Charlie Munger: The 5 Investing Tricks That Made Him a Billionaire
Summary
TLDRIn this video, Charlie Munger shares five mental tricks that have contributed to his financial success. These include inverting problems to find solutions, understanding the limits of one's competence, staying rational amidst market volatility, focusing on simple, strong businesses, and the importance of continuous self-education through reading. Munger emphasizes the value of these mental models in making better investment decisions and achieving long-term success.
Takeaways
- 🧠 Inversion: Charlie Munger emphasizes the importance of inverting problems to solve them more effectively, which is a mental trick that has contributed to his financial success.
- 🤔 Humility: Munger highlights the value of knowing the limits of one's competence and avoiding areas where one lacks expertise, which is crucial for making better investment decisions.
- 🔍 Circle of Competence: Understanding and staying within one's circle of competence is key to avoiding bad investments and making informed decisions.
- 📈 Long-term Focus: Munger advises maintaining a long-term perspective and not reacting to short-term market fluctuations, which is essential for successful investing.
- 💡 Simplicity: He advocates for simplicity in business and investing, preferring businesses that are straightforward and have a clear competitive advantage.
- 📚 Reading: Munger's success is partly attributed to his extensive reading and continuous self-education, which provides a broad perspective and knowledge base.
- 🤝 Rationality: The ability to remain rational and unaffected by market volatility is a key trait for investors, as emphasized by Munger's experiences with Berkshire Hathaway's stock.
- 🏆 Specialization: While Munger himself enjoys a broad range of knowledge, he recognizes the benefits of specialization in investing and career advancement.
- 🚫 Avoiding Mistakes: Munger's approach to investing includes avoiding bad investments by understanding and applying mental models to prevent errors.
- 🌐 Global Perspective: Munger's understanding of diverse areas such as China and macroeconomics contributes to his comprehensive approach to investing.
Q & A
What mental framework does Charlie Munger attribute his financial success to?
-Charlie Munger attributes his financial success to a framework of mental tricks and models, rather than superior intelligence or insight. These tricks have helped him avoid making bad mistakes and make better decisions in the stock market.
What is the concept of 'inversion' as described by Charlie Munger?
-Inversion is a mental trick where one approaches problems by considering the opposite of what they want to achieve. Instead of asking how to make something successful, Munger suggests asking how it could fail and then avoiding those pitfalls.
How did Charlie Munger apply the concept of inversion in his role as a weather forecaster?
-As a weather forecaster, Munger inverted the problem by asking how he could kill pilots rather than how to keep them safe. He identified the two main risks—icing and running out of gas—and focused on avoiding those specific hazards.
What is the significance of knowing one's circle of competence in investing?
-Knowing one's circle of competence is crucial in investing as it helps an investor understand their areas of expertise and avoid venturing into areas they do not fully understand, thus minimizing the risk of bad investments.
How does Charlie Munger define humility in the context of investing?
-Munger defines humility as knowing the edge of one's own competency and not stepping over that boundary. It is about being aware of what you don't know and avoiding arrogance in areas beyond one's expertise.
What is the importance of being unaffected by wild swings in the stock market according to Charlie Munger?
-Being unaffected by wild swings in the stock market is important for maintaining a long-term focus and avoiding knee-jerk reactions that can lead to poor investment decisions. Munger suggests treating success and failure equally and not letting short-term market fluctuations dictate one's investment strategy.
What does Charlie Munger mean by 'a business that an idiot could run'?
-Munger is referring to businesses that have such strong competitive advantages and are so fundamentally sound that they could be run by someone with little expertise and still perform well, indicating the intrinsic quality of the business.
Why does Charlie Munger emphasize the importance of simplicity in businesses?
-Munger emphasizes simplicity because straightforward businesses are easier to understand and evaluate. They often have clear competitive advantages and are less likely to be affected by poor management, making them ideal investment targets.
How does Charlie Munger's approach to reading contribute to his success in investing?
-Munger's extensive reading habit contributes to his success by providing him with a broad perspective, diverse knowledge, and continuous self-education. This self-improvement through reading enhances his understanding of various businesses and investment opportunities.
What is the role of self-education in Charlie Munger's philosophy of success?
-Self-education plays a central role in Munger's philosophy of success. He believes that continuous learning and self-improvement are essential for staying ahead and making informed decisions, both in life and in investing.
What is the significance of the 'circle of competence' concept in Charlie Munger's investment strategy?
-The 'circle of competence' concept is significant in Munger's investment strategy as it encourages investors to focus on areas where they have deep knowledge and understanding. This focus helps in making better investment decisions and avoiding areas of uncertainty.
Outlines
🧙♂️ Inverting Problems for Better Decision Making
Charlie Munger emphasizes the power of inverting problems to achieve financial success, rather than relying solely on superior intelligence. He shares his experience as a weather forecaster in the air corps, where he focused on avoiding the easiest ways to cause accidents, which led to safer outcomes. This approach is applicable to stock market investing, where understanding potential pitfalls of a company is as important as recognizing its potential for success. Munger suggests that considering the opposite perspective can lead to better long-term returns and advises investors to thank those who bring a negative view on their investments for providing an inverted perspective.
🌐 Understanding the Circle of Competence
Munger discusses the importance of recognizing and staying within one's circle of competence, which is a core philosophy in investing. He and Warren Buffett are known for their ability to identify and avoid areas outside their expertise. Munger suggests that specialization is a safer path for most people, as demonstrated by the success of experts in various fields who focus deeply on their area of knowledge. He also acknowledges his own preference for a broader knowledge base, but advises that specializing in a few areas is the smart approach to avoid bad investments and achieve success in one's field.
📉 Staying Rational Amidst Market Volatility
Charlie Munger's third mental trick is the ability to remain unaffected by the wild swings of the stock market. He recounts instances where Berkshire Hathaway's stock declined by 50% and how he maintained a long-term focus without reacting impulsively. Munger cites the poem 'If' by Rudyard Kipling, which advises treating success and failure equally, as a guiding principle. He stresses the importance of staying rational and not panicking during market downturns, as panic can lead to loss. Munger's philosophy is to maintain a long-term perspective and equanimity in the face of market fluctuations.
🏭 Investing in Simple, Strong Businesses
Munger's fourth trick is to keep things simple and invest in businesses that are inherently strong and straightforward, even if mismanaged. He and Buffett prefer businesses that can withstand poor management due to their inherent strength. Munger uses the analogy of preferring businesses that can stand a lot of mismanagement, indicating that they are looking for companies with significant competitive advantages. The focus should be on finding businesses that are solid and have a clear path to success, even if led by an 'idiot', as a sign of their robustness.
📚 The Power of Reading and Self-Education
Charlie Munger's final trick is the commitment to self-education through extensive reading. He shares his habit of reading and skimming a lot, attributing much of his success to the knowledge gained from books. Munger believes that self-education is a key to success and that continuous learning is essential for improvement. He encourages the pursuit of knowledge beyond formal education, suggesting that successful people are those who dedicate themselves to lifelong learning. Munger's passion for reading and self-improvement is evident, even at the age of 98, as he continues to read and learn.
🎬 Conclusion and Channel Promotion
The video concludes with a summary of Charlie Munger's mental tricks and their impact on his success as an investor and thinker. The host encourages viewers to like and subscribe for more content on value investing and rational decision-making, inspired by figures like Munger and Warren Buffett. There is also a promotion for Sharesight, a platform for tracking investment performance and managing tax-related information, with an offer for a free trial or a discount for annual plan sign-ups.
Mindmap
Keywords
💡Financial success
💡Mental tricks
💡Inverting
💡Humility
💡Circle of competence
💡Rationality
💡Competitive advantage
💡Self-education
💡Reading
💡Specialization
💡Market volatility
Highlights
Charlie Munger attributes his financial success to mental tricks and models rather than superior intelligence.
Munger emphasizes the importance of inverting problems to avoid making bad mistakes in decision-making and investing.
His experience as a weather forecaster taught him to think about what could go wrong to prevent disasters.
Inversion in stock market investing involves considering why a stock might do poorly, not just why it might succeed.
Humility, or knowing the edge of one's competency, is a key to avoiding bad investments and making better decisions.
Munger and Buffett are successful because they know their circle of competence and avoid stepping beyond it.
Specialization is safer and more rewarded in both career and investing, according to Munger's philosophy.
Munger advises being rational and unaffected by wild swings in the stock market to maintain long-term focus.
He shares his personal experience with Berkshire Hathaway stock declines and how he remains unphased by them.
Munger prefers businesses that are solid, straightforward, and can withstand mismanagement.
The ideal business for Munger is one that is inherently strong, even if run by an 'idiot', with a wonderful person actually running it.
Reading extensively and self-education are vital for continuous learning and improvement, as per Munger's practices.
Munger's success is attributed to his lifelong commitment to learning and gaining perspective through reading.
The video encourages viewers to adopt the mental tricks Munger describes for better decision-making and investing.
A call to subscribe for more insights on value investing and rational approaches from successful investors like Munger.
The video is sponsored by Sharesight, a tool for tracking investment performance and managing tax preparation.
Transcripts
but what caused the financial success
was not
extreme ability
you know i have a good mind but i i i'm
way short of prodigy
and i've had results in life that are
prodigious
and that came from tricks i just learned
a few basic tricks from people like my
grandfather
what kind of
now everybody's leaning in wanting to
know charlie munger has often said that
the vast majority of his financial
success has come not from superior
intelligence or insight but from a
framework of mental tricks and models
that have helped him avoid just making
bad mistakes and by applying those
mental tricks in the realm of stock
market investing he's been able to
accumulate a net worth of 2.4 billion
dollars and will go down as one of the
best investors and best thinkers to have
ever lived so in this video i'm going to
explain five mental tricks that charlie
described in his 2020 interview that
have helped his decision making and his
investing throughout his lifetime and it
starts with the very powerful trick of
inverting inverting the problems you
have to solve there are all kinds of
tricks that i just got into by accident
in life one i invert all the time i was
a weather forecaster when i was in the
air corps
and how did i handle my new
assignment
being a weather forecaster in the air
force a lot like being a doctor that
reads x-rays it's a pretty solitary
you're in the hangar in the middle of
the night and drawing weather maps and
you're going pilots but you're not
interfacing with a bunch of your fellow
men very much
and so i figured out the minute i was
actually
making weather forecasts for real pilots
i said how can i kill these pilots now
that's not the question that most people
would ask but i want to know what the
easiest way to kill them would be so i
could avoid it
and so i thought it through and reversed
that way and i finally figured out i
said there are only two ways i'm ever
going to i was in the ferry command the
only two ways i'm going to kill a pilot
so i'm going to get him to icing his
plane can't handle and that will kill
him or i'm going to get him someplace
who's going to run out of gas before he
can land because
all the airports are sucked in
and i just was
fanatic about avoiding those two hazards
my grandfather would say to him when i'm
swimming he'd say swim as long as you
want but stay near the shore but you can
laugh but you know he was a very wise
man
but what i'm what i'm hearing you say is
that you
as a discipline look at what the risk is
on the other side of the situation and
you avoid that that's one of the rules
right well it's it's just it's it's like
a lot of practical problems
in algebra if you invert you can solve
it easily if you don't it you can't
solve it exactly right and so of course
i had that trick very early and most
people would say how can you
please tell us what you'd do to save
india and of course i would approach it
differently i'd say what could i do
which would most easily hurt india
and approaching it in reverse that way i
got better results you look at the
vulnerabilities
yeah yes and and
i have a whole
bag of tricks like that so while charlie
describes how he applied this to his
work as a meteorologist inversion is
also a very powerful concept in the
stock market people are very good at
finding stocks they think could be a
winner but of course that's only half
the story the other half of the
investing equation is to ensure the
company you're looking at won't be a
loser you know buffett's first rule of
investing after all is don't lose money
so while it's necessary to ask why will
this stock do well in the future
remember it's equally as important to
ask
why might this stock do poorly
and oftentimes asking the latter will do
much more for your long term returns
than anything else
so you know next time you hear someone
talking negatively about a stock that
you own
don't argue with them instead thank them
for bringing the inverted perspective to
your attention so inversion is key but
another mental model charlie talks about
is the concept of humility or knowing
what you don't know but if humility
means that you know the edge of your own
competency yes and you aren't arrogantly
stepping over the boundary
i'm very good at that yeah well i'd
redefine humility as knowing what you
don't know
yes well both lauren and i are very good
at that
one of these guys at the berkshire
meeting from one of the foreign
publications
said why do a couple of guys in a little
place and omaha do so much better than
all these powerful minds and great
institutions
and i said well i think warren and i
know the edge of our competency better
than other people do warren frequently
says i'd rather deal with a guy with an
iq of 130
who thinks it's 125. a guy with an iq of
180 that thinks it's 200.
that second guy will kill you so this
discussion revolves around a core
philosophy of investing which is the
circle of competence in investing you
don't need to know about a lot of things
you just need to know a few things very
well
and this is another mental trick to
avoiding bad investments know the limit
of your competency to be able to
understand when you're drifting into
areas that you don't know
and then once you can understand what's
inside your circle and what's outside
your circle don't be afraid to double
down and go deep on learning about the
areas of business that do fall firmly
within your circle of competence
specialization is the
safest way up for most people
and for that reason
the surgeons know more and more about
less and less and that's that that's
what gets rewarded and if you have a
nasty fistula in your colon you do not
want a surgeon who's good at proofs or
political science you know
it's it's it's understandable how
how the world rewards this
specialization
i never liked it
and i loved picking up new ideas being a
great
passionate reader
and so i decided i'd make whatever
living i could make doing what i like to
do which is sort of romping over a whole
field
i do not recommend it to other people
because the safe way up is to
know a hell of a lot about something so
while charlie munger doesn't himself
like to specialize he acknowledges that
it's the smart thing to do
now here he was talking about
specializing in you know a certain
career but of course this applies to
investing as well um you know warren
buffett he understands insurance very
well ray dalio understands macro
economics very well charlie munger
understands china very well benjamin
graham understood distressed businesses
very well jack bogle understood
long-term market patterns very well all
of these guys knew a lot about a little
not a little about a lot for example the
people on cnbc are people that
understand a little about a lot but when
they do want to go deep on a particular
issue then they bring in a big investor
that specializes in that area so
definitely make sure you know your
circle of confidence and don't be afraid
to go deep on things you already
understand reasonably well so that's
trick two then from here the third trick
charlie talks about in this interview is
to be rational enough to be unaffected
by wild swings in the stock market well
i am continuously invested in american
equity but i've had my
berkshire stock declined by 50 percent
three times
and i don't it doesn't bother me that
much
by weird that is just the natural
consequence of the life properly lived
so
if you have my attitude it doesn't
really matter i i always like kepling
stressing
expression in that poem
called if and he said
success and failure he says treat those
two impostors just the same
you just roll with it
sometimes it's going for you and some
against it's all part of the same game
this might be one of the most powerful
philosophies that charlie has the
ability to stay focused on the long term
and not have a knee-jerk reaction when
the market starts swinging wildly and
this is something he's always been very
passionate about let's rewind the clock
to this old interview he did with the
bbc how worried are you by
the declines in the share price of
berkshire hathaway the difficulty
this is the third time
that warren and i have seen our holdings
in berkshire go down
top tick to bottom tick by 50
i think it's the nature of long-term
shareholding with the normal
vicissitudes and
and worldly outcomes and in markets
that
the long-term holder has his
quoted value of his stock go down and
then
by say 50 percent
in fact you can argue that if you're not
willing to
react with equanimity to a market price
decline of
50 percent
two or three times a century
you're not fit to be a common
shareholder and you deserve the mediocre
result you're going to get there you go
if you're not prepared to tough it out
through periods where your portfolio is
down 50
just do yourself a favor and never buy
into the market because it will happen
to you at some point and you won't be
able to see it coming and when it does
hit you need to be able to stay focused
on the long term and not panic you panic
you lose so always stay rational and
just ignore those sudden market swings
then moving on to charlie's fourth trick
is to always keep things simple and
moreover ensure the companies you look
into are solid straightforward
businesses that anyone could run we have
a very peculiar way of looking at things
we want to buy
something that's intrinsically a very
good business
meaning that an idiot could run
and it would do all right
and then we want that business which an
idiot could run successfully to have a
wonderful person in it running it
and if we have
a wonderful business with a wonderful
person running it that really turns us
on and it works very well
and now we we do make exceptions
but not many and
and
it's a pretty simple philosophy
warren sometimes says
you have to choose
good person or good business
you know what he says
this is not politically correct
he says good business
he wants something that has such an
such tremendous strength
that
i had a friend when we practiced law and
he said
if it won't stand a little mismanagement
it's not much of a business
and
we like businesses that stand a lot of
mismanagement but don't get it
so that's our formula and it and we
can't make it work perfectly
but it certainly worked better than most
people's
so ideally you want a wonderful business
and a wonderful person running it but
the most important thing is that the
business is solid and straightforward
and it's got a big competitive advantage
you know as charlie said if it won't
stand a bit of mismanagement then it
isn't much of a business so even though
we like businesses that are well managed
above all else finding a straightforward
strong business that anyone could run
is definitely the top priority and then
finally charlie's fifth trick that
helped him do very well in investing is
a simple one
it's to read a lot take a listen oh by
the way don't you read a book a day
something like that like you do well
maybe not i read and i skim a lot yeah
i
do the accidents of life you give me
books i haven't torn the books and
perfect strangers give me books
lots of them and
and i
almost never buy a book anymore when i
was young i used to
order them from the book review columns
of the new york times
and
now it's torn to books comes and i just
select what i want and i'm amazed at how
well some of these people are reading me
i don't think you can take every bookish
little boy
and turn him into a billionaire by
petting him on the head and say read all
you want johnny
but
if it were that easy there'd be more
billionaires but
it enormously helped me and i think
reading
once you've learned it reading and
arithmetic you can take in so much and
you can take it on your own time
schedule if somebody's talking to you he
may be telling you something
you don't want to know
you already know
it's too hard
or he's going too fast or too slow yeah
but when you're reading you can just
take it take it as you want it so it's
just it's just it's just god's gift if
you if you're into self-education
there's nothing like reading
and of course people who do a lot of it
have an enormous advantage so charlie is
a big fan of reading as is warren
buffett but beyond the general tip of
reading uh i think self-education is
really the trick that charlie is getting
at you know it's a shame but most people
finish their uni degree and they think
that their learning is done they'll just
go out and work their job for the rest
of their lives you know school's out
hooray we've we've done it
but all the most successful people in
the world are the ones that make
self-education and self-improvement a
focus throughout their whole life you
know and it doesn't necessarily have to
be books it could be courses or podcasts
audio books or interviews or whatever
really but if you do take the time to
improve your own abilities and your own
earning power as charlie says that will
serve you tremendously well in life
having an innate
interest in self-improvement that's
charlie's last trick and he practices
what he preaches he's 98 years old and
he's still putting in the effort to read
a lot and gain perspective so overall
they are five of charlie's mental tricks
that helped him become not only one of
the best investors in the world but also
one of the best minds full stop so
anyway guys i hope you enjoyed the video
make sure you leave a like on it if you
did find it useful or if you enjoyed it
subscribe to the channel if you want to
learn more about value investing people
like charlie munger and warren buffett
all those guys that preach the value
investing the rational value investing
approach make sure you subscribed uh if
you're interested in more new money
content you can check out new money
clips links down in the description
below thanks always the patreon
producers for supporting the channel but
guys that will just about do us for
today thank you very much for watching
and i'll see you all in the next video
this video is brought to you by
sharesight seek of tracking your
performance manually track capital gains
dividends and currency fluctuations
easily and when it comes to tax time
have everything you need ready to go
with just a click of a button try
sharesight for free or use the referral
link in the description to get four
months free when you sign up to an
annual plan
تصفح المزيد من مقاطع الفيديو ذات الصلة
How To Stop Checking Stocks EVERYDAY! 3 Strategies I Used & The Benefits From Checking Less Often
Warren Buffett's Top Tips for New Investors (MUST WATCH) | Berkshire Hathaway 2010
Warren Buffett: 11 Books That Made Me MILLIONS (Must READ)
10 MELHORES AÇÕES PARA COMPRAR E NUNCA VENDER
Warren Buffett: The Easiest Way To Value Stocks
Ep. 1 - Investment Philosophies of Buffett and Munger | Learn how to pick a stock
5.0 / 5 (0 votes)