Charlie Munger: The 5 Investing Tricks That Made Him a Billionaire

June 7, 2024

Charlie Munger: The 5 Investing Tricks That Made Him a Billionaire

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but what caused the financial success was not extreme ability you know i have a good mind but i i i’m way short of prodigy and i’ve had results in life that are prodigious and that came from tricks i just learned a few basic tricks from people like my grandfather what kind of now everybody’s leaning in wanting to know charlie munger has often said that the vast majority of his financial success has come not from superior intelligence or insight but from a framework of mental tricks and models that have helped him avoid just making bad mistakes and by applying those mental tricks in the realm of stock market investing he’s been able to accumulate a net worth of 2.4 billion dollars and will go down as one of the best investors and best thinkers to have ever lived so in this video i’m going to explain five mental tricks that charlie described in his 2020 interview that have helped his decision making and his investing throughout his lifetime and it starts with the very powerful trick of inverting inverting the problems you have to solve there are all kinds of tricks that i just got into by accident in life one i invert all the time i was a weather forecaster when i was in the air corps and how did i handle my new assignment being a weather forecaster in the air force a lot like being a doctor that reads x-rays it’s a pretty solitary you’re in the hangar in the middle of the night and drawing weather maps and you’re going pilots but you’re not interfacing with a bunch of your fellow men very much and so i figured out the minute i was actually making weather forecasts for real pilots i said how can i kill these pilots now that’s not the question that most people would ask but i want to know what the easiest way to kill them would be so i could avoid it and so i thought it through and reversed that way and i finally figured out i said there are only two ways i’m ever going to i was in the ferry command the only two ways i’m going to kill a pilot so i’m going to get him to icing his plane can’t handle and that will kill him or i’m going to get him someplace who’s going to run out of gas before he can land because all the airports are sucked in and i just was fanatic about avoiding those two hazards my grandfather would say to him when i’m swimming he’d say swim as long as you want but stay near the shore but you can laugh but you know he was a very wise man but what i’m what i’m hearing you say is that you as a discipline look at what the risk is on the other side of the situation and you avoid that that’s one of the rules right well it’s it’s just it’s it’s like a lot of practical problems in algebra if you invert you can solve it easily if you don’t it you can’t solve it exactly right and so of course i had that trick very early and most people would say how can you please tell us what you’d do to save india and of course i would approach it differently i’d say what could i do which would most easily hurt india and approaching it in reverse that way i got better results you look at the vulnerabilities yeah yes and and i have a whole bag of tricks like that so while charlie describes how he applied this to his work as a meteorologist inversion is also a very powerful concept in the stock market people are very good at finding stocks they think could be a winner but of course that’s only half the story the other half of the investing equation is to ensure the company you’re looking at won’t be a loser you know buffett’s first rule of investing after all is don’t lose money so while it’s necessary to ask why will this stock do well in the future remember it’s equally as important to ask why might this stock do poorly and oftentimes asking the latter will do much more for your long term returns than anything else so you know next time you hear someone talking negatively about a stock that you own don’t argue with them instead thank them for bringing the inverted perspective to your attention so inversion is key but another mental model charlie talks about is the concept of humility or knowing what you don’t know but if humility means that you know the edge of your own competency yes and you aren’t arrogantly stepping over the boundary i’m very good at that yeah well i’d redefine humility as knowing what you don’t know yes well both lauren and i are very good at that one of these guys at the berkshire meeting from one of the foreign publications said why do a couple of guys in a little place and omaha do so much better than all these powerful minds and great institutions and i said well i think warren and i know the edge of our competency better than other people do warren frequently says i’d rather deal with a guy with an iq of 130 who thinks it’s 125. a guy with an iq of 180 that thinks it’s 200. that second guy will kill you so this discussion revolves around a core philosophy of investing which is the circle of competence in investing you don’t need to know about a lot of things you just need to know a few things very well and this is another mental trick to avoiding bad investments know the limit of your competency to be able to understand when you’re drifting into areas that you don’t know and then once you can understand what’s inside your circle and what’s outside your circle don’t be afraid to double down and go deep on learning about the areas of business that do fall firmly within your circle of competence specialization is the safest way up for most people and for that reason the surgeons know more and more about less and less and that’s that that’s what gets rewarded and if you have a nasty fistula in your colon you do not want a surgeon who’s good at proofs or political science you know it’s it’s it’s understandable how how the world rewards this specialization i never liked it and i loved picking up new ideas being a great passionate reader and so i decided i’d make whatever living i could make doing what i like to do which is sort of romping over a whole field i do not recommend it to other people because the safe way up is to know a hell of a lot about something so while charlie munger doesn’t himself like to specialize he acknowledges that it’s the smart thing to do now here he was talking about specializing in you know a certain career but of course this applies to investing as well um you know warren buffett he understands insurance very well ray dalio understands macro economics very well charlie munger understands china very well benjamin graham understood distressed businesses very well jack bogle understood long-term market patterns very well all of these guys knew a lot about a little not a little about a lot for example the people on cnbc are people that understand a little about a lot but when they do want to go deep on a particular issue then they bring in a big investor that specializes in that area so definitely make sure you know your circle of confidence and don’t be afraid to go deep on things you already understand reasonably well so that’s trick two then from here the third trick charlie talks about in this interview is to be rational enough to be unaffected by wild swings in the stock market well i am continuously invested in american equity but i’ve had my berkshire stock declined by 50 percent three times and i don’t it doesn’t bother me that much by weird that is just the natural consequence of the life properly lived so if you have my attitude it doesn’t really matter i i always like kepling stressing expression in that poem called if and he said success and failure he says treat those two impostors just the same you just roll with it sometimes it’s going for you and some against it’s all part of the same game this might be one of the most powerful philosophies that charlie has the ability to stay focused on the long term and not have a knee-jerk reaction when the market starts swinging wildly and this is something he’s always been very passionate about let’s rewind the clock to this old interview he did with the bbc how worried are you by the declines in the share price of berkshire hathaway the difficulty this is the third time that warren and i have seen our holdings in berkshire go down top tick to bottom tick by 50 i think it’s the nature of long-term shareholding with the normal vicissitudes and and worldly outcomes and in markets that the long-term holder has his quoted value of his stock go down and then by say 50 percent in fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50 percent two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get there you go if you’re not prepared to tough it out through periods where your portfolio is down 50 just do yourself a favor and never buy into the market because it will happen to you at some point and you won’t be able to see it coming and when it does hit you need to be able to stay focused on the long term and not panic you panic you lose so always stay rational and just ignore those sudden market swings then moving on to charlie’s fourth trick is to always keep things simple and moreover ensure the companies you look into are solid straightforward businesses that anyone could run we have a very peculiar way of looking at things we want to buy something that’s intrinsically a very good business meaning that an idiot could run and it would do all right and then we want that business which an idiot could run successfully to have a wonderful person in it running it and if we have a wonderful business with a wonderful person running it that really turns us on and it works very well and now we we do make exceptions but not many and and it’s a pretty simple philosophy warren sometimes says you have to choose good person or good business you know what he says this is not politically correct he says good business he wants something that has such an such tremendous strength that i had a friend when we practiced law and he said if it won’t stand a little mismanagement it’s not much of a business and we like businesses that stand a lot of mismanagement but don’t get it so that’s our formula and it and we can’t make it work perfectly but it certainly worked better than most people’s so ideally you want a wonderful business and a wonderful person running it but the most important thing is that the business is solid and straightforward and it’s got a big competitive advantage you know as charlie said if it won’t stand a bit of mismanagement then it isn’t much of a business so even though we like businesses that are well managed above all else finding a straightforward strong business that anyone could run is definitely the top priority and then finally charlie’s fifth trick that helped him do very well in investing is a simple one it’s to read a lot take a listen oh by the way don’t you read a book a day something like that like you do well maybe not i read and i skim a lot yeah i do the accidents of life you give me books i haven’t torn the books and perfect strangers give me books lots of them and and i almost never buy a book anymore when i was young i used to order them from the book review columns of the new york times and now it’s torn to books comes and i just select what i want and i’m amazed at how well some of these people are reading me i don’t think you can take every bookish little boy and turn him into a billionaire by petting him on the head and say read all you want johnny but if it were that easy there’d be more billionaires but it enormously helped me and i think reading once you’ve learned it reading and arithmetic you can take in so much and you can take it on your own time schedule if somebody’s talking to you he may be telling you something you don’t want to know you already know it’s too hard or he’s going too fast or too slow yeah but when you’re reading you can just take it take it as you want it so it’s just it’s just it’s just god’s gift if you if you’re into self-education there’s nothing like reading and of course people who do a lot of it have an enormous advantage so charlie is a big fan of reading as is warren buffett but beyond the general tip of reading uh i think self-education is really the trick that charlie is getting at you know it’s a shame but most people finish their uni degree and they think that their learning is done they’ll just go out and work their job for the rest of their lives you know school’s out hooray we’ve we’ve done it but all the most successful people in the world are the ones that make self-education and self-improvement a focus throughout their whole life you know and it doesn’t necessarily have to be books it could be courses or podcasts audio books or interviews or whatever really but if you do take the time to improve your own abilities and your own earning power as charlie says that will serve you tremendously well in life having an innate interest in self-improvement that’s charlie’s last trick and he practices what he preaches he’s 98 years old and he’s still putting in the effort to read a lot and gain perspective so overall they are five of charlie’s mental tricks that helped him become not only one of the best investors in the world but also one of the best minds full stop so anyway guys i hope you enjoyed the video make sure you leave a like on it if you did find it useful or if you enjoyed it subscribe to the channel if you want to learn more about value investing people like charlie munger and warren buffett all those guys that preach the value investing the rational value investing approach make sure you subscribed uh if you’re interested in more new money content you can check out new money clips links down in the description below thanks always the patreon producers for supporting the channel but guys that will just about do us for today thank you very much for watching and i’ll see you all in the next video this video is brought to you by sharesight seek 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