Poor Charlie’s Almanack
“There are answers worth billions of dollars in a $30 history book.”
- Charles T. Munger
I suspect that this book has done so already and will continue to produce such answers in the future. One thing I know for sure though, is that anybody who reads this book will come away with something profound from it.
I did an article a few weeks back where I shared a few thoughts on a small section of the book, Poor Charlie’s Almanack. This article will add to my view on this great book after going through my notes the past week.
The most logical place for me to start is the last chapter, chapter eleven, The Psychology of Human Misjudgment. The chapter is basically an in-depth summary of previous talks by Charlie at various times throughout his life and the chapter is an attempt to shore up a lifetime’s worth of knowledge into something more digestible and accessible for the reader.
The chapter is often said to be a favourite of whomever reads the book and for good reason. It touches on the very things that make us human in a very obvious but hard-to-swallow kind of way. There’s comfort and uncomfortableness to it. Ah-ha and duh moments.
Nobody likes to think they suffer fools and we all tend to blow more smoke up our own ass than is deserved but when reading these tendencies, as Charlie calls them you’re left laughing, crying, rejecting, accepting and just plain denying that any of this can happen to you. It does happen to you and it’s happened to humans for as long as we can imagine. Charlie just packaged it up into something for us all to see.
What are these tendencies? Well, there are 25 of them and in true Charlie Munger fashion I’ve made them into a checklist you can have for free. Just click on the pdf below.
These tendencies cover human psychology and they are our deep-rooted biases. Charlie likes to invert things when trying to solve problems and having a basic understanding of these biases for when you and others are falling prey to them is a surefire way for you to live a happier, wealthier life.
Will understanding these tendencies make you a millionaire? I can’t say for sure, there are too many other variables to consider but Charlie knows one thing for sure - they’ll certainly make your life easier. If all we can ask for in life is to not do stupid things, help people we care about not do them either and live a generally happier, richer (in every sense), stress-free life I think most people are going to take that.
Now because there are 25 of them to learn it’s not something that happens overnight. I’ve tried to learn a few and tendencies such as social proof are easy to see. Just go for a walk or take a few minutes out of your day at work and you’ll see how people just basically copy other people a lot of the time. In fact, just go on social media when a celebrity dies or when there’s some crisis and you’ll social proof in action. Sheep follow sheep.
But learning these 25 tendencies is really just the beginning, or rather, the end of the book. Let’s go back to some of Charlie’s other talks.
In talk one, The Harvard School Commencement Speech that Charlie made in 1986 he speaks of Darwin and his revolutionary evolution by natural selection theory. Charlie is convinced that this wasn’t attributed to his intelligence but rather, his ability to specifically look for disconfirming evidence of his beliefs. This is something that took him an incredible 20 or so years to do. Einstein too was very apt at this. This is in contrast to most people who staunchly hold onto their pre-existing beliefs no matter if they are working for them or not. This can be explained by a couple of Charlie’s tendencies, the inconsistency-avoidance & liking-loving tendencies.
“If you minimize objectivity, you ignore not only a lesson from Darwin but also one from Einstein. Einstein said that his successful theories came from "curiosity, concentration, perseverance, and selfcriticism.” And by selfcriticism, he meant the testing and destruction of his own well-loved ideas.”
- Charles T. Munger
Therefore if you want to succeed in life you need to challenge your own beliefs. Why should we remain married to any particular set of beliefs anyway? Bruce Lee has a great quote for those of us who struggle to adapt or change; “Flow, like water.” It’s just that easy.
Talks two & three are on the same subject with one being in 1994 and the other in 1996. The subject is, A Lesson on Elementary, Worldly Wisdom as it Relates to Investment and Management Business. For those who aren’t interested in investing or business management, I can assure you there’s more here than meets the eye. These were, along with the last chapter my most highlighted.
Charlie’s pretty famous for saying that you need to build your life around frameworks and mental models that are readily available in your mind at a moment’s notice. A latticework of theory ready to be put to use in a practical sense.
“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. You've got to have models in your head. And you've got to array your experience― both vicarious and direct-on this latticework of models.”
- Charles T. Munger
Failure to have these models in your head, learned will suppress your chances in life. When you have limited frameworks in your mind you will tend to use the same frameworks over and over again and wonder why your results are no different to the last time.
“To the man with only a hammer, every problem looks like a nail.”
- Charles T. Munger
If your only mental model for problems is a hammer then you naturally only look for nails in your solutions. Again our own biases are working against us here with doubt-avoidance, inconsistency-avoidance & contrast-misreaction tendencies at play. The 25th tendency is the lollapalooza effect where a combination of two or more tendencies can bear extreme consequences.
Instead, Charlie advocates that you learn and understand the foundations of the hard sciences, human psychology, investing and economics although not everyone has to learn the last two in my opinion. This means understanding the basics in algebra, accountancy, probability and geometry for maths. Biology, chemistry & physics for science. Basic engineering principles such as quality control or breakpoints. He urges us to understand our own psychology as explained in the 25 human tendencies and the limitations of our cognitive and executive functions. For those who want to go further, there are basic microeconomic principles such as advantages of scale, cost reductions & informational advantages. Further still those who must understand investing principles such as transaction costs and the pari-mutuel system.
All in all, there’s about a 100 he says we need to learn.
“You've got to learn 100 models and a few mental tricks and keep doing it all of your life. It's not that hard. And the beauty of it is that most people won't do it-partly because they've been miseducated. And I'm here trying to help you avoid some of the perils that might otherwise result from that miseducation.”
- Charles T. Munger
Having somebody say to you that you need to learn 100 new mental frameworks you need to have in your mind ready, at a moment’s notice to call upon can sound daunting but as Charlie says, most people won’t even try so if you do try, well you’re already moving past the people who are choosing to stand still and moving in the right direction. If you’re struggling to wrap your head around why this is important to try and attempt this just listen to what Charlie has to say.
“The human mind is not constructed so that it works well without having reasons. You've got to hang reality on a theoretical structure with reasons. That's the way it hangs together in usable form so that you're an effective thinker. And to teach doctrines either with no reasons or with poorly explained reasons? That's wrong.”
- Charles T. Munger
Charlie has a big thing about doctrines or disciplines that stay exclusively in their lane. An engineer thinks of all problems like an engineer. A lawyer thinks in terms of legalise. But by having a multi-disciplinary set of frameworks in your mind you avoid the man with a hammer tendency. We’ve all heard the saying “think outside the box.” Well, the box is engineering or law or math and when your discipline can’t find the answer you are looking for it’s often a good starting point to look across the pond and see how other disciplines think about problems.
“I believe in the discipline of mastering the best that other people have ever figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart.”
- Charles T. Munger
And that’s coming from Charlie Munger!
Talk four is, Practical Thought about Practical Thought? Now, even Charlie admits that this chapter may be a little confusing to some who read it but it’s based on a hypothetical question about how he would create Coco Cola knowing what he knows now back before Coke was born. Confused? Don’t be, because as usual, there are some profound nuggets of wisdom in this chapter and here Charlie really turns the screws on the tendencies he is yet to formalise in talk eleven. He talks through his thought process about how he would turn Coke into the giant it is today and he does this through having 5 notions.
Simplify problems.
You must understand numerical fluency.
You can’t just think problems through forward, you must invert, always invert! Turn a problem upside down.
You must think in a multi-disciplinary manner. Master the basics in the important subjects.
Big effects (good & bad) happen when there is a combination of factors.
In the book and in this article you see Charlie repeat or re-word a lot of things but the message is always the same - learn the basics from the hard sciences and a few select soft sciences, weave them together and create mental models you can readily use to solve practical problems.
In talk five, Harvard Law School 50th Reunion address Charlie touches on the importance of testing new and old principles when looking to solve problems.
“You should hypothesize and test to establishment of new principles, ordinarily by using methods similar to those that created successful old principles. But you may not use any new principle inconsistent with an old one unless you can now prove that the old principle is not true.”
- Charles T. Munger
I think it’s important he mentions this for two reasons;
You shouldn’t just rely on old solutions to fix new problems.
You need to back-check new principles against old principles and prove them better if you are to use one principle over another.
As Charlie says “Reality is talking to anyone who will listen.”
In talk six, Investment Practices of Leading Charitable Foundations Charlie uses a quote from the famous Physicist Richard Feynman:
“The first principle is that you must not fool yourself, and you're the easiest person to fool." Richard Feynman”
When thinking something through whether that be a problem, something somebody said to you or something you want to say or do to another person you will do well remember this quote and although it’s not attributed directly to Charlie himself, I think it falls very easily in line with Charlies logical thinking and his definition of human psychology.
You can tell throughout the book that Charlie, as he has mentioned believes that we should be trying to learn what other people have already figured out. He quotes Feynman, Einstein, Darwin, Franklin and more. He’s not trying to reinvent the wheel and neither should you.
Talks seven, eight & nine touch on many of the same subjects with talk eight discussing The Financial Crash of 2003 for those who would find that interesting. History is often a great indicator of the future simply because humans tend to do the same thing over and over again.
Talk ten, USC Gould School of Law Commencement Address was another I personally enjoyed. This talk felt more like advice from your Grandad or somebody who had lived and knew what they were saying. If you’re trying to figure out what it is you’re supposed to be doing with your life you might not have all the answers or solutions there in front of you. It can be hard to untangle your interests with your aptitude. People aren’t always good at what they want to be good at but there is a kind of superpower you can learn and it’s not because it provides a magical solution but rather because most people stop doing it a fifth into their lives. That superpower is learning.
“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 that morning. And boy, does that habit help, particularly when you have a long run ahead of you.”
- Charles T. Munger,
That doesn’t sound very sexy and I can’t imagine Hollywood making a 2-hour movie about someone who finds time to read for an hour or so a day, creates frameworks to solve problems they come across and tests with real-life examples. We don’t like to hear something as obvious as that, we prefer the abstract, the dream. Again, reality is talking to anyone who will listen.
When you think in terms of decades you give yourself an edge over people who think in minutes, hours and days. This is true for investing so why wouldn’t it be true for anything else? It works for your health. It works when trying to decide if the person you’re with is somebody you want to spend the rest of your life with. It works for almost anything, that’s just how compounding works.
We live in a world where it’s never been easier to be micro-famous and it’s even easier to just copy how somebody got there because everything is documented online. If it was easy though everybody would do it but not everybody can. There is a skill to getting people to follow you but Charlie offers some advice I think is useful. When you copy other people you're always going to be at least number 2 and if other people are trying to copy them as well it’s even harder, so when trying to get what you want out of life all you have to do is, be or build something something that you want or would use. The first person you have to prove it to is you!
“The safest way to try to get what you want is to try to deserve what you want. It's such a simple idea. It's the golden rule. You want to deliver to the world what you would buy if you were on the other end.”
- Charles T. Munger
Charlie mentions envy, resentment and self-pity as being disastrous modes of thought with self-pity verging on paranoia. This coming from a man divorced by his wife in his 20s and also losing his young son to Cancer. Charlie Munger’s life and his wisdom that has gifted so many people better lives could have been so different if he buried his head in the sand in those moments and not a single person in the world could have begrudged him for it.
I’ll finish with this quote from Charlie;
“I think we have two kinds of knowledge. One is Planck knowledge, that of the people who really know. They've paid the dues, they have the aptitude. Then we've got chauffeur knowledge. They have learned to prattle the talk. They may have a big head of hair. They often have a fine timbre in their voices. They make a big impression. But in the end, what they've got is chauffeur knowledge masquerading as real knowledge."
- Charles T. Munger
You can go through life pretending to know what you’re doing or you can go and figure it out. As always, the choice is always yours.
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Until next time, The School of Knowledge.