Book SummaryPoor Charlie's Almanack, by Charles T. Munger

1-Page Summary1-Page Book Summary of Poor Charlie's Almanack

Charlie Munger is Warren Buffett’s long-time partner at Berkshire Hathaway. Content to being the lesser known of the two, Munger is no less impressive. Bill Gates says that Charlie Munger “is truly the broadest thinker I have ever encountered,” and Buffett calls him the ideal partner who is “both smarter and wiser.”

Poor Charlie’s Almanack is a collection of Charlie Munger’s best advice given over 30 years, in the form of 11 speeches given as commencement addresses and roundtable talks. He covers a wide range of topics, including rationality and decision making, investing, and how to live a good life.

Rationality and Decision Making

When asked to describe himself in one word, Charlie Munger chose “rational.” He knows he’s subject to the same biases affecting all other humans, and he’s trained himself to recognize when the biases are active and how to limit their damage.

Objectivity and Changing One’s Mind

If you want to make better decisions, you need to seek truth—what is really happening in the world, not what you want to believe is happening. Recognizing the truth is often painful—it may go against your prior beliefs or desires, but recognizing reality is better than deluding yourself.

• First, recognize that it’s very easy to delude yourself.
• Second, you should readily entertain other opinions. You should deliberately consider arguments of the other side. In fact, try to state the other side’s opinions better than they can themselves.

Third, after considering other viewpoints, you should readily change your mind. Be willing to destroy your favorite ideas. Munger says that any year he doesn’t destroy one of his beloved ideas is a wasted year.

Practice Divergent and Contrary Thinking

Social proof bias is the tendency to believe what others believe, to improve social cohesion. This causes humans to think like sheep, even if the ideas they believe are wrong. Practicing contrary thinking invites new ideas that might be more correct than what everyone else thinks.

Munger and Buffett practice this regularly in their financial management. If you adopt the same investment practices as everyone else, you can by definition only get average returns. To achieve outstanding returns, you need to think differently from the crowd.

Invert, Always Invert

One way to practice divergent thinking is to invert your view on a situation, to look at it from the opposite perspective. This can reveal new insights. “Many hard problems are best solved only when they are addressed backwards.”

Here are a few examples of inverting thinking:

• Instead of thinking about how something can succeed, think about how it can fail. “What can go wrong that I haven’t seen?”
• When physicists were trying to revise Maxwell’s electromagnetic laws to be consistent with Newton’s mechanical laws, Einstein inverted the situation—he revised Newton’s laws to fit Maxwell’s, and so discovered special relativity.

Know Your Circle of Competence

To make good decisions, you need to know what you’re good at and what you’re bad at. Munger calls this the “circle of competence”—know where your boundary is, and don’t step outside of the circle.

Here are elaborations of this idea:

• “Knowing what you don’t know is more useful than being brilliant.”
• “People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”
• “You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don't, you are going to lose.”
• “It’s great to have a manager with a 160 IQ—unless he thinks it’s 180.”

In investments, Charlie Munger and Warren Buffett know what they’re good at and what they’re bad at. They hesitate to stray outside their circle of competence. For example, they have three baskets for investing: yes, no, and too tough to understand.

• First, Munger looks for an easy to understand, dominant business franchise that can sustain itself and thrive in all market environments. Most businesses don’t make this cut.
• Certain businesses, like pharmaceuticals and technology, go into the “too tough to understand” bucket. Munger finds that the dynamics of software and computer chips are simply outside their area of expertise, so they reject them completely. Munger and Buffett don’t try to grasp the esoteric—they simply try to remember the obvious.
• “Hot” deals and IPOs get rejected as no’s (Munger considers these as overhyped and overpriced).

Learn Vicariously from Others’ Mistakes

Munger and Buffett both read and learn constantly, and one of the reasons is to learn from other people’s mistakes. You can learn vicariously from other people’s terrible experiences and save yourself from the same fate.

Understand and Avoid Psychological Biases

A student of human psychology, Munger compiled a list of 25 psychological biases that distort how you see the world and impair decision making. Here are a few notable ones:

• Incentive bias: Self-interest drives human behavior. If someone receives rewards for doing a behavior, they will do that behavior again and again.
• Doubt-avoidance tendency: Doubt is painful, causing puzzlement and stress. When you feel doubt, you reach a decision more quickly than a fully considered decision would take.
• Inconsistency-avoidance tendency: People are reluctant to change. This applies to personal behavior, beliefs, relationships, and commitments. Once someone believes something, it’s typically hard for them to change their mind.
• Influence from mere association: When two items are placed close together, the qualities of one item transfer to the other. If you like something, you’ll like other things that it’s paired with. The inverse is also true.
• Deprival superreaction: We hate having things taken away from us. Being deprived of things ignites a strong counterreaction.
• Social proof: You think...

Poor Charlie's Almanack Summary Shortform Introduction

Charlie Munger is Warren Buffett’s long-time partner at Berkshire Hathaway. Content to being the lesser known of the two, Munger is no less impressive. Bill Gates says that Charlie Munger “is truly the broadest thinker I have ever encountered.” Of their 50-year partnership, Buffett “couldn’t be more grateful” for their friendship and says Munger fits the profile of the ideal partner who...

Poor Charlie's Almanack Summary On Rationality and Decision Making

When asked to describe himself in one word, Charlie Munger chose “rational.” He knows he’s subject to the same biases affecting all other humans, and he’s trained himself to recognize when the biases are active and how to limit their damage.

Objectivity and Changing One’s Mind

If you want to make better decisions, you need to seek truth—what is really happening in the world, not what you want to believe is happening. Recognizing the truth is often painful—it may go against your prior beliefs or desires, but recognizing reality is better than deluding yourself.

Here are major principles on staying objective.

First, recognize that it’s very easy to delude yourself.

• “What a man wishes, he will believe.”—Demosthenes
• “Never fool yourself, and remember that you are the easiest person to fool.”—Richard Feynman
• “How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn’t make it a leg.”—Abraham Lincoln
• “Apply logic to help avoid fooling yourself. Charlie will not accept anything I say just because I say it, although most of the world will.”—Warren Buffett
• “A new scientific truth does not triumph by convincing...

Poor Charlie's Almanack Summary 25 Psychological Biases: Part 1

Our brains, like much of our bodies, are biologically optimized to deliver results with efficiency. The brain often employs shortcuts to make decision making easier and faster. Often these shortcuts are well-serving, like when your eyes detect the shape of a predator in the bushes before you consciously perceive it. But often these shortcuts also obscure the truth and lead to dysfunctional thinking. Even worse, people can take advantage of these shortcuts and manipulate you.

Charlie Munger mastered his understanding of these shortcuts. Through his reading in psychology and his real-world experiences, he assembled 25 psychological tendencies that tend to mislead humans.

(Shortform note: What Munger calls “tendencies” are also commonly known as “cognitive biases.” You can read more about biases in our book guides to Influence by Robert Cialdini and Thinking, Fast and Slow by Daniel Kahneman.)

One warning: simply being aware of these biases is not an adequate defense against them. For important decisions, Munger runs through a full checklist covering all of...

Poor Charlie's Almanack Summary 25 Psychological Biases: Part 2

11: Simple, Pain-Avoiding Psychological Denial

What It Is

Denial is denying that an objective truth exists because it causes pain.

It’s often mixed up with love, death, and chemical dependency

Denial can possibly be helpful in these situations:

• If the objective truth is not available, and you need denial to persevere
• If the common wisdom is incorrect, and denying it helps you make better decisions

Why It Evolved

Avoiding pain probably helped people continue to survive in emotionally difficult situations.

How It Can Be Harmful

If the truth exists and you refuse to accept it, denial can only worsen your decision making.

Denial compounds consistency tendency and sunk cost fallacy. Say you’ve lost a lot of money in a bad venture.

• Denial tricks you into thinking the situation is better than it really is.
• The sunk cost fallacy prompts you to put more money after bad.
• Self-consistency makes you behave with inertia so it’s harder not to behave differently than you have.

Examples

• Denial is the first stage of grief, suggesting it’s part of a coping mechanism.
• Substance abusers tend to deny they have a problem as...

Poor Charlie's Almanack Summary The 25th Bias: Lollapalooza Tendency

Lollapalooza, the 25th tendency on Munger’s list, is a kind of “super-tendency”—it involves the confluence of multiple tendencies that reinforce each other and lead to extreme consequences. Other terms for Lollapalooza Tendency might include “synergy” and “emergent effects.”

As we’ll see below, an otherwise normal person can become a cult devotee through a combination of doubt-avoidance, stress influence, liking tendency, and a dozen other biases.

Unlike the 24 other cognitive biases, this isn’t a well-characterized tendency in psychology. Munger argues this is because multiple biases are hard to replicate in the lab, and psychologists simplify their research to yield replicable, isolated studies. Yet it seems like common sense that different biases could reinforce each other and be acting in the same situation simultaneously. This is yet another example of how contrarian thinking can be more correct than what an entire body of research has suggested.

Munger argues that anytime you see extreme behaviors on an individual or social level, lollapaloozas might be at work. This can include cults, the Milgram experiment (both of which we’ll explore further), the rise of Hitler,...

Shortform Exercise: Think Through Your Biases

The best way to understand whether you’re subject to psychological biases is to step through a checklist of every bias. This avoids errors and omissions.

Think of an important, life-changing decision that you need to make. What is it?

Poor Charlie's Almanack Summary On Mental Models

Charlie Munger has learned a lot about the world, and he calls the main ideas from the major fields “mental models.” He stresses the importance of multidisciplinary learning and connecting the major ideas together in a latticework, where the ideas can interact with each other.

We’ll discuss the general concept of a latticework of mental models, share a synthesized list of mental models he mentions throughout the book, then discuss specific models to see how they apply to the real world.

Latticework of Mental Models

The inferior way to learn is to learn isolated facts that exist entirely in separate silos. You can recite the facts, but you don’t know the ideas underlying them, and you can’t apply those ideas to solve problems in real life. This is a failure of rote learning, which is common in many national education systems.

Munger argues that the superior way to learn is to learn lots of mental models, then assemble them into a connected latticework (or a network).

What are Mental Models?

You can think of “mental models” as important ideas in a field that have broad relevance outside the field itself.

For example, the idea of “critical mass”...

Shortform Exercise: Plan Your Multidisciplinary Learning

Build your latticework of mental models by studying a broad range of disciplines.

Which fields do you think are important to understand that you currently don’t understand very well?

Poor Charlie's Almanack Summary On Investing

In Poor Charlie’s Almanack, Munger doesn’t talk directly about Berkshire Hathaway’s decisions much, but he does share the general investment philosophies and practices that have made them successful over decades. In this chapter, we’ll discuss his perspectives as an investor; in the next, we’ll discuss perspectives on creating a successful business.

Berkshire Hathaway

Despite its giant size, Berkshire Hathaway’s model is relatively simple:

1. Use insurance companies to generate “float,” or cash collected from insurance premiums before claims have to be paid.
2. Use this float to invest in businesses at a much higher rate of return than has to be paid out.

In essence, if you can take in money at 3% and invest it in things that grow at 13%, and you can do this for 50 years, you can grow to be very large, as Berkshire Hathaway has.

Warren Buffett and Charlie Munger are famously hands-off in the management of companies they acquire. They decentralize all the decision-making to the owned companies, trusting that the company managers are in the best position to make technical decisions for their companies. In this way, they recognize their circle of competence—they’re...

Poor Charlie's Almanack Summary On Business Strategy

Even though Charlie Munger and Warren Buffett don’t operate businesses themselves (they are famously hands-off and leave management to their business leaders), they do base their investment decisions on the strength of a company. They therefore have strong opinions on what makes companies successful over the long term.

What Makes Companies Successful?

According to Munger, outlier business success often results from the combination of some of these factors:

• Extreme focus on maximizing or minimizing one or two variables. For example, Costco focuses on driving volume and lowering prices, to the exclusion of many other factors obsessed over by typical retailers.
• Positive feedback loops, so that success begets further success. These often produce nonlinear results as the combination of multiple multiplicative factors.
• Strong, consistent execution over many factors. For example, Toyota executes well on many aspects of manufacturing, marketing, and capital allocation.
• Riding a rising wave that adds tailwinds even to an otherwise strong company. For example, Oracle rode a wave of improving technology and adoption of technology by businesses.

Moats and...

Poor Charlie's Almanack Summary On Character and Living a Good Life

In all, Charlie Munger is said to be a man of solid character—hard-working, humble, and always learning. In his speeches, he talks often about the traits leading to a happy and productive life. We’ve synthesized the main themes here.

Key Points of His Biography

The book has a brief biography of Charlie Munger. Here are bullet points:

• Charlie grew up in Omaha, Nebraska, sharing the hometown with Warren Buffett. He worked for Buffett’s grandfather in his grocery store; Warren worked there a few years later.
• Charlie liked raising hamsters and traded them with other kids. This was early practice in negotiating.
• In high school, Munger was captain of his high school’s varsity rifle team.
• He enrolled in University of Michigan to study math, but in 1943 left to serve in the military during World War II.
• He started his career as a lawyer. He was admitted to Harvard Law School without a bachelor’s degree and graduated in 1948.
• He had 3 kids with his first wife Nancy Huggins, whom he divorced in 1953. His son Teddy died of leukemia soon after at the age of 9. He met Nancy Barry and married in 1956.
• After law school, he joined a law firm, then founded a...

Poor Charlie's Almanack Summary Miscellaneous Ideas

To conclude the book guide, we’ll cover a variety of topics mentioned through Poor Charlie’s Almanack that didn’t fit cleanly into the previous chapters.

Being Persuasive

If you want people to do something, often asking them to do it won’t get the best results. You may have to take a more oblique path, especially leveraging the psychological biases we covered. We’ll cover two examples.

First, Munger gives the example of Captain Cook, who knew his sailors suffered from scurvy. He learned that Dutch ships had less scurvy, and also noticed that they ate lots of sauerkraut (which, possibly unknown to him, contained vitamin C). But tough, ornery English sailors were unlikely to eat sauerkraut, given the rivalry with the Germans and Dutch. Cook also knew he couldn’t tell them to eat sauerkraut to prevent scurvy, since this would tip them into thinking the voyage would be so long they had to mutiny instead. So he relied on social proof and exclusivity—he gave sauerkraut to the officers’ table only, but not to the main crew. The crew looked on enviously, until Cook relented, allowing the crew to eat sauerkraut one day a week. Soon he had the entire crew eating sauerkraut...