Poor Charlie's Almanack

"Poor Charlie's Almanack: The Wisdom of Charlie Munger" Reading Notes | Core Concepts of Investment Research Institute Multidisciplinary Thinking Models
The most important examples of these models include the redundancy backup model in engineering, the compound interest model in mathematics, the critical points, overturning moments, self-catalytic models in physics and chemistry, the modern Darwinian synthesis model in biology, and the cognitive bias model in psychology.

"The Wisdom of Charlie Munger" Reading Notes#

Core Concepts#

Multidisciplinary Thinking Models

The most important examples of these models include the redundancy backup model in engineering, the compound interest model in mathematics, the critical points, overturning moments, self-catalytic models in physics and chemistry, the modern Darwinian synthesis model in biology, and the cognitive bias model in psychology.

The thinking models of hard sciences and engineering are the most reliable thinking models on Earth.
Biology / Physiology
Psychology

Lollapalooza Effect

The phrase invented by Munger for factors that mutually reinforce and greatly amplify each other's effects is the "Lollapalooza Effect."

Checklist

The items on the investment checklist are as follows: What are the current price and trading volume? What is the market trend? When will the annual report be disclosed? Are there any other sensitive factors? Is there a strategy for exiting the investment at any time? Is the money used to buy stocks better utilized now or in the future? Is there enough liquidity on hand? Or must it be borrowed? What is the opportunity cost of this capital?

Charlie's Checklist

Dual-track analysis
Investment and decision-making checklist
Super simple common concepts
Psychology-based tendencies

Human Misjudgment Psychology#

List those psychological tendencies that, while generally useful, often mislead people.

Reward and punishment
Super response tendency
Liking/loving tendency
Disliking/hating tendency
Avoiding doubt tendency
Avoiding inconsistency tendency
Curiosity tendency
Kantian fairness tendency
Envy/jealousy tendency
Reciprocity tendency
Tendency influenced by simple associations
Simple psychological denial to avoid pain
Overconfidence tendency
Over-optimism tendency
Deprivation super response tendency
Social proof tendency
Contrast error response tendency
Stress influence tendency
Error in measuring availability tendency
Forgetting tendency when not used
Chemical error influence tendency
Aging - error influence tendency
Authority - error influence tendency
Nonsense tendency
Reasoning tendency
Lollapalooza tendency - the tendency for multiple psychological tendencies to work together to create extreme outcomes

Short Stories#

I just want to know where I will die in the future, so I won't go there.
How to find an excellent partner. Charlie says the best way is to make yourself worthy of her/him.
Hammerman: To a person holding a hammer, the world looks like a nail.
Pavlovian association
The "surfing" model: When a surfer successfully rides the crest of a wave and stays there, he can ride for a long time. But if he fails to catch the wave, he will be swallowed by the sea.
20 chances to punch in - this represents the number of investment opportunities you can have in your lifetime. Once you finish punching in, you can no longer invest.
"Shepico Syndrome"

It refers to the extremely corrupt situation in the New York Police Department that Frank Shepico joined. Shepico was nearly shot for refusing to go along with his corrupt colleagues.

Horse racing
Butt-kicking competition
"Scooping gray gold"

Key Chapters#

Chapter 2 Munger's Life, Learning, and Decision-Making Methods - Investment Principles Checklist
Chapter 4 Charlie's Eleven Talks - Human Misjudgment Psychology
Chapter 5 Articles, Reports, and Comments - "Never Enough," "High Financial Skills," "Black-hearted," and the Tragedy of the "Brain-dead" Country

Classic Quotes#

"In books, there are houses of gold."
Become friends with the greats who have passed away.
Charlie always starts thinking about problems in reverse.
First see the drawbacks, then attack the benefits.
Learn the truly important theories in all disciplines and form what is called "universal wisdom" based on them.
Fundamental human nature, basic truths, and core principles of many disciplines.
"Don't just see the money," choose "clients you would like to be friends with."
You must first be a subordinate before you can become a leader. People should learn to play various roles.
Philosophical studies that attempt to solve fundamental problems are an ideal activity.
Pythagorean philosophy is similar to Cicero's thoughts, as he believed people can be divided into three types: those who love wisdom, those who love reputation, and those who love self-interest.
Living in a secluded countryside helps cultivate reasonable values.
The best armor in old age is a life well spent before it. - Charlie Munger
If you borrow someone else's car, don't forget to fill it up before returning it.

This is a terrible mistake, and we hope you don't make the same mistake again. But who is without fault? We can overlook this matter. You did the right thing by admitting your mistake. If you try to cover up the mistake or delay confessing for a while, you will leave this company. But now we hope you stay.

Find what you are best at, and then persistently and joyfully do it well.
Think simply and act seriously.
In the business world, we often find that winning systems go to absurd extremes in maximizing or minimizing one or a few variables.
Conduct a comprehensive analysis of the internal operations of the company you intend to invest in and its larger overall "ecosystem." He calls the tools he uses to make this assessment "multidisciplinary thinking models."
Charlie believes that being prepared, patient, self-disciplined, and impartial are the most fundamental guiding principles.
One of Munger's most famous traits: Don't trade very frequently.

The secret to making big money is not in buying and selling... but in waiting.

Albert Einstein's advice: "Scientific theories should be as simple as possible, but not overly simple."
20 chances to punch in - this represents the number of investment opportunities you can have in your lifetime.
Graham reminds investors to make objective judgments about the value of stocks themselves and not to rely on the manic-depressive behavior common in financial markets.
Quickly eliminate things that should not be done, then launch a skilled, interdisciplinary attack on things that should be done, and then, when the right opportunity arises - only when the right opportunity arises - take decisive action.
Emphasize knowable factors.
We just lower our heads and do our best to deal with the headwinds and tailwinds, reaping the results every few years.
Regarding investment, we have three options: we can invest, we cannot invest, or it is too difficult to understand.
Charlie knows that there is no such thing as a risk-free investment project; he looks for those with very low risk and easy to understand.
(Buying) great companies at fair prices is better than (buying) ordinary companies at extremely low prices.
Bad results are acceptable (because some outcomes are beyond their control), but being unprepared and making hasty decisions are unforgivable, as these factors are controllable.
Investing is like playing baseball; to increase the score on the scoreboard, you must focus on the field, not the scoreboard. - Warren Buffett
Following the crowd will only bring you closer to the average (only achieving mediocre performance).
Master the thinking models of various disciplines proficiently.
Act only within your clearly defined circle of competence.

You must figure out what your skills are. If you want to play games that others play well and you know nothing about, you are destined to fail. That is a certainty. You must figure out where your strengths lie and compete within your circle of competence.

Understand human nature, the state of the world, how to think rationally, and most importantly, how to live a more upright, happy, and kind life.
We make money by remembering the obvious, not mastering the profound. We never try to be very smart, but we continuously try not to become fools.
Do not deal with door-to-door salespeople.
Success means you must be very patient, yet able to take action when you know it is time to act.
You must have a strong interest in understanding the reasons behind what is happening. If you can maintain this mindset over the long term, your ability to focus on reality will gradually improve.
Stock options not only increase a company's costs but also dilute equity.
When bad people become wealthy, they gain tremendous political power, and you cannot stop them from doing bad things, so the key is to nip such things in the bud.
You must know the important theories of important disciplines and use them frequently - use them all, not just a few.
Many people absurdly cling to wrong ideas. Keynes said, "Introducing new ideas is not very difficult; the hard part is clearing away the old ideas."
The dangers brought by computers are numerous. People calculate too much and think too little.
Every day when you get up, strive to be a little smarter than you were before. Complete your tasks seriously and excellently.
Understanding everything is very difficult, but if you cannot understand it, you can hand the problem over to a smarter friend.
Carson's research method is to think about the problem in reverse. That is, to solve for X, you must first study how to get non-X.

Emphasizing reverse thinking: He is always committed to seeking evidence to disprove his existing theories, no matter how much he cherishes that theory, no matter how hard-won that theory is.

Avoiding life's traps

If you can keep your head when all about you are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you, but make allowance for their doubting too,
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise;

If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!

——Excerpt from the poem "If" that Charlie has always appreciated.

Scale Advantage

Winner takes all situation
The steel required for the surface of the oil tank will increase at a square rate, while the capacity of the oil tank will increase at a cubic rate. In other words, when you expand the oil tank, you can get more volume with less steel.

Promotional techniques: Effective promotional techniques, new media communication and promotion;
Information advantage: Having high visibility to gain scale advantage;
Social proof: From psychology;

Before becoming a leader, success is about developing yourself. When you become a leader, success is about helping others develop.
Business tips: Never let anyone stand between you and your customers or suppliers.
If you can't be first or second, we prefer not to do it.
Being too large has disadvantages

Reducing scale and increasing specialization can bring you significant advantages. Bigger is not always better.
Companies are not always winners - after a business grows, bureaucratic tendencies emerge, leading to perfunctory situations - this is also human nature.
The downside of large scale has always been that it leads to large, clumsy bureaucracies.

Establishing the right incentive mechanisms is a very, very important lesson.
Generally speaking, betting on the quality of the business is more prudent than betting on the quality of the management.
The effect of taxation

Holding stocks of great companies for the long term can add a lot of wealth just from paying less income tax.

One-time consumer products have huge sales.
Once you spot an opportunity, go all in.
Three basic principles

Don’t sell things you wouldn’t buy yourself.
Don’t work for people you don’t respect or admire.
Only work with people you like.

You don’t need to know everything; just absorb the best thoughts from various disciplines.
Aroma can greatly promote consumption. So taste is extremely important.
In addition to utilizing multidisciplinary thinking models from different disciplines, I also want to add that you should be wary of severe ideological biases.
What a person wants, they will believe.
The five elements of success are focus, acuity, order, innovation, and communication.
If you lack this method of acquiring various major models and using them in combination, you will repeatedly fail.
The secret to success is to do simple things, not to solve difficult problems.
What each faction says aligns with their natural biases.
When you don’t understand and have no relevant skills, don’t be afraid to say so.
His teaching method is very clever - because he doesn’t directly instill this principle in me, but rather lets me experience it through thinking. I must think for myself to understand.
The tendency to commit and maintain consistency. If you understand a principle through thinking, you will remember it better.
He is good at using clever metaphors to effectively convey his points.
To persuade others, using a bit of humorous metaphor is very helpful.
To persuade a person, starting from that person's interests is the most effective.
Master those principles that are obviously important and obviously correct.
The principle of operant conditioning - that is, people will repeat their last successful activities.
Einstein once summarized this well: "Everything should be made as simple as possible, but not too simple."
It is wrong for teachers to teach students some principles without giving reasons or explaining them very little!
The trick to learning, but relying solely on this one lecture is not enough. The correct approach should be to write a book.
In terms of social psychology, the more people understand the various tendencies revealed by it, the weaker the effects of these tendencies will become;
People should avoid strong political biases, as they drive many people insane.
The best way to simplify tasks is generally to first solve the obvious big problems.
Only mathematics can reveal the true nature of science, as mathematics seems to be the language of God.
Just thinking positively is not enough; you must engage in reverse thinking.
Every profession ultimately involves deceiving outsiders.

The real big effects, namely the Lollapalooza effect, usually occur under the combined action of several factors.
Essentially, the business we want to do is to create and maintain conditioned reflexes. The trademark name and image of "Coca-Cola" will play the role of a stimulus, and purchasing and drinking our beverage is the response we desire.
How do people create and maintain conditioned reflexes? Well, psychology textbooks provide two answers: (1) through operant conditioning; (2) through classical conditioning, commonly referred to as "Pavlovian reflex."
Men's brains crave the drink held by the beautiful woman they cannot have.
Combining the following factors, (1) Pavlovian conditioning, (2) strong social proof effects, (3) a drink that tastes great, refreshes, is cool, and can trigger operant conditioning, the tremendous synergy produced will boost our sales for a long time.

Competitors copying our taste will not hinder us from achieving our goals.
We must avoid the situation where consumers feel bored after drinking the beverage.
We must avoid losing our strong trademark name.
Avoid the adverse effects of jealousy.
Be true to your name.
Once the taste of our brand occupies a new market, we must avoid making significant changes to the product's taste suddenly.

The psychology of higher education lacks interdisciplinary integration.

The situation of psychology and other disciplines being completely disconnected is very serious.

Achievement depends on four factors: first self-criticism, then curiosity, focus, and perseverance.
Fools have imagination but lack knowledge; scholars have knowledge but lack imagination.
True courage is not the brutal violence of a vulgar hero, but the steadfast determination of virtue and reason.
What kills knowledge is not ignorance, but the ignorance of ignorance.
To achieve the best results

We must let students learn a large amount of interdisciplinary knowledge, master all necessary skills that can be applied flexibly, have the ability to synthesize and skillfully use various knowledge based on actual situations, and prove the positive and reverse thinking techniques used in algebra problems, along with the lifelong habit of checking the "checklist."

If the truth contradicts a person's interests, that person will find it hard to accept the truth.
Compared to honest transactions of equal scale, the stimulating effect of undisclosed embezzled money on consumption is greater.
Companies that need new machines but have not yet purchased them are already spending money on them.
It is difficult to get people to understand things that conflict with their interests.
The excessive pursuit of geometric growth by all humanity, on a finite Earth, ultimately ends in painful failure.
Pleasure is the greatest motive for sin. - Plato
"If you want to persuade others, appeal to their interests, not to reason."
Economics always emphasizes interdisciplinary research more than other soft sciences.
Opportunity cost is a superpower.
Incentive mechanisms are also a superpower.
"Tragedy of the Commons"
Adam Smith was an extremely outstanding thinker and an extremely outstanding writer.
"Hammerman Syndrome"
Overemphasizing the importance of measurable factors while underestimating the importance of unmeasurable factors.

In fact, everyone (1) overemphasizes the importance of factors with relevant data because they allow people to use the statistical techniques learned in higher education, and (2) does not consider those potentially more important factors without relevant data.

Whatever thoughts he needs, he picks for himself.
Absorb the essence of all disciplines, point out the sources of reference, and use all knowledge in the simplest way possible.
Extreme success is likely caused by the following factors working together

Maximizing or minimizing one or two factors.
Adding some successful factors to achieve greater effectiveness, which is often nonlinear, reminiscent of theories about critical points or critical substances in physics.
Fully utilizing several advantages.
Riding certain major trends.

The psychological factor of "reciprocity tendency."
Self-reflection destroys the ideas you love and have worked hard to obtain.
Roughly correct is better than precisely wrong.
If you want to increase sales, the correct approach is to raise prices, for example:

Luxury goods: Raising prices can enhance the "show-off" function of luxury goods; for example, after the price increase, it seems to improve performance in the eyes of some consumers with a show-off mentality.
Non-luxury goods: Higher prices are perceived to mean better quality. This approach is particularly applicable to durable industrial products.
Raise prices and use the extra profit legally to improve product performance or enhance the sales system.
Raise prices and use the extra profit illegally or unethically to promote sales, such as through bribing trading brokers or other harmful practices to end consumers - for example, sales kickbacks for open-end funds.

No bread, no law; no law, no bread.
The future belongs to those who can rise above the constraints of the Earth.
Human society can only develop after inventing the method of invention; similarly, you can only progress after learning the method of learning.
Learn all the important principles of all important disciplines.
If your correctness makes other dignified people feel embarrassed, you may provoke a strong sense of revenge in others.

It is best to learn to hide your insights.

If a problem is difficult to solve, using reverse proof often makes it easier to resolve.
Be very careful to guard against strong ideologies, as they pose a great danger to your precious mind.
I feel I am not qualified to hold an opinion unless I can refute my position better than my opponent.
You don't need to have hope to persist.
Self-pity is of no help; self-pity always has negative effects.
What should be avoided is being driven by perverse incentive mechanisms.
Perverse working relationships should also be avoided.
You should especially avoid working under people you do not respect or do not want to be like.
Develop the habit of checking the checklist.
Let the best players play long games.
Every misfortune is a good opportunity to learn. People should not sink into self-pity but should use every setback to improve themselves.
If a person cannot control themselves, freedom cannot be discussed.

Self-discipline is freedom.

What troubles people is not things, but their views on things.
Always expect trouble to come and be prepared for how to deal with it when it arrives.

Prepare for the worst, and you will be safe.

Complex bureaucratic procedures are not the best systems for civilized societies. A better system is a seamless, non-bureaucratic web of trust.
What you should pursue in life is to cultivate a seamless web of trust as much as possible.
My sword is passed on to those who can wield it.
An important management principle is "establish the right incentive mechanisms."
Prevent loopholes. Institutional design must also adhere to the following principles: avoid rewarding things that are easy to fake as much as possible.
Countermeasures for the super response tendency of rewards and punishments are as follows:
(1) If the professional advice offered by a consultant is particularly beneficial to him, you should be especially wary of that advice;
(2) When dealing with consultants, learn and use the basic knowledge of the industry your consultant is in;
(3) Review, question, or change the advice you receive.
Bad behavior that gets rewarded is particularly easy to become a habit.
Some people spend money to buy status, some make money from status, and some do both.
The consequences of liking/loving tendency
(1) Ignoring the shortcomings of the object of affection and being compliant with it;
(2) Favoring those who remind oneself of the object of affection;
(3) Distorting other facts for the sake of love.
Politics is the art of properly handling hatred.
The consequences of disliking/hating tendency
(1) Ignoring the merits of the object of hatred;
(2) Hating those who remind oneself of the object of hatred;
(3) Distorting other facts for the sake of hatred.
Maintaining many good habits in life, avoiding or quitting many bad habits, is the wise way to live.
An ounce of prevention is worth a pound of cure.
The correct education should be a long process of improving cognitive abilities so that we become wise enough to destroy those wrong ideas retained due to the tendency to refuse change.
Reciprocity tendency: Humans also have extreme tendencies to repay kindness and retaliate.
The standard method to defuse excessive hostility is for people to delay their reactions.
Be wary of flattery from salespeople.
Cialdini excellently demonstrated: "Experimenters" have the ability to mislead people by inducing their subconscious reciprocity tendencies.
What Cialdini's experimenters did was make small concessions, and then the other party made small concessions too. Because Cialdini's subjects made this reciprocal concession subconsciously.

Just like Lu Xun's "Opening a Window":
Lu Xun said that if a room is too dark, and someone proposes to open a window, they will inevitably face opposition. But if someone suggests tearing off the roof, they will come to mediate and agree to open a window.

Tendency influenced by simple associations
The correct countermeasure to avoid doing foolish things because of past successes is:
(1) Carefully examine each past success, identify the random factors within those successes to avoid being misled by them, thus exaggerating the probability of success for the new action planned;
(2) Look at what new dangers the new action will encounter that did not appear in past successes.
Hatred and dislike can also cause cognitive errors due to simple associations.
The correct countermeasure is to consciously cultivate the habit of welcoming bad news.
Stay wise and informed.
Tendency influenced by simple associations

When buying lottery tickets, if the numbers are randomly assigned, the bets placed will be fewer, while if the numbers are chosen by the player, the bets placed will be more. This is very irrational.

The "endowment effect," which over-praises one's personal belongings, reinforces people's love for their conclusions.
The correct countermeasure to prevent this foolishness is to downplay the impression of the interview and value the applicant's past performance.
Deprivation super response tendency
The harm caused by loss is much greater than the pleasure brought by gain.
Countermeasures against extreme ideologies: Build a culture of extreme politeness.
Social proof tendency
For parents, rather than reprimanding their children, it is better to control the quality of their friends.
People are most easily influenced by social proof tendency when they feel confused or under pressure, especially when they are both confused and under pressure.
Contrast error response tendency
Often used to extract more money from customers purchasing goods and services.
A small mistake can sink a big ship.
Error in measuring availability tendency
The human brain tends to overestimate the importance of easily available things, thus exhibiting the availability - error in measurement tendency.
The main countermeasures to avoid being influenced by availability - error in measurement tendency

Usually act according to procedures, including using checklists that are almost always very helpful.
Especially emphasize the practice of looking for contrary evidence.
Seek out and hire knowledgeable, skeptical, and articulate people to play the role of the opposing viewpoint.

Constructively applied to:
(1) Persuading others to reach the correct conclusion;
(2) As a tool to enhance memory, linking vivid images one after another with things people do not want to forget.
In fact, the great orators of ancient Greece and Rome used vivid imagery as a memory aid to speak fluently and coherently without notes.
The main countermeasures to avoid being influenced by availability - error in measurement tendency

Flight simulators
Wise people will practice all useful but rarely used skills throughout their lives, most of which come from other disciplines, and regard this as a responsibility for self-improvement.

People can reduce the influence of the forgetting tendency by being diligent.
The main countermeasures to avoid being influenced by availability - error in measurement tendency
Continuously thinking and learning with joy can somewhat delay the inevitable decline process.
The main countermeasures to avoid being influenced by availability - error in measurement tendency
Be very cautious about who you give power to, as once authoritative figures come to power, they will receive help from the authority - error influence tendency, making it difficult to overthrow them.
Reasoning tendency
German-style large enterprises have a very simple rule: you must clearly explain who will do what, when, where, and why.
Things that operate well, if encouraged and supported, usually perform better;
A business of re-insuring re-insurance
Buffett is a stock picker, Munger is a skeptic, a doubter, and Buffett tests his ideas through him.
The requirement for working with others is that you must clearly articulate your thoughts; just this rule can benefit you greatly.
No problem, this is a good company.
But is its stock price low enough?
Is its management composed of people that Munger and Buffett are satisfied with?
If the stock price is low enough to be purchasable, is it normal for it to be so cheap?
In Munger's words: "What is the catch behind this?
Are there any hidden dangers that I am not seeing now?"
Most investment managers only compete in the public stock market. That is just a zero-sum game.
We love making money for those who have trusted us long ago, when we were young and poor.
Accounting standards must make it difficult for fools and fraudsters to fake profits and net assets.
Set a margin of safety.
The phenomenon of undisclosed embezzlement can be amplified and cause significant macroeconomic consequences, as long as the phenomenon of embezzlement continues for a long time, both victims and wrongdoers will believe they have become wealthy.

A book that changed my life - "Poor Charlie's Almanack." What if life came with a manual? An accurate guide to health, wealth, and everything you need to know.

What if life came with a manual? An accurate guide to health, wealth, and happiness. In today's love article, I will delve into my favorite book and try to summarize the key learning points from all 532 pages.

I have read many books by many authors, and today I want to talk about the most important book in my library, "Poor Charlie's Almanack: The Wisdom and Wit of Charles T. Munger," which is the closest thing I have found to a manual for life.

Charlie Munger is Warren Buffett's long-time partner at Berkshire Hathaway. Although Munger is not as famous, his influence is no less than that of Buffett. Bill Gates said that Charlie Munger is "the clearest thinker I have ever met," while Buffett calls him "the ideal partner who is both smart and wise."
Poor Charlie's Almanack contains the best advice given by Charlie Munger over 30 years, including 11 commencement speeches and roundtable talks. He covers a wide range of topics, including rationality and decision-making, investment, and how to live a good life.
I will arrange this video according to the key concepts and learning points collected in the book. I will divide the article into five parts, similar to the key themes of the book: 1. Rationality and Decision-Making, 2. Understanding and Avoiding Psychological Biases, 3. Building Mental Models, 4. Understanding Investment and Business, 5. Character and Living a Good Life. I will break down each part into different points, so let's get into the first part on rationality and decision-making.

1. Rationality and Decision-Making#

When asked to describe himself in one word, Charlie Munger chose "rational." He knows that he, like everyone else, has biases, and he trains himself to recognize cognitive biases and how to limit their influence.

Objectivity and Changing Ideas#

If you want to make better decisions, you need to seek the truth - what is really happening in the world, not what you want to believe is happening. Recognizing the truth is often painful - it may contradict your previous beliefs or desires, but facing reality is always better than self-deception.

First, recognize that self-deception is easy.
Second, you should gladly accept other viewpoints. You should seriously consider the arguments of others. In fact, strive to express their viewpoints better than they can themselves.

Third, after considering other viewpoints, you should be willing to change your mind at any time. Be willing to abandon your favorite ideas. Munger says that any year in which he does not abandon a favorite idea is a wasted year. Charlie also emphasizes the importance of avoiding extreme ideologies and blindly following ideas without understanding their pros and cons, and being able to make wise decisions after understanding the duality of an idea or situation.

Practice Divergent and Reverse Thinking#

Social proof bias refers to people's tendency to believe what others believe to enhance social cohesion. This leads humans to think like sheep, even if the ideas they believe in are wrong. Practicing reverse thinking can spark new ideas that may be more correct than others' ideas.
Munger and Buffett often do this in their financial management. If you adopt the same investment practices as others, you can only achieve average returns. To achieve outstanding returns, you need a different way of thinking.

Inversion, Always Invert#

One way to practice divergent thinking is to invert your perspective on a situation and view it from the opposite angle. This can reveal new insights. "Many difficult problems can only be best solved by addressing them from the opposite side."
Here are some examples of inverted thinking:

Don’t think about how something will succeed; think about how it will fail. "What could possibly go wrong?"
When physicists tried to modify Maxwell's electromagnetic laws to align with Newton's laws of mechanics, Einstein inverted the situation - he modified Newton's laws to conform to Maxwell's laws, leading to the discovery of special relativity.

Understand Your Circle of Competence#

To make the right decisions, you need to know what you are good at and what you are not good at. Munger calls this your "circle of competence" - knowing where your boundaries are and not stepping outside this circle.
Here is a detailed explanation of this idea:

"Knowing what you don't know is more useful than becoming smarter."
"People are all trying to become smarter - what I do is not become stupid, but that is harder than most people think."
"You must figure out what your talents are. If in the game you are playing, others have talents and you do not, you will lose."
"Having a manager with an IQ of 160 is great - unless he thinks an IQ of 180 is required."

In terms of investment, both Charlie Munger and Warren Buffett know what they are good at and what they are not good at. They are unwilling to step outside their circle of competence. For example, they have three baskets when investing: yes, no, and too difficult to understand.

First, Munger looks for businesses that are easy to understand, dominant, self-sustaining, and thriving in all market environments. Most businesses do not meet this standard.
Certain industries, such as pharmaceuticals and technology, fall into the "too difficult to understand" category. Munger finds the dynamics of software and computer chips completely beyond their expertise, so they completely reject them. Munger and Buffett do not try to understand the obscure - they just try to remember the obvious.
"Hot" trades and IPOs are rejected (Munger believes these trades are overhyped and overpriced).

Learn from Others' Mistakes#

Munger and Buffett constantly read and learn, one reason being to learn from others' mistakes. You can learn indirectly from others' terrible experiences to avoid the same fate.

Reduce Complexity#

Charlie strives to simplify complex situations into the most basic, least emotional fundamental principles. However, in pursuing rationality and simplicity, he carefully avoids what he calls "physics envy," the universal human desire to simplify extremely complex systems (like those in economics) into one-size-fits-all Newtonian formulas. Instead, he faithfully follows Albert Einstein's advice: "Scientific theories should be as simple as possible, but not overly simple." Or in his own words, "What I oppose is being very confident that you know for sure that your specific actions will bring more benefits than harms. You are dealing with a highly complex system where everything interacts."

2. Understanding and Avoiding Psychological Biases#

Munger is a student of human psychology, and he lists 25 psychological biases that distort your view of the world and affect your decision-making. This is a very important topic that I will elaborate on in my blog and videos, but here are some notable biases:

Incentive Bias: Personal interests drive human behavior. If someone is rewarded for doing something, they will do it repeatedly.
Avoiding Doubt Tendency: Doubt is painful and causes confusion and stress. When you feel doubt, you will make decisions faster than if you had thought deeply.
Avoiding Inconsistency Tendency: People are reluctant to change. This applies to personal behavior, beliefs, relationships, and commitments. Once people believe something, they often find it hard to change their minds.
Simple Association Effect: When two items are placed together, the quality of one item transfers to the other. If you like something, you will also like other things associated with it. And vice versa.
Deprivation Super Response: We hate things being taken away. Being deprived of things triggers strong backlash.
Social Proof: You think you can independently control your behavior, but in reality, you are just acting according to others' observations. You think about their thoughts and mimic their actions.
Authority Misleading: Humans are mostly born followers, with only a few truly leading. People tend to follow the directives of authority, even blindly.
Lollapalooza: This is a "super tendency" - it involves the convergence of multiple tendencies that mutually reinforce and lead to extreme outcomes. Examples include people joining extreme cults and the Milgram shock experiment.

The best way to prevent biases is to understand what biases are and how they affect cognition, then create a checklist to check each bias and think about whether it has influenced your current judgment.

3. Building Mental Models#

Charlie Munger has a deep understanding of the world, and he refers to the main ideas from various fields as "mental models." He emphasizes the importance of multidisciplinary learning, connecting main ideas to form a grid, allowing these ideas to interact. This is similar to the concept of interweaving ideas in learning.
An inferior way of learning is to learn isolated facts that exist completely in independent units. You can recite facts but do not understand the ideas behind them, nor can you apply these ideas to solve real-life problems. This is the failure of rote memorization, which is common in many countries' education systems.
Munger believes that an excellent learning method is to learn a large number of mental models and then assemble them into an interconnected grid or network.

What are Mental Models?#

You can think of "mental models" as important ideas within a field that have broad relevance beyond that field.
For example, the concept of "critical mass" comes from physics. In the field of physics, critical mass specifically refers to the mass required to sustain a nuclear chain reaction - if the mass is below critical mass, the chain reaction will not self-sustain. But this concept generally applies beyond physics - for instance, it can apply to the minimum mass needed to start any virtuous cycle, such as the minimum number of users needed for a social networking application to launch.
Other examples of mental models include "margin of safety" in engineering, "compound interest" in mathematics, and "feedback loops" in biology.

Learning Models from Different Fields#

The best ideas in the world exist in every major field. No single academic department can solve all problems. To become the most versatile problem solver, you need to collect mental models from each major field of study.
Modern academia tends to divide research fields into isolated departments. Ideas are narrowly defined, and experts within a field are mostly limited to their own area. Munger believes this is why literature professors can be respected in their field but considered unwise in other aspects of life.
When you combine models from different fields, it can produce astonishing results that others do not see.

The Grid of Mental Models#

As you collect more of these ideas, you will begin to connect them. For example, you might find that stock market fluctuations are a combination of psychological biases (loss aversion, social proof), biological feedback loops, physical critical mass, and mathematical random walks. These interconnected ideas form the grid of mental models.

4. Understanding Investment and Business Strategies#

In "The Poor Charlie Yearbook," Munger does not directly discuss the decision-making of Berkshire Hathaway, but he does share the general investment philosophies and practices that have led to their success over the decades.

Be Patient but Decisive#

Warren Buffett and Charlie Munger are successful investors because they can patiently wait for excellent opportunities. Unlike many investors, when they do not see excellent opportunities, they do not mind maintaining a wait-and-see attitude, even for years. However, when they do see an excellent opportunity, they go all in.
Warren Buffett once said in a business school speech that if everyone were given a punch card with 20 holes, and they could only make 20 investments in their lifetime, everyone would make better investments. Once they have punched all 20 holes, they can no longer invest. In this case, investors would be more cautious about which investments to make and would place big bets on the few investments they discover.

Look for Quality Companies#

In addition to looking for cheap deals, Munger also looks for high-quality companies. In summary, these are profitable companies with sustainable competitive advantages and good growth prospects.
The quality of a company may even surpass its cheapness - "excellent companies sold at reasonable prices are better than ordinary companies sold at reasonable prices." A company with an 18% return on capital over twenty years can yield astonishing results, even if the price you pay initially seems expensive.

Moats and Competitive Advantages#

Munger and Buffett believe that the main factor for great companies is a lasting competitive advantage - they call it a "moat." Just as a moat protects a castle, a competitive advantage allows a company to withstand the threats posed by competitors or changing markets. Examples of moats include loyal brands (like See's Candies) or large distribution systems that are hard to compete with (like Coca-Cola). Therefore,
Berkshire Hathaway advises its subsidiary companies to widen their moats every year. This does not necessarily mean earning more profits every year, but rather enhancing the strategic position of the company to meet long-term challenges.

Managing Affairs#

The father of value investing, Benjamin Graham, never considered management quality in his value investing principles, partly because the audience for his book was the general public who had no opportunity to talk to or assess management. He was also inherently distrustful of management.
But Munger and Buffett believe management can make a huge difference. For example, the famous CEO Jack Welch brought tremendous change to General Electric, while the manager of Westinghouse Electric did not. Munger looks for management that is 1) exceptionally skilled and 2) trustworthy.

Company Valuation#

Of course, to achieve substantial returns, it is not only necessary to find excellent companies but also to find excellent companies at reasonable prices. If the price is too high, even excellent companies can be poor investments.
Take horse racing as an example. Based on the horse's records, weight, health, etc., the best horses are often obvious, and they are clearly better than sick horses with poor records. But the odds have already reflected this - the odds for the best horse might be 2 to 1, while the odds for the bad horse might be 50 to 1. Which is more cost-effective? It is still unclear.

5. Character and Living a Good Life#

In summary, Charlie Munger is considered a person of strong character - diligent, humble, and constantly learning. He often talks about the qualities of a happy and productive life in his speeches.

How to Live Happily#

Keep your expectations low.
Have a sense of humor.
Immerse yourself in the love of friends and family.
Figure out the lifestyle you want most. You might indeed work 80 hours a week for 15 years to become a partner in a law firm, just to gain the right to do more of the same work. But if you don't do that, it may not suit you.
To get what you want, first strive to earn what you want.
Avoid self-pity. Self-pity only backfires and does not change your situation. If you do not indulge in self-pity, you will have an advantage over many people, as it is a common reaction. Munger has a friend who carries a stack of business cards; when he hears self-pitying comments, he gives that person a card that reads: "Your story touched my heart. I have never heard of anyone who has encountered as much misfortune as you."
Surround yourself with people you admire. Do not work under people you do not want to become.
Work hard. Munger likes the word "diligence" because its common meaning is "sit down until you finish it."
Anticipate trouble. You will know how to avoid it.

Moral Character and Honesty#

Munger cares deeply about reputation - the reputation of Berkshire Hathaway, its subsidiaries, and his own. He wants the people he works with and the managers of the companies he wants to acquire to be honest and upright. Companies with trustworthy brands have competitive advantages that can be maintained long-term. Trust takes a long time to build, but can disappear in an instant.

"When you borrow someone else's car, you must fill it up before returning it." People will notice these small things.
Past records are important; if you can cultivate an indispensable quality like honesty, you will have a tremendous advantage in the world.

Continuous Learning#

Munger and Buffett are known for their curiosity and voracious reading.

"In my lifetime, every smart person I have known (across a wide range of topics) has been a constant reader - none, zero. The amount Warren reads and the amount I read will surprise you. My children all mock me. They think I am a book with a few legs sticking out."
"You need to have a strong interest in understanding the reasons behind things happening. This mindset, if maintained over the long term, will gradually improve your ability to focus on reality. If you do not have this mindset, even if your IQ is high, you are destined to fail."
Every day, strive to be a little smarter than you were when you woke up.

Work Hard#

Without effort, there will be no success.

Munger believes that passion is more important than talent or intelligence. Many companies under Berkshire have people who are passionate about their work.
Munger and Buffett are known for their voracious reading. But just reading is not enough; you also need the courage to choose the right ideas and do good with them.

Choosing a Career#

What should young people look for in their careers? According to Charlie, you should try to follow three basic rules, although it is nearly impossible to satisfy all three, but you should still try:

Don’t sell things you wouldn’t buy yourself.
Don’t work for anyone you don’t respect or admire.
Only work with people you enjoy working with.

Old Age#

According to a passage from Cicero's "On Old Age":

"The best armor against old age is to live a life in Madrid before it. A life devoted to pursuing useful knowledge, glorious deeds, and practicing virtue; those who strive to improve themselves from a young age will reap the happiest fruits in old age; not only because these will never leave a person, even in extreme old age; but also because the conscience witnesses our life spent in the tropics, combined with the memories of past good deeds, brings inexpressible care to the soul."

If you want to watch, here is an interesting complete graduation speech video:

Five lessons from Charlie Munger's "Poor Charlie's Almanack."

The key to secular knowledge is objectivity and a multidisciplinary approach.

"For a person holding a hammer, every problem looks like a nail."

"For a person holding a hammer, there is a simple solution - having rich skills across multiple disciplines (more tools)."

"Great ideas in each discipline have the most significant impact. There are not many of them, and their interactions are not complex, so you cannot figure them out."

"Look for truly effective great ideas from all directions."

Learning history can bring enormous benefits throughout your life.

Charlie first focuses on what should be avoided, that is, what should not be done. He does this by studying history. In history, you can also find success and replicate those ideas.

"I believe that if you were friends with Adam Smith, you would learn better. It sounds interesting to be friends with 'great deceased figures,' but if you spend your life befriending deceased great figures with the right ideas, I think it will elevate your life and education."

"Cicero has a saying: If a person does not know what happened before they were born, their life is like a child."

"Seek correct judgments by collecting instances of erroneous judgments."

Resigning is not a bad thing.

Quitting is often understood as giving up - unwilling to put in the effort. While effort sometimes has its time and place, it is also important to ensure that your efforts are not in vain.

"Life is like a poker game; when you hold your favorite hand, sometimes you have to learn to fold."

"The inability to cope with cognitive denial is a common reason for people's bankruptcy. You have made a huge commitment to something. You have invested energy and money. The more you invest, the more the principle of consistency will make you feel, 'Now it must work. If I invest a little more, it will work.'"

"People go bankrupt because they cannot stop, rethink, and then say, 'I can give up everything and continue to fight. I do not need to obsessively pursue this thing, or I will collapse.'"

To get something you want, the most reliable way is to make yourself worthy of it. What you want to gain, you should also give.
The right love should be based on admiration, and we should love those wise predecessors who educate us.
Gaining wisdom is a moral responsibility: continuous learning.
Human society can only develop after inventing the method of invention; only by learning the method of learning can one progress.
Having a multidisciplinary mindset allows for efficient and mature living.
Adopting reverse thinking often makes problems easier to solve.
Words must be followed by actions, and diligence is essential.
Reverse thinking. Reverse thinking can help you solve problems that positive thinking cannot address.
For example, what will cause us to fail in life, what should we avoid? Laziness and broken promises. Even excellent people can end up in dire straits if they make empty promises. Therefore, we should avoid laziness and broken promises. Another thing to avoid is extreme ideological consciousness, as it can lead to irrationality and trap people in a dangerous ideological mindset. I have a rule for myself: I feel I am not qualified to hold an opinion unless I can refute my position better than my opponent.
Another rule for others is: You do not need to have hope to persist.
The reason your life is going poorly: you are overspending your money for enjoyment.
Overall, jealousy, resentment, hatred, and self-pity are disastrous mental states. Excessive self-pity can lead to near paranoia, and paranoia is one of the hardest things to reverse; do not fall into the emotion of self-pity, as it is of no help and the most useless. If you can avoid it, your advantages will far exceed those of others.
To persuade others, appeal to their interests, not to reason. Even when your motives are very noble.
Perverse incentive mechanisms have the power to control people's behavior, and people should avoid being influenced by them; reverse working relationships should also be avoided.
Be good at making lists and think systematically when doing things.
Maximizing inequality can often yield remarkable results. There are two types of people in the world: those with Planck knowledge, who truly understand and have the ability, and those with driver-type knowledge, who only master the skills of parroting.
If you want to excel in a field, you must have a strong interest in it. I can force myself to do many things, but I cannot excel in things I do not have a strong interest in.
Be a diligent person.
Avoid extreme ideologies.
Jealousy, resentment, hatred, and self-pity are disastrous mental states.
Avoid developing "self-serving biases" while allowing others to have "self-serving biases." If you want to persuade others, appeal to their interests, not to reason.
Avoid being driven by perverse incentive mechanisms.
Avoid working relationships that are contrary to your values.
Develop habits that allow you to remain objective and fair, and the habit of checking your checklist.
Maximizing inequality can often yield remarkable results.
If you want to excel in a field, you must have a strong interest in it.
Every misfortune in life, no matter how unfortunate, is an opportunity for exercise.
Always be prepared to face trouble.
Another point: Trust, mutual trust is the best system; build your own web of trust. (If a marriage contract is 47 pages long, it is better not to get married.)

Interactive eBook of "Poor Charlie's Almanack"

Link: https://www.stripe.press/poor-charlies-almanack/cover

The famous billionaire Charlie Munger recently passed away, and the American payment company Stripe has turned Munger's work "Poor Charlie's Almanack" into an online interactive eBook. Stripe has a dedicated website showcasing various classic interactive eBooks it has produced (https://press.stripe.com/), totaling 15 books, and the website and eBook effects are very cool.
Interactive eBook of "Poor Charlie's Almanack"

Link: https://www.stripe.press/poor-charlies-almanack/cover

"Poor Charlie's Almanack" In-Depth Reading Notes: A Comprehensive Analysis of Munger's Life Philosophy and Investment Wisdom#

"Poor Charlie's Almanack" In-Depth Reading Notes: A Comprehensive Analysis of Munger's Life Philosophy and Investment Wisdom

Statement: 1. The quoted content in this article is marked with references at the end;
2. The images in the article are all generated by Midjourney.

PART.01

Origin

I have long heard of this book, known as the "Bible of Value Investing," with over 2 million copies sold in China. I once bought a physical copy and skimmed through it, leaving little impression. Feeling the market warming up, I wanted to read it again using the card box note-taking method, hoping to gain something.

PART.02

Five-in-One Book Breakdown

(Swipe left and right for more)

PART.03

Main Content

This book consists of three main parts: Munger's biography, life, learning, and decision-making methods compiled by others, Munger's own talks and speeches, and media reports and comments.

1. Munger's Biography, Life, Learning, and Decision-Making Methods Compiled by Others

First, Munger's Biography: Introduces his life and background. His father was a local lawyer, he studied physics in high school, dropped out of college (math major), joined the U.S. Air Force as an astronomy officer, and after retiring, entered Harvard Law School, graduating and co-founding a law firm and partnership until he met Buffett.

Second, Learning and Decision-Making Methods: It elaborates on Munger's investment evaluation process, investment principles, checklists, and how to use "multidisciplinary thinking models" for business analysis and evaluation. It also explores the methods Munger employs in business decision-making, including his "Lollapalooza Effect" (the huge effect produced by the combination of multiple factors) and reverse thinking.

2. Munger's Own Talks and Speeches

First, Munger's Own Talks: Includes Munger's impromptu talks, covering his views on the keys to success, Berkshire Hathaway, investment advice, market commentary, and criticism of corporate management.

Second, Munger's Speeches: Contains 11 speeches by Munger on various occasions, covering universal wisdom, investment management, business relationships, charitable fund investment practices, and more. Personally, I believe this part is the essence of the entire book, where you can see a candid, rational, and straightforward teacher imparting wisdom to students, along with some ruthless criticism of accounting and derivatives at the time. Excerpts are as follows:

I believe that every time you see the term EBITDA (i.e., earnings before interest, taxes, depreciation, and amortization), you should replace it with "GP profit."

--- Chapter 3 P357

A large number of people absurdly cling to wrong ideas. Keynes said:

"Introducing new ideas is not very difficult; the hard part is clearing away the old ideas."

The spirit of not self-deceiving is the best spirit you can have. It is very powerful because it is so rare.

--- Chapter 3 P388

Many young businessmen ask us this question. It is a smart question: you see a wealthy old man and ask him, "How can I become like you?"

Every day when you get up, strive to be a little smarter than you were before. Complete your tasks seriously and excellently. Slowly, you will make progress, but this progress may not be fast.

But you can lay a good foundation for rapid progress... Move forward a little every day. In the end

—if you live long enough—most people get what they deserve.

--- Chapter 3 P400

Many young businessmen ask us this question. It is a smart question: you see a wealthy old man and ask him, "How can I become like you?"

Every day when you get up, strive to be a little smarter than you were before. Complete your tasks seriously and excellently. Slowly, you will make progress, but this progress may not be fast.

But you can lay a good foundation for rapid progress... Move forward a little every day. In the end

—if you live long enough—most people get what they deserve.

--- Chapter 4 P435

The model I like to use to simplify the concept of the common stock market is the pool betting system in horse racing. If you stop to think, you will find that the pool betting system is actually a market. Everyone goes to place bets, and the odds change based on the bets. The stock market is the same.

--- Chapter 4 P523

So if your professors do not teach you the correct interdisciplinary methods—if every professor wants to overuse his own model and discard the important models of other disciplines—you can correct that foolish practice yourself. Just because he is a fool does not mean you have to become one. You can learn models from other disciplines that can better solve problems. As long as you develop the right thinking habits, you can do this.

---- Chapter 4 P597

3. Media Reports and Comments

First, Articles, Reports, and Comments: Includes articles and comments about Munger and Berkshire Hathaway, as well as Munger's criticisms of accounting, stock options, financial institutions, and derivatives.

PART.04

A Great Treasure

One major treasure that Munger repeatedly emphasizes in the book is interdisciplinary thinking; I will summarize human misjudgment psychology under its psychological sub-item. In fact, the term "psychology" appears 259 times in the book's top 5 high-frequency words, highlighting its importance.

Below is a framework summarizing interdisciplinary thinking based on the book, including key theories mentioned in the book:

Chapter 11, "Human Misjudgment Psychology," is specifically written by Munger for this book, stating that "because of this, he considers certain psychological factors that lead to human error as the most important mental models for judging investment opportunities." He first lists 25 principles of misjudgment, and the next article will analyze them with examples from around us.

Please scroll up and down.

Super response tendency of rewards and punishments
Liking/loving tendency
Disliking/hating tendency
Avoiding doubt tendency
Avoiding inconsistency tendency
Curiosity tendency
Kantian fairness tendency
Envy/jealousy tendency
Reciprocity tendency
Tendency influenced by simple associations
Simple psychological denial to avoid pain
Overconfidence tendency
Over-optimism tendency
Deprivation super response tendency
Social proof tendency
Contrast error response tendency
Stress influence tendency
Error in measuring availability tendency
Forgetting tendency when not used
Chemical error influence tendency
Aging - error influence tendency
Authority - error influence tendency
Nonsense tendency
Reasoning tendency
Lollapalooza

PART.05

My Permanent Card

From the reading summary, I extracted my permanent card,

(Swipe left and right for more)

PART.06

Final Thoughts

"Poor Charlie's Almanack" is indeed a great treasure. I plan to divide it into two parts; the first part mainly introduces the main content and displays my permanent card, while the second part will analyze cases based on interdisciplinary models. If anyone has good suggestions, feel free to leave comments. Let's explore and treasure hunt together!

References

【U.S.】 Peter Kaufman, ed. Li Jihong, trans. "Poor Charlie's Almanack: The Wisdom of Charlie Munger." CITIC Press.

"Poor Charlie's Almanack" In-Depth Reading Notes 2: Reverse Thinking Helps You Avoid
Statement: 1. The quoted content in this article is marked with references at the end;
2. The images in the article are all generated by Midjourney.

Thanks in Advance

As of now, over 850 people have read the in-depth notes on "Poor Charlie's Almanack," and 28 fortunate friends have followed me. Thank you very much!

Among them, Shunshun is my first follower on my public account; thank you!

Just like a child focused on playing with sand on the beach, among thousands, a fortunate person comes to take a look, sit down, and chat. I hope everyone can leave suggestions in the comment area to avoid self-indulgence.

PART.01

Origin

In the previous in-depth notes on "Poor Charlie's Almanack," I mainly introduced its general content framework and core ideas. However, I feel that merely understanding the core ideas may have limited help for our learning, life, and work. I want to continue writing from Munger's perspective based on the thinking methods in the text, analyzing a case, posing questions in the process, applying its core ideas for analysis, and deepening understanding, hoping to help friends.

In light of this, I have also read three books: "The Munger Way," "Getting Smart," and "Mental Models" to expand my thinking.

PART.02

Case Analysis

I was shocked to hear that several stores of the well-known restaurant chain "Tian Tai" (Simply Thai) in Shanghai have closed down. It was once the pioneer of Thai cuisine in Shanghai, a "queue king" in large shopping malls, with the sound of calling numbers echoing.

The above image is from Interface News.

In a comment below a news article, I saw that one of Tian Tai's stores was offering a promotion of "Recharge 1000, Get 300 Free." If my family of three goes to this store for dinner on the weekend, and we see promotional ads and the manager's introduction saying, "This promotion is only for this weekend. You come often, it's a good deal," what should I do? Let's see my dialogue with Munger:

Dialogue with Munger 1

Fat Bookworm:
This "Recharge 1000, Get 300 Free" promotion is a great deal! I considered it with reverse thinking; only if the store closes down will I lose the 1000 yuan I recharged.

This brand is quite famous in Shanghai and has been operating for over 20 years. Looking at the occupancy rate and location, it should not close down, right?

The weekend promotion is about to end; I need to recharge! Don’t stop me!

Munger:
Fat Worm, calm down! There is nothing wrong with considering it with reverse thinking, but have you objectively evaluated the operating situation of this store?

You may have made common misjudgments, such as the super response tendency caused by inappropriate incentives, overconfidence tendency, over-optimism tendency, and stress influence tendency (due to the limited time of the promotion).

![Image](https://mmbiz.qpic.cn/mmbiz_png/k9ZHGe6bMuaMibF1hufv