Tuesday, 21 January 2014 - 20:00

 

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Seed Weekly - Charlie Munger: Poor Charlie?s Almanac

Over the Christmas break, I had the opportunity to read Poor Charlie’s Almanack – a compendium of insightful articles, essays about and talks from Charlie Munger.

Who is Charlie Munger? He is the partner of the better known Warren Buffett, chairman and CEO of listed Berkshire Hathaway. He has partnered Buffett for some 45 years. Munger, now 90 years old, is vice chairman of the Berkshire Hathaway and Chairman of Wesco Financial Corporation.

Munger is noted as an excellent thinker and this book gave some insight into how his mind works. Buffett said of him, “Charlie can analyse and evaluate any kind of deal faster and more accurately than any man alive. He sees valid weakness in sixty seconds.”

Munger has a systematic way of analysing problems and approaches to business analysis and assessment. Instead of making a standalone assessment of a company and its finances, he will rather conduct a more comprehensive analysis, calling the tools that he uses his “Multiple Mental Model”.

“You must know the big ideas in the big disciplines and use them routinely – all of them. Not just a few. Most people are trained in one model – economics for example – and try to solve all problems in one way. You know the old saying, “to the man with a hammer, the world looks like a nail.” This is a dumb way of handling problems.”

When properly collected and organised, his Multiple Mental Models (around 100 of them he estimates) provides a context or latticework that leads to remarkable insights as to the purpose and nature of life. His models supply the analytical structure that enables him to reduce the inherent chaos and confusion of a complex investment problem into a clarified set of fundamentals. Some of the more important models that he knows well and uses often include:

• Redundancy / backup, breakpoints and critical mass system model from engineering
• Compound interest, permutations, probability and decision tree model from maths
• Breakpoint / tipping moment / autocatalysis model from physics and chemistry
• Cognitive misjudgement model from psychology
• Accounting – double entry bookkeeping
• Microeconomics – scale and competitive destruction
• Chemistry

His most basic guiding principles and fundamental philosophy of life includes preparation, patience, discipline, and decisiveness.

As part of his decision making process, Charlie Munger firmly believes in using checklists for investing decisions. Such a checklist, not necessarily used by Munger, was outlined in the book and covered the following headings:

• Risk – all investment valuations should begin by measuring risk;
• Independence – only in fairy tales are emperors told they are naked;
• Preparation – the only way to win is to work, work, work and hope to have a few insights;
• Intellectual humility – acknowledge what you don’t know is the dawning of wisdom;
• Analytics rigor – use of the scientific method and effective checklists minimises errors and omissions;
• Allocation – proper allocation of capital is an investors number one job;
• Patience – resist the natural human bias to act;
• Decisiveness - when proper circumstances present themselves act with decisiveness and conviction;
• Change – live with change and accept irremovable complexity; and
• Focus – keep things simple and remember what you set out to do.

All in all, a very good outline for decision making from a very successful investor.

Kind regards,

Ian de Lange

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Tue, 21 Jan 2014

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