Charlie Munger: Invert, always invert (Mental models to use in your life)

Summary

In this transcript, the speaker reflects on the secrets behind his financial success, attributing it not to extraordinary talent but to learned 'tricks' from mentors like his grandfather. He emphasizes the value of inverting problems to identify potential risks and avoid them, drawing parallels to his experience as a weather forecaster in the Air Corps. The speaker also shares anecdotes from his career as a lawyer, illustrating how applying basic principles and thinking in three dimensions can lead to significant financial gains. His conversation with Warren Buffett about investing in Anadarko, a big oil company, exemplifies how relying on a 'bag of tricks' and quick decision-making can yield substantial results without exhaustive due diligence.

Takeaways

• 🧠 The speaker attributes their financial success not to extreme ability but to learning a few basic tricks from mentors like their grandfather.
• 🔄 The concept of inversion is highlighted as a key strategy, where the speaker approaches problems by considering the opposite outcome to avoid or achieve.
• 🌐 The speaker's experience as a weather forecaster in the Air Corps taught them to think in reverse to ensure safety, a method that has influenced their problem-solving approach.
• 💡 The importance of considering all dimensions (literally and metaphorically) is emphasized, as illustrated by the three-dimensional approach to a real estate appraisal problem.
• 👴 The speaker's grandfather's wisdom, such as 'stay near the shore when swimming,' has been internalized and applied to various aspects of decision-making.
• 🎯 Identifying and avoiding vulnerabilities is a recurring theme, suggesting a proactive approach to risk management.
• 🛠️ The speaker has a 'bag of tricks' or mental models that they've collected and applied throughout their life, which have been instrumental in achieving success.
• 🏢 In business, the speaker advocates for quick decision-making based on a solid understanding of fundamentals rather than exhaustive due diligence.
• 📈 The speaker and Warren Buffett's investment in Anadarko was a swift decision based on a clear understanding of the Permian Basin's value and the company's preferred stock.
• 🚫 The speaker criticizes excessive due diligence as a sign of insecurity and a distraction from the essential factors that truly matter in making sound decisions.

Q & A

What was the key to the speaker's financial success?

The key to the speaker's financial success was not extreme ability but rather a few basic tricks learned from people like his grandfather, which he applied throughout his life.

What did the speaker learn from his time as a weather forecaster in the Air Corps?

As a weather forecaster, the speaker learned to approach problems by inverting them, considering how to avoid killing pilots by making accurate weather forecasts and understanding the potential hazards.

What advice did the speaker's grandfather give him about swimming?

The speaker's grandfather advised him to swim as long as he wanted but to stay near the shore, which was a simple trick that the speaker applied to various aspects of his life.

How does the speaker describe the process of solving practical problems?

The speaker describes solving practical problems by inverting them, similar to solving algebraic problems, which allows for easier solutions when approached from the opposite perspective.

What is the significance of the 'bag of tricks' the speaker mentions?

The 'bag of tricks' refers to a collection of mental models and strategies the speaker has acquired over time, which he uses to tackle various challenges and achieve success.

How did the speaker apply his 'bag of tricks' to a client's land appraisal issue?

The speaker applied his 'bag of tricks' by advising his client to think in three dimensions about the land appraisal, considering the impact of utility towers on the land's value, which led to a significantly higher offer.

What was the outcome of the speaker's approach to the client's land appraisal?

The outcome was that the speaker's client received an offer of six hundred thousand dollars, a substantial increase from the initial appraisal, by considering the three-dimensional impact of the utility towers on the land.

How does the speaker view the role of due diligence in decision-making?

The speaker views excessive due diligence as a sign of insecurity and a way to avoid making decisions. He believes that having a solid understanding of the fundamentals and a 'bag of tricks' allows for quicker and more confident decision-making.

What example does the speaker give about making a quick decision on a business deal?

The speaker gives the example of quickly deciding to invest in Anadarko, a big oil company, based on his understanding of the Permian Basin's value and the advantages of a preferred stock, without needing extensive due diligence.

What does the speaker think about people who rely heavily on due diligence?

The speaker believes that people who rely heavily on due diligence, especially if they are weaker thinkers, are often trying to compensate for their lack of understanding or confidence in the fundamentals.

Outlines

00:00

🔍 Inverting Problems for Effective Solutions

The speaker reflects on his financial success, attributing it not to extraordinary talent but to practical tricks he learned from his grandfather. He emphasizes the importance of inverting problems to find solutions, drawing on his experience as a weather forecaster in the Air Corps. He used reverse thinking to avoid causing harm to pilots by identifying the easiest ways to kill them and then avoiding those scenarios. The speaker also shares a story about his grandfather's wisdom of staying near the shore while swimming, which he applies to his approach to problem-solving. He advocates for considering the risks and vulnerabilities in any situation to achieve better outcomes, comparing it to solving algebraic problems by inverting them.

05:06

📏 Applying 3D Thinking to Real Estate Appraisal

In this paragraph, the speaker recounts a real estate appraisal case where a client's land was undervalued by an appraiser who only considered two-dimensional factors. The speaker suggests a three-dimensional approach, considering the impact of utility towers on the land's value. He argues that the appraiser failed to account for the damage caused by freezing the grade and the potential for land development. By thinking in three dimensions, the speaker was able to secure a higher valuation for the client's land. The speaker also touches on the importance of understanding the fundamentals and not relying solely on due diligence, which he sees as a way to compensate for lack of insight.

10:07

🏢 Streamlining Decision-Making in Business

The speaker discusses the inefficiency of excessive due diligence in business, particularly in the context of leveraged buyouts. He contrasts this with his own approach, which involves quick decision-making based on a deep understanding of fundamental principles. He gives an example of a successful investment in Anadarko, a major oil company, where he and Warren Buffett made a decision quickly without extensive due diligence. The speaker highlights the importance of recognizing the value of assets, such as the Permian Basin's oil reserves, and making decisions based on a clear understanding of these fundamentals rather than relying on exhaustive research.

Keywords

💡Inversion

Inversion, as used in the script, refers to the mental strategy of reversing the approach to a problem to find a solution. It is a key concept in the video, illustrating how the speaker avoids negative outcomes by thinking through the opposite of what he wants to achieve. For instance, when tasked with forecasting weather, he considered how to kill pilots through his forecasts and then worked to avoid those outcomes.

💡Prodigious results

Prodigious results are outcomes that are exceptionally impressive or outstanding. In the context of the video, the speaker mentions that his success is not due to extraordinary ability but rather the application of simple tricks and strategies that lead to extraordinary outcomes. He emphasizes that even someone without prodigious talent can achieve such results by applying certain mental models and strategies.

💡Tricks

Tricks in this script represent the practical strategies or mental models that the speaker has learned and applied throughout his life. These are not magic tricks but rather practical insights and approaches that have helped him achieve success. For example, he mentions 'tricks' he learned from his grandfather and how these have been instrumental in his decision-making process.

💡Weather forecasting

Weather forecasting is used in the script as an analogy for the speaker's approach to problem-solving. He describes his experience as a weather forecaster in the Air Corps, where he inverted the problem to consider how to avoid causing harm to pilots rather than how to provide accurate forecasts. This example illustrates the application of his problem-solving 'tricks' in a real-world scenario.

💡Risk management

Risk management is a concept that underlies much of the speaker's approach to decision-making. He discusses how he identifies potential risks and then works to avoid them, as opposed to seeking only positive outcomes. This is evident when he talks about his approach to appraising land, where he considers the potential damage to the property in three dimensions, not just the two-dimensional approach of traditional appraisal.

💡Three-dimensional thinking

Three-dimensional thinking is a metaphor used by the speaker to describe the need to consider all aspects of a problem, not just the obvious or superficial ones. He uses the example of land appraisal, where considering the impact of utility towers in three dimensions (rather than just the land's surface area) leads to a more accurate and comprehensive valuation. This思维方式 allows for a deeper understanding and better decision-making.

💡Appraisal

Appraisal in the script refers to the process of estimating the value of a property or asset. The speaker critiques traditional appraisal methods as being too simplistic and advocates for a more comprehensive approach that considers all dimensions of a property's value. He uses the example of a client's land appraisal to illustrate how a more nuanced approach can lead to a significantly higher valuation.

💡Decision-making

Decision-making is a central theme in the video, with the speaker discussing how he makes decisions based on a set of 'tricks' or strategies. He emphasizes the importance of understanding the fundamentals and avoiding unnecessary complexity. The speaker's approach to decision-making is characterized by simplicity, inversion, and a focus on avoiding negative outcomes.

💡Fundamentals

Fundamentals refer to the basic principles or core concepts that underlie a field of study or activity. In the context of the video, the speaker stresses the importance of returning to the basics when solving problems or making decisions. He contrasts this with the tendency of some individuals to overcomplicate matters, suggesting that a focus on fundamentals can lead to clearer and more effective solutions.

💡Due diligence

Due diligence in the script is discussed as a process often used in business transactions to investigate and evaluate a company or asset before making a decision. The speaker critiques excessive due diligence as a sign of insecurity and suggests that it can be a waste of time and resources. He argues that in many cases, a basic understanding of the fundamentals is sufficient to make informed decisions, as illustrated by his quick decision to invest in Anadarko.

💡Permian Basin

The Permian Basin is mentioned as a significant oil reserve in the United States. The speaker uses it as an example of how certain investments can be 'no-brainers' if one understands the fundamentals. He points out that the basin's unique geological features make it an exceptional oil reserve, and this understanding, combined with a favorable investment structure, led to a swift and successful investment decision.

Highlights

The speaker attributes their financial success to learned 'tricks' rather than extreme ability.

Mentorship from figures like the speaker's grandfather played a crucial role in teaching life lessons.

Inverting problems to find solutions, as exemplified by the speaker's weather forecasting experience.

The importance of considering risks and vulnerabilities from the outset, as illustrated by the speaker's approach to weather forecasting.

The speaker's grandfather's wisdom on safety, paralleled with the speaker's approach to problem-solving.

Applying the concept of inversion to practical problems, drawing a comparison to solving algebraic equations.

The speaker's use of 'bag of tricks' to achieve success, emphasizing the importance of a diverse set of strategies.

The speaker's military training and how it influenced their approach to problem-solving.

A real estate appraisal story demonstrating the speaker's three-dimensional thinking over traditional two-dimensional approaches.

The value of understanding the fundamentals and applying them to complex situations.

The speaker's quick decision-making in the Anadarko acquisition, highlighting the importance of acting on key insights.

The Permian Basin's significance as a top oil reserve and its role in the Anadarko deal.

The speaker's critique of excessive due diligence as a crutch for insecurity in decision-making.

The importance of not needing perfect information to make informed decisions, as opposed to seeking exhaustive data.

The speaker's view on the inefficiency of traditional due diligence processes in comparison to their own methods.

The speaker's emphasis on the value of simplicity and avoiding unnecessary complexity in decision-making.

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

now everybody's leaning in wanting to

know

it's too late for you old guys

the no

there are all kinds of tricks that i

just got into by accident in life

one i invert all the time

and and i 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 clearing

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 in reverse

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 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 and if

kobe bryant had somebody like me he'd

still be with us

it was so stupid to kill yourself that

way

and but just that basic i may have

learned that from my grandfather my

grandfather would say to him when i'm

swimming

he'd say swim as long as you want but

stay near the shore

well

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 and most people would say how can

you

please tell us what you do to save india

to help 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 i have a whole

bag of tricks like that i went to the

rotc both in high school and college

and the irtc taught me to fire mortar

shells or artillery shells

one shot over one shot short and then

kapow

well i never shot any damn shells but

i've been using that metal trick all my

life that's why how i determine

what size to make something over and

under and kapow

and so i just got a bag of tricks and i

got the right bag of tricks early

and of course it's been an enormous help

to me

let me give you an example i had a

client once when i was a young lawyer

and he owned a bunch of hilly ranch land

on the edge of civilization

not very far from here in southern

california

[Music]

and

the edison company came through and they

wanted a new easement through his land

they already had some easements

and he hired the leading appraiser in

orange county real estate appraiser

and said

and he had the idea that he should have

250 000

for this easement from the edison

company

and this leading appraiser who was

very pompous and very old and and

uh very distinguished and he told no i'm

sorry it's only 125 000

value in your damn ranch and so he came

to me

and said charlie can you talk some sense

into this elderly appraiser

and so i looked at his problem and i

told the president but i thought how he

was doing his

own appraisal wrong i'm not a real

estate appraiser he is

and what he had done is what he was

taught to do in appraisal school he

thought the problem through in two

dimensions

and he figured out from comparable sales

what the value per acre was and he

computed the acreage and he had

something a little bit on the

on the damage the easement would do to

the remaining property and so it was all

done in two dimensions

and i said to this appraiser you've got

to do this in three dimensions

you know god gave us three dimensions

and i said if they put

the utility towers big transmission line

towers which is why these

guys it's going to freeze the grade and

the logical way to

of your land is to lop off the top of

the hills and put them in the valley

that's the way kelly land is developed

and they're doing enormous damage to you

by freezing the grade

and he said he wouldn't change a damn

thing so i said

to my elderly client i think you have to

fire this twit

and i will hire you an appraiser who can

think

and so i got him six hundred thousand

dollars

which wasn't at all hard because i was

dealing with a bunch of

honest engineers at the edison who did

think of three dimensions

but again that's so simple but you'd be

surprised how many lawyers would screw

that one up

and and of course the people like that

appraiser

who didn't know his own business very

well because he didn't pay attention to

the fundamentals

those people are always with us and if

you just have the mental trick of

constantly

going back to the basics it's pretty

basic insight that

are you conscious about the geometrical

problem in the real world is

three-dimensional are you conscious of

the rules or they're just there

well it's so habitual with yeah i

understand

that and i revolve possibilities and i

rag

problems hard and if they don't yield i

come back

and and and so this is just a bag of

tricks and it enables a non-prodigious

man to get

prodigious results remember you

last summer you bought anadarko big oil

company yes

and uh you described i think you just

gotten back from being with warren for

the weekend

yeah you were describing that you didn't

do all the analytics and you didn't do

all of the research

but you used your bag of tricks and you

flew out to omaha you and warren spent

the weekend

he called up the president of the bank

america got the money made the deal

no i didn't go to omaha or where did you

go no no i stay

we have a telephone

[Music]

okay you talk uh

okay you talked to warren about it

anyway

yeah but you made it in about two days

and it was like no no

okay warren didn't need warren and i

have been together so long that just one

grunt we can

speak of volume and

and no it's perfectly obvious the

permian basin is our

number one oil reservoir and we don't

have another like it

and it's perfectly obvious you have a

preferred stock

that you have an advantage over

everybody else and plus an upside

and so we've done this kind of thing

before

too so of course we did it and

and and it's not very difficult

but you're right there are all kinds of

organization

endless due diligence

we knew enough to act

based on the rules and why they were in

a hurry yes but but

you don't need perfect if you're 96 sure

that's all you're entitled to in many

cases

and i see these people doing this due

diligence and the weaker they are as

thinkers the more due diligence they do

and of course it's just a way of

allaying an inner insecurity

and of course it doesn't work you've got

to be able to

to quickly understand how much brains

does it take to know the permian basin

is america's best oil reserve

it's layer after layer after layer you

know

there is nothing nothing like comparable

yes

and if you have an eight percent

dividend off the top

from a perfectly reputable place of very

talented people

the woman that runs that is a production

engineer she's good

and and they get better results in that

shale than other people

and so it's a no-brainer at least it's a

no-brainer if you don't make it hard but

i see people

if you in america now they do these

leverage buyouts

and these firms do what they call due

diligence

and they will send armies of young

lawyers out at high rates per hour

to ripple through all the purchasing

orders

at a place like esri don't even think

about it

no yeah i'm not thinking about it

but they but they but my point is they

don't esri wouldn't

no you don't have to look through the

purchasing orders

right to know that history is a good

business and

yeah i don't think people are that

insecure mentally ought to be in

positions of

decision making