It was Charlie Munger’s 95th birthday earlier in January. For those who don’t know, Charlie is Warren Buffett’s partner and Co-investor at Berkshire Hathaway. Both are not only investors but also known for their simple, yet wise and timeless life-philosophies. In honor of Charlie’s birthday, here is a list of Charlie’s approach to making decisions (not only investments) into 12 main categories, summarized in under 500 words by investor and writer Tren Griffin. Maybe someone will find some value here.
1. STAY IN YOUR CIRCE OF COMPETENCE: Know the edge of your own competency. It is not a competency if you don’t know the edge of it.
2. MAINTAIN A MARGIN OF SAFETY: Buy assets at a bargain so your investing results can be financially attractive even if you make a mistake. Price is not always the same as value. Avoid big mistakes. Reputation and integrity are your most valuable assets. Reputation earned over a lifetime can be lost in seconds.
3. THINK INDEPENDENTLY AND WITH OPPORTUNITY COST IN MIND: Markets and crowds are not always wise. Allocate your time and other resources to your most attractive opportunities. The highest and best use of a resource is always measured by the next best use.
4. BE INTELLECTUALLY HUMBLE: Recognize that the world is genuinely complex and that what you know is a fraction of what you still don’t know. Wait for what you expect rather than try to forecast timing. Think about second order and above impacts of anything.
5. BE SMART BY NOT BEING STUPID: Tune out stupidity. The greatest and most important risk is permanent loss of capital, not just volatility in price. Only accept risk when you are properly compensated for assuming that risk. Activity for its own sake is not intelligent.
6. BE PATIENT, BUT AGGRESSIVE WHEN IT IS TIME: Great opportunities do not appear that often, but when they do appear they won’t last long so you must be aggressive when the time is right. When the odds of success are very substantially in your favor, bet big.
7. BE PREPARED: Great investments are hard to find but by consistently working hard you might find a few of them. You only need to find a few great investments in a lifetime.
8. KEEP IT SIMPLE: Apply organized common sense when solving a problem or when doing an analysis of an opportunity. Think more and calculate less. Avoid false precision and unnecessary transaction costs. Try not to interrupt interest that is compounding. Focus on being a business analyst, not a macroeconomic forecaster. Pay attention to the business cycle, but don’t try to predict it.
9. ACCEPT CHANGE: Avoid master plans since change is the only constant in life. Adapt. Look for evidence that would dis-confirm your own ideas. Understand arguments from all sides. Face your problems.
10. THINK BROADLY: Use multiple models from many disciplines in doing an analysis. Borrow the great ideas of the best thinkers in every discipline. The antidote to man with a hammer syndrome is a full set of tools.
11. AVOID HUBRIS: Try to avoid fooling yourself, which is hard since it is easy to do. Understand that success in life is luck more than you imagine.
12. KEEP LEARNING: Be a learning machine. Never stop reading. Be curious. Surround yourself with smart people. Set aside time to read and think.