“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ‘em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.” — Charlie Munger
Charlie Munger, the billionaire business partner of Warren Buffett and major inspiration behind this site, is not only one of the best investors the world has witnessed, he's also one of the best thinkers. A quick recap is in order.
Munger has illuminated timeless wisdom in the minds' search algorithm, Academic Economics, stretch goals, mental models, the value of thinking backward and forward, problem solving, partnerships, and inversion among others.
He's even offered two sets of book recommendations.
In his book, Charlie Munger: The Complete Investor, which has become my new go-to recommendation for people interested in an introduction to Munger's thinking. Griffin lays out Munger's path to worldly wisdom.
Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines—psychology, history, mathematics, physics, philosophy, biology, and so on—a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts. Robert Hagstrom wrote a wonderful book on worldly wisdom entitled Investing: The Last Liberal Art, in which he states that “each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom.”
It is clear that Munger loves to learn. He actually has fun when he is learning, and that makes the worldly wisdom investing process enjoyable for him. This is important because many people do not find investing enjoyable, especially when compared to gambling, which science has shown can generate pleasure via chemicals (e.g., dopamine) even though it is an activity with a negative net present value. What Munger has done is created a system—worldly wisdom—that allows him to generate the same chemical rewards in an activity that has a positive net present value. When you learn something new, your brain gives itself a chemical reward, which motivates you to do the work necessary to be a successful investor. If you do this work and adopt a worldly wisdom mindset, Munger believes you will create an investing edge over other investors.
Munger used a latticework of mental models in developing his approach. Herbert Simon, in his autobiography, Models of My Life, captured the idea of a mental model when he said:
A large part of the difference between the experienced decision maker and the novice in these situations is not any particular intangible like “judgment” or “intuition.” If one could open the lid, so to speak, and see what was in the head of the experienced decision maker, one would find that he had at his disposal repertoires of possible actions; that he had checklists of things to think about before he acted; and that he had mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decisions arose.
Munger carefully chose the latticework model, to convey the idea that things are interconnected. We need more than a deep understanding of one segment, we need a working knowledge of all of them and how they interact and link. This is conveyed by the Japanese proverb “The frog in a well knows nothing of the mighty ocean.”
In Charlie Munger: The Complete Investor, Griffin continues:
Understanding the worldly wisdom methodology is made easier if you see it applied in an example. To illustrate the method, Munger gave the example of a business that raises the price of its product and yet sells more of that product. This would appear to violate the rule of supply and demand as taught in economics. However, if one thinks about the discipline of psychology, one might conclude that the product is a Geffen good, which people desire more of at higher prices. Or one could conclude that low prices signal poor quality to buyers and that raising prices will result in more sales. Alternatively, you can look for bias caused by incentives and discover that what has actually happened in his example is that the seller has bribed the purchasing agents of the purchasers.
Munger described a situation in which this actually happens:
Suppose you’re the manager of a mutual fund, and you want to sell more. People commonly come to the following answer: You raise the commissions which, of course, reduces the number of units of real investments delivered to the ultimate buyer, so you’re increasing the price per unit of real investment that you’re selling the ultimate customer. And you’re using that extra commission to bribe the customer’s purchasing agent. You’re bribing the broker to betray his client and put the client’s money into the high-commission product.
While we can't know everything, we can know the big ideas from multiple disciplines. We don't want to be the frog. This is one way we can add value in the decision making process and it allows for the effective use of what I call the Munger two-step, which is something we talk about at Re:Think Decision Making.
“Simply put,” Griffin writes, “Munger believes that people who think very broadly and understand many different models from many different disciplines make better decisions.”
In a 2003 speech as UCB Business School entitled Academic Economics — Strengths and Weaknesses, after Considering Interdisciplinary Needs, Munger said:
You’ve got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there’s no precise numbering you can put to these factors. You know they’re important, but you don’t have the numbers. Well, practically (1) everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and (2) doesn’t mix in the hard-to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that.
In Munger’s view, it is better to be worldly wise than to spend lots of time working with a single model that is precisely wrong.
A multiple-model approach that is only approximately right will produce a far better outcome in anything that involves people or a social system. While making the case for a lattice of mental models approach (described here shortly), Robert Hagstrom pointed out that Munger is providing support for those who advocate for a wide-ranging liberal arts education.
Munger would be what the poet Archilochus calls a fox. The ancient Greeks said “The fox knows many things; the hedgehog one great thing.”
Commenting on Munger, former Microsoft CEO Bill Gates said, “(he) is truly the broadest thinker I have ever encountered.” Buffett added that Munger has “the best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you even finish the sentence.”
How does Munger do this? That's a question worth slowing down and thinking about.
Where do we get these ideas? We let history be our guide. If one way to ensure you make poor decisions is to use a small sample size, we can reason that we should seek out the biggest sample sizes we can.
What crosses most of history? Biology, Chemistry, Physics. And of course, throw in some Psychology so we can better understand how we are led astray.
Munger’s breadth of knowledge is something that is naturally part of his character but also something that he intentionally cultivates. In his view, to know nothing about an important subject is to invite problems. Both Munger and Buffett set aside plenty of time each day to just think. Anyone reading the news is provided with constant reminders of the consequences of not thinking. Thinking is a surprisingly underrated activity. Researchers published a study in 2014 that revealed that approximately a quarter of women and two-thirds of men chose electric shocks over spending time alone with their own thoughts.
If you can't be alone with your thoughts, you don't deserve them. We try to run away from the pain of thinking. Instead, we turn to the instant gratification of Netflix.
Munger’s speeches and essays are filled with the thoughts of great people from the past and present from many different domains. Munger is also careful to set aside a lot of time in his schedule for reading. To say he loves books is an understatement. Buffett has said that Munger has read hundreds of biographies, as just one example. He is very purposeful in his approach to worldly wisdom, preferring not to fill his calendar with appointments and meetings.
When talking about how to get smarter, Buffett said: “You could hardly find a partnership in which two people settle on reading more hours of the day than in ours.” Adding, “Look, my job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action.”
This is where we go astray so easily. It's easy to think about our own discipline, the one we live in on a daily basis. This comes naturally. However it's likely to lead to problems. We become the proverbial man with a hammer, “To the man with a hammer everything looks like a nail. If you only have one model you will fit whatever problem you face to the model you have.” It's hard work to think. That's why so few people seem to take this passage. But it should be hard, otherwise it would be too easy.
A Multidisciplinary Approach
The tagline for this website: Mastering the best of what other people have already figured out, comes from this Munger quote.
It is critical for a person who desires to be wise to think broadly and learn from others. Munger has said many times that someone who is really smart but has devoted all of their time to being an expert in a narrow area may be dangerous to themselves and others. Examples of this include macroeconomists who study the economy but are disastrous when investing their own portfolios and marketing experts who may think that most all business problems can be solved through marketing. Financiers tend to think similarly about their own profession. Too many people believe that what they do at work is hard and what others do is easy.
The best approach is the multi-disciplinary one, Munger argues:
You may say, “My God, this is already getting way too tough.” But, fortunately, it isn’t that tough—because eighty or ninety important models will carry about 90 percent of the freight in making you a worldly wise person. And, of those, only a mere handful really carry very heavy freight.
“This reference to eighty or ninety important models” Griffin writes, “has caused people to ask Munger for a complete list of these important models.”
While Munger identified many models in the discipline of psychology in his famous “The Psychology of Human Misjudgment” speech and mentioned other models on an ad-hoc basis, he has never prepared a complete list covering all disciplines.
Munger believes that by learning to recognize certain dysfunctional decision-making processes, an investor can learn to make fewer mistakes. He also believes that no matter how hard someone works and learns, mistakes cannot be completely eliminated. The best one can hope for is to reduce their frequency and, hopefully, their magnitude.
Munger elaborates in a 1995 speech at Harvard University:
Man’s imperfect, limited-capacity brain easily drifts into working with what’s easily available to it. And the brain can’t use what it can’t remember or when it’s blocked from recognizing because it’s heavily influenced by one or more psychological tendencies bearing strongly on it … the deep structure of the human mind requires that the way to full scope competency of virtually any kind is to learn it all to fluency—like it or not.
In a 2007 speech at USC law school, Munger says:
I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy, does that help, particularly when you have a long run ahead of you. … So if civilization can progress only with an advanced method of invention, you can progress only when you learn the method of learning. Nothing has served me better in my long life than continuous learning. I went through life constantly practicing (because if you don’t practice it, you lose it) the multidisciplinary approach and I can’t tell you what that’s done for me. It’s made life more fun, it’s made me more constructive, it’s made me more helpful to others, and it’s made me enormously rich. You name it, that attitude really helps.
Back to Griffin, writing in Charlie Munger: The Complete Investor, who says:
In looking at a decision, Munger believes that it is wise to ask questions. Have dysfunctional decision-making heuristics from psychology caused an error? Are there approaches one can use to find those mistakes? Munger likes to use a model from algebra and invert problems to find a solution. Looking for models that can reveal and explain mistakes so one can accumulate worldly wisdom is actually lots of fun. It is like a puzzle to be solved.
A lattice approach is, in effect, a double-check on the investing process. But instead of just two checks, you are checking the result over and over. Munger believes that by going over your decision-making process and carefully using skills, ideas, and models from many disciplines, you can more consistently not be stupid. You will always make some bone-headed mistakes even if you’re careful, but his process is designed to decrease the probability of those mistakes.
To make sure he is taking advantage of as many models as possible, Munger likes checklists. At the 2002 Berkshire Hathaway annual meeting, Munger said:
Learning From Mistakes
An aspect of Munger's approach is learning from your mistakes. I've made more than my fair share of them.
Munger has said repeatedly that he made more mistakes earlier in life than he is making now. One of his early mistakes was to own a company that made electrical transformers. He has also said that he has found himself in real estate ventures that would only be enjoyed by a masochist. He seems to have more tolerance for mistakes in real estate than other areas of business. The idea of building things as opposed to just trading stocks has a particular appeal to Munger.
Munger believes that one great way to avoid mistakes is to own a business that is simple to understand, given your education and experience. He pointed out: “Where you have complexity, by nature you can have fraud and mistakes.” This approach echoes the view of Buffett, who likes challenges that are the business equivalent of netting fish in a barrel.
Buffett has said that if you cannot explain why you failed after you have made a mistake, the business was too complex for you. In other words, Munger and Buffett like to understand why they made a mistake so they can learn from the experience. If you cannot understand the business, then you cannot determine what you did wrong. If you cannot determine what you did wrong, then you cannot learn. If you cannot learn, you will not know what you’re doing, which is the real cause of risk.
Munger has chosen the word wisdom purposefully because he believes that mere knowledge, especially from only one domain, is not enough. To be wise, one must also have experience, common sense, and good judgment. How one actually applies these things in life is what makes a person wise.
Charlie Munger: The Complete Investor is about more than investing, it's about the pursuit of wisdom across boundaries.