Charlie Munger: Invert, always invert (Mental models to use in your life)
Summary
TLDRIn 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
- đ§ The speaker attributes their financial success not to extreme ability but to learning a few basic tricks from mentors like their grandfather.
- đ The concept of inversion is highlighted as a key strategy, where the speaker approaches problems by considering the opposite outcome to avoid or achieve.
- đ 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.
- đĄ The importance of considering all dimensions (literally and metaphorically) is emphasized, as illustrated by the three-dimensional approach to a real estate appraisal problem.
- đŽ 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.
- đŻ Identifying and avoiding vulnerabilities is a recurring theme, suggesting a proactive approach to risk management.
- đ ïž 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.
- đą In business, the speaker advocates for quick decision-making based on a solid understanding of fundamentals rather than exhaustive due diligence.
- đ 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.
- đ« 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
đ 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.
đ 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.
đą 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.
Mindmap
Keywords
đĄInversion
đĄProdigious results
đĄTricks
đĄWeather forecasting
đĄRisk management
đĄThree-dimensional thinking
đĄAppraisal
đĄDecision-making
đĄFundamentals
đĄDue diligence
đĄPermian Basin
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
Voir Plus de Vidéos Connexes
How Charlie Munger use Inversion Thinking Process in life. | Daily Journal 2020ăC:C.M Ep.16ă
Any POOR person who does this becomes RICH in 6 Months | Warren Buffett
Warren Buffettâs Most Iconic Interview Ever
How I Close Million Dollar Sales 1 On 1
Soramazsın: Borsacı | Haydar Acun | 200. BölĂŒm
Warren Buffett's Top Tips for New Investors (MUST WATCH) | Berkshire Hathaway 2010
5.0 / 5 (0 votes)