keynes: “It’s not bringing in the new ideas that’s hard. It’s getting rid of the old ones.”
“Well, luckily I had the idea at a very early age that the safest way to try to get what you want is to try to deserve what you want. It’s such a simple idea. It’s the golden rule. You want to deliver to the world what you would buy if you were on the other end.”
“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent. But they are learning machines. They go to bed every night a little wiser than they were that morning. And boy, does that habit help, particularly when you have a long run ahead of you.”
“You can cause enormous offense by being right in a way that causes somebody else to lose face in his own discipline or hierarchy.”
“If you turn problems around into reverse, you often think better. For instance, if you want to help India, the question you should consider asking is not “How can I help India?” Instead, you should ask, “How can I hurt India?” You find what will do the worst damage and then try to avoid it.”
“If you’re unreliable, it doesn’t matter what your virtues are, you’re going to crater immediately. So faithfully doing what you’ve engaged to do should be an automatic part of your conduct.”
“Generally speaking, envy, resentment, revenge, and self-pity are disastrous modes of thought. Self-pity can get pretty close to paranoia… Self-pity is always counterproductive. It’s the wrong way to think. And when you avoid it you get a great advantage over everybody else, or almost everybody else, because self-pity is a standard response. And you can train yourself out of it.”
How a legal counsel should have appealed to a CEO: “Look, this is likely to erupt into something that will destroy you, take away your money, take away your status, grossly impair your reputation. My recommendation will prevent a likely disaster from which you can’t recover.”
“Perverse associations are also to be avoided. You particularly want to avoid working directly under somebody you don’t admire and don’t want to be like.”
The arrangement of two chaps Charlie went into business with: “Two-man partnership,” they said, “and divide everything equally. And whenever we’re behind in our commitments to other people, we will both work 14 hours a day, seven days a week, until we’re caught up.” Well, needless to say that firm didn’t fail, and my partners were widely admired. Simple, old-fashioned ideas like theirs are almost sure to provide a good outcome.”
“Another thing to cope with is that life is very likely to provide terrible blows, unfair blows. Some people recover and others don’t. There I think the attitude of Epictetus helps guide one to the right reaction. He thought that every mischance in life, however bad, created an opportunity to behave well. He believed every mischance provided an opportunity to learn something useful, and one’s duty was not to become immersed in self-pity but to utilize each terrible blow in a constructive fashion. His ideas were very sound, influencing the best of the Roman emperors, Marcus Aurelius and many others over many centuries.”
Cialdini’s book (recommended by Charlie): LINK
“The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. The system has no integrity for the customers if the night work shift can’t accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.”
“Never, ever, think about something else when you should be thinking about the power of incentives.”
“In my long life, I have never seen a management consultant’s report that didn’t end with the same advice: ‘This problem needs more management consulting services.‘”
“Anti-gaming features constitute a huge and necessary part of almost all system design.”
“One corollary of inconsistency-avoidance tendency is that a person making big sacrifices in the course of assuming a new identity will intensify his devotion to the new identity. After all, it would be quite inconsistent behavior to make a large sacrifice for something that was no good. Thus civilization has invented many tough and solemn initiation ceremonies, often public in nature, that intensify new commitments made.

Tough initiation ceremonies can intensify bad conduct as well as good. The loyalty of the new made-man mafia member or of the military officer making the required blood oath of loyalty to Hitler was boosted through the triggering of inconsistency-avoidance tendency.”
“Franklin would often maneuvre that man into doing Franklin some unimportant favor, like lending Franklin a book. Thereafter, the man would admire and trust Franklin more because a non-admired and non-trusted Franklin would be inconsistent with the appraisal implicit in lending Franklin the book.”
Buffett: “It is not greed that drives the world but envy.”
“There is a famous passage somewhere in Tolstoy that illuminates the power of excessive self-regard tendency. According to Tolstoy, the worst criminals don’t appraise themselves as all that bad. They come to believe either that 1) they didn’t commit their crimes or 2) considering the pressures and disadvantages of their lives, it is understandable and forgivable that they behaved as they did and became what they became.”
“Deprival-superreaction tendency is also a huge contributor to ruin from the compulsion to gamble. First, it causes the gambler to have a passion to get even once he has suffered a loss, and the passion grows with the loss. Second, the most addictive forms of gambling provide a lot of near misses, and each one triggers deprival-superreaction tendency. Some slot machine creators are vicious in exploiting this weakness of man. Electronic machines enable these creators to produce a lot of meaningless bar-bar-lemon results that greatly increase play by fools who think they have very nearly won large rewards.”
“teenagers’ parents usually learn more than they would like about teenagers’ cognitive errors from social-proof tendency. This phenomenon was recently involved in a breakthrough by Judith Rich Harris, who demonstrated that super-respect by young people for their peers, rather than for parents or other adults, is ordained to some considerable extent by the genes of the young people. This makes it wise for parents to rely more on manipulating the quality of the peers than on exhortations to their own offspring.”
“Because both bad and good behavior are made contagious by social-proof tendency, it is highly important that human societies 1) stop any bad behavior before it spreads and 2) foster and display all good behavior.”
“It’s a very important part of wise administration to keep prattling people pouring out twaddle far away from the serious work.”