“No wise pilot, no matter how great his talent and experience, fails to use his checklist.“
- Risk – All investment evaluations should begin by measuring risk, especially reputational
o Incorporate and appropriate margin of safety
o Avoid dealing with people of questionable character
o Insist upon proper compensations for risk assumed
o Always beware of inflation and interest rate exposure
o Avoid big mistakes; shun permanent capital loss
- Independences – “Only in fairy tales are emperors told they are naked”
o Objectivity and rationally require independence of thought
o Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of you analysis and judgement
o Mimicking the herd invites regression to the mean (merely average performance)
- Preparation – “The only way to win is to work, work, work, work , and hope to have a few insights”
o Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
o More important than the will to win is the will to prepare
o Develop fluency in mental models from the major academic disciplines
o If you want to get smart, the question you have to keep is asking is “why, why, why?”
- Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom
o Stay within a well-defined circle of competence
o Identify and reconcile disconfirming evidence
o Resist the craving for false precision, false certainty, etc.
o Above all, never fool yourself, and remember that you are the easier person to fool
- Analytical rigor – Use of the scientific method an checklists minimize errors and omissions
o Determine value apart from price; progress apart from activity; wealth apart from size
o It is better to remember the obvious than to grasp the esoteric
o Be a business analyst, not a market, macroeconomics or security analyst
o Consider totality of risk and effect; look always at potential second order and higher level effects
o Think forward and backwards – Invert, always invert
- Proper allocation of capital is an investor’s number one job
o Remember that highest and best use is always measured by the next best use (opportunity costs)
o Good ideas are rare –when the odds are greatly in your favour, bet (allocate) heavily
o Don’t fall in love with an investment – be situation-dependent and opportunity driven
- Patience – Resist the natural human bias to act
o “Compound interest is the eighth wonder of the world “ (Einstein); never interrupt it unnecessarily
o Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
o Be alert for the arrival of luck
o Enjoy the process along with proceeds, because the process is where you life
- Decisiveness- When proper circumstances present themselves, act with decisiveness and conviction
o Be fearful when others are greedy, and greedy when others are fearful
o Opportunity does not come often, so seize it when it does
o Opportunity meeting the prepared mind: that’s the game
- Change – Life with change and accept unremovable complexity
o Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
o Continually challenge and willingly amend your “best-loved-ideas”
o Recognize reality even when you don’t like it – especially when you don’t like
- Focus – Keep things simple and remember what you set out to do
o Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
o Guard against the effects of hubris and boredom
o Don’t overlook the obvious by downing in minutiae
o Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
o Face your big troubles don’t sweep them under the rig
In the end it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness. Each attribute is in turn lost without the other, but together they form the dynamic critical mass for a cascading positive effects for which Munger is famous (the “lollapalooza”).
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