Charlie Munger: The 5 Investing Tricks That Made Him a Billionaire

Summary

In 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

00:00

🧙‍♂️ 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.

05:02

🌐 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.

10:02

📉 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.

15:03

🏭 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.

Keywords

💡Financial success

Financial success refers to the accumulation of wealth or assets through effective management and investment strategies. In the video's context, it is attributed not solely to extreme ability but also to the application of mental tricks and models learned from mentors like Charlie Munger's grandfather. An example from the script is Munger's acknowledgment that his prodigious results in life stem from these learned tricks rather than innate genius.

💡Mental tricks

Mental tricks are strategies or thought processes that help individuals make better decisions or solve problems. The video emphasizes their importance in Charlie Munger's approach to investing and life. For instance, the concept of inverting problems to avoid negative outcomes is highlighted as a key mental trick that has contributed to Munger's financial success.

💡Inverting

Inverting, as a mental trick, involves thinking about problems in reverse to find solutions. The script explains that Munger used this approach as a weather forecaster to avoid causing harm to pilots, and it is also applicable in investing by considering how a stock might fail before investing in it, which helps in avoiding potential losses.

💡Humility

Humility in this context is the recognition of one's limitations and the boundaries of one's knowledge or competence. Munger emphasizes the importance of knowing what you don't know to avoid making mistakes. The script illustrates this with the Berkshire Hathaway example, where Munger and Buffett's humility helps them understand their circle of competence and avoid overstepping it.

💡Circle of competence

The circle of competence is a concept in investing that refers to the areas in which an investor has sufficient knowledge and understanding to make informed decisions. The video script uses this term to explain how Munger and Buffett focus on what they know well and avoid areas outside this circle, which contributes to their successful investment strategies.

💡Rationality

Rationality in the video refers to the ability to maintain logical thinking and not be swayed by emotions, especially in the face of market volatility. Munger's approach to investing is highlighted as being unaffected by wild swings in the stock market, as he remains focused on long-term value rather than short-term fluctuations.

💡Competitive advantage

A competitive advantage is a characteristic or attribute that allows a business to outperform its competitors. The script mentions that Munger looks for businesses with solid and straightforward operations that have a significant competitive advantage, which is a key factor in his investment decisions.

💡Self-education

Self-education is the process of learning independently, without formal instruction. The video emphasizes the importance of continuous learning and self-improvement throughout one's life, as exemplified by Munger's extensive reading habits. It is presented as a key to success in investing and in life.

💡Reading

Reading, as discussed in the video, is a form of self-education that provides a wealth of knowledge and perspective. Munger's success is attributed in part to his voracious reading habits, which have allowed him to gain insights and understanding across a wide range of subjects.

💡Specialization

Specialization is the process of focusing on a specific area of knowledge or skill to gain expertise. While Munger admits to not favoring specialization personally, he acknowledges its wisdom in career and investment strategies. The script points out that successful investors often specialize in certain areas to gain a deep understanding and competitive edge.

💡Market volatility

Market volatility refers to the rapid fluctuations in the value of investments, such as stocks. The video script discusses Munger's philosophy of maintaining rationality and not reacting to these fluctuations, which is crucial for long-term investment success.

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

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