Charlie Munger – The Complete Investor

Anything Charlie always piques me, given his success, wisdom and candor. Being one of the wealthiest and greatest thinkers of our time, he has an opinion on whatever he touches and an associated wisdom that can be imbued in our lives on similar or different acts. So this book simply a no brainer to read and I think the wisdom is unlimited lest it needs to be applied. In these times of crypto-currencies shunned by every central bank and cautioned by Munger and Buffet that it’s a Ponzi scheme is something to be take not e and be wary of. Unless you have invested in them in its infancy, it is windfall now but investing now is a windfall for others at your expense. This book by Tren Griffin is a collection of thoughts and wisdom from Charlie Munger in a succinct way. Some high points & excerpts to keep note:

The Principles of Graham Value Investing:

  1. Treat a share of stock as a proportional ownership of a business – I think with substantially large investment makes sense but even for miniscule investors like me too I suppose.
    John Maynard Keynes defined speculation as “the activity of fore- casting the psychology of the market.” Keynes went on to say that the speculator must think about what others are thinking about, what others are thinking about the market (and repeat). In what is now called a “Keynesian beauty contest,” judges are told not to pick the most beautiful woman but instead to pick the contestant they think the other judges will choose as the most beautiful. The winner of such a contest may be very different than the winner of a traditional beauty contest. Keynes said this about such a contest: It’s not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees. —JOHN MAYNARD KEYNES, GENERAL THEORY, 1936
    How some promoters have learned how to manipulate this process can be illustrated with a story: Once upon a time, a man and is assistant arrived in a very small town and spread the word to the townspeople that the man was willing to buy monkeys for Sloo each. The people knew there were many monkeys in the nearby forest and immediately started catching them. Thousands of monkeys were bought at a price of $100 and placed in a large cage. Unfortunately for the townspeople, the supply of monkeys quickly diminished to a point where it took many hours to catch even one. When the new man announced he would now buy monkeys at a price of $200 per monkey, the town’s resident’s redoubled their efforts to catch monkeys. But after a few days the monkeys were so hard to find that the townspeople stopped trying to catch any more. The man responded by announcing that he would buy monkeys at $500 after he returned with additional cash from a trip to the big city. While the man was gone, his assistant told the villagers one by one: “I will secretly sell you my boss’ monkeys for $350, and when he returns from the city, you can sell them to him for $500 each.” The villagers bought every single monkey, and they never saw the man or his assistant ever again. Howard Marks advised that Graham value investors focus on what they know now and not where they are going because, rather obviously, your data about the present is extensive while your data about the future will always be zero. Like Marks in making investment decisions, Munger is focused on what is happening in a given business right now. Projections about the future are scrupulously avoided. Buffett put it this way: “I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections but we care very much about, and look very deeply, at track records. If a company has a lousy track record but a very bright future, we will miss the opportunity.
  2. Buy at significant discount to intrinsic value to create a margin of safety
    A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rap- idly changing world.
  3. Make Mr. Market your servant rather than your master
    Falling in with the crowd will put you under the sway of Mr. Market because Mr. Market is the crowd. If you are the crowd, then you can- not, by definition, beat the crowd. Munger believes that short-term price movements are not rationally based, based on always-efficient markets, or predictable with certainty. The best advice is simple; Buffet says, “Be fearful when others are greedy, and be greedy when others are fearful. “14 This is easy to say but hard to do, because it requires courage at the hardest possible time.Over many decades, our usual practice is that if [the stock of] some- thing we like goes down, we buy more and more. Sometimes some- thing happens, you realize you’re wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices. Graham’s value investing system is based on the premise that risk (the possibility of losing) is determined by the price at which you buy an asset. The higher the price you pay for an asset, the greater the risk that you will experience a loss of capital. If the price of a stock drops, risk goes down, not up. For this reason, the Graham value investor will often find that price decrease for a given stock is an opportunity to buy more of that stock.
  4. Be rational, Objective and Dispassionate

The Psychology of human misjudgment – to be avoided in judging a stock

  1. Reward and Punishment Super response Tendency
    Reward and punishment super response tendency relates to what psychologists call reinforcement and what economists call incentives. A classic example of this tendency causing problems in investing may happen when a financial advisor is able to earn a big sales commission for selling clients offerings, such as certain types of annuities. The financial incentives available to the advisor can turn an otherwise kindly, churchgoing, community-minded person into a perversely motivated shark. This misalignment of incentives is why it is wise to retain a fee-based financial planner and to make sure that he or she is not receiving hidden rebates and sales commissions. Munger gave another example: Everyone wants to be an investment manager, raise the maximum amount of money, trade like mad with one another, and then just scrape the fees off the top. I know one guy; he’s extremely smart and a very capable investor. I asked him, “What returns do you tell your institutional clients you will earn for them?” He said, “20 percent.” I couldn’t believe it, because he knows that’s impossible. But he said, “Charlie, if I gave them a lower number, they wouldn’t give me any money to invest!” The investment-management business is Insane.
  2. Liking/Loving Tendency
    Munger believes that people tend to ignore or deny the faults of people they love and also tend to distort facts to facilitate that love. He believes we are more influenced by people we like, and perhaps more importantly by people who genuinely like us. There are obviously positive aspects to this tendency for society, but they rarely have a place in making investment decisions. You may like or even love your friend or relative, but that does not mean that you should trust him or her with your money. Loaning money to relatives is fraught with danger. It is usually a far better idea to simply give away money to needy friends and relatives—or, if you do make a loan, to never expect it back. Relatives and friends in receipt of your money as a loan too often acquire a short-term and fuzzy/selective memory. Another example of this tendency arises when people fall in love with a company and make investing mistakes about that company as a result of that love. Even if you love your employer, it is very risky to have too much of your savings in the stock of a single company. One way that some companies leverage this tendency is to have their salespeople sell to people they know at parties. Tupperware parties are a classic example of this principle in action. One valuable check on this liking/loving tendency is to seek out wise people who are not afraid to disagree with you. Munger likes to say that a year in which you do not change your mind on some big idea that is important to you is a wasted year.
  3. Dislike/Hating Tendency
    The disliking/hating tendency is the inverse of the previous tendency. Munger that life is too short to do business with people you don’t like. He also refuses to invest in certain companies that sell goods and services that he does not like for ethical reasons. As an example, Munger and Buffett avoid investing in casinos. Munger believes that the disliking/hating tendency can sometimes be dysfunctional even if you ignore the ethical aspects. For example, the fact that a job candidate attended a rival college of your alma mater should not influence your hiring decision. Taking a factor like that into account is simply not rational. In other words, Munger it is sensible to pass judgment on a company or person for ethical reasons, but one must be careful not to pass judgment on a company or person based on irrational associations. Family mem- bers do not fall outside of the disliking/hating tendency. Munger quoted Buffett on this point: “A major difference between rich and poor people is that the rich people can spend more of their time suing their relatives.” Compliance professionals, including some politicians and religious leaders, have learned to manipulate people into making decisions using this tendency. If someone attempts to manipulate your behavior, you should stay rational and separate how you feel about one thing from how you feel about something else that is related. If someone seems to like or admire you, it may be a ruse to secure your compliance with something they desire. The skill needed to sort out whether a person is genuine is acquired with experience
  4. Double Avoidance Tendency
    Researchers believe that the doubt-avoidance tendency exists because a brain’s processing load can be substantially reduced if a person rejects doubt. Daniel Kahneman considers doubt-avoid- ance tendency to be a System 1 activity, which Michael Maubous- sin described as follows: “System 1 is your experiential system. It’s fast. It’s quick. It’s automatic and really difficult to control. System 2 is your analytical system: slow, purposeful, deliberate, but malleable.” When it comes to investments, avoiding doubt can get a person into serious trouble. One example is the people who thought, “Why investigate an asset manager like Bernard Madoff when avoiding doubt is so much easier? After all, he managed money for many important people. Surely they looked carefully into his operations and background.” The confidence of entrepreneurs bolstered by doubt-avoidance tendency creates positive benefits for society in the aggregate by generating productivity and genuine growth in the economy, even if legions of entrepreneurs may fail. Nassim Taleb put it this way: “Most of you will fail, disrespected, impoverished, but we are grateful for the risks you’re taking and the sacrifices you’re making for the sake of the economic growth of the planet and pulling others out of poverty. You’re the source of our antifragility.
  5. Inconsistency Avoidance Tendency
    People are reluctant to change even when they have been given new information that conflicts with what they already believe. Inconsistency-avoidance tendency is another often-useful heuristic because starting each day with a fresh mind about everything requires too much processing power. Unfortunately, as is the case with every heuristic, what is mostly helpful can sometimes be harmful. The adverse effects of this tendency can be made worse when it appears in combination with the previously discussed doubt-avoiding tendency. The desire to resist any change in a given conclusion or belief is particularly strong if a person has invested a lot of effort in reaching that conclusion or belief and/or if the change will result in something that is unpleasant. This is a major reason why progress in many professions tends to advance “one funeral at a time.” An example of this phenomenon can be found in the many companies which refused to recognize that personal computers or mobile phones were a threat to their business. Absence of the inconsistency-avoidance tendency among some people operates to benefit society. For example, company founders who are not wedded to old ideas can sometimes create innovative new businesses more easily. As another example, an executive may cling to an idea he or she has publicly advocated, even after facts come to light proving the idea false. One way to avoid this problem is to be very careful about what you say in public. Also, be aware that once you say something in public, you may be blind to disconfirming evidence. Mark Twain’s statement comes to mind on this tendency: “All you need in this life is ignorance and confidence; then success is sure.” Some entrepreneurs often don’t know enough to think that something can’t be done, so once in a while they actually do something that is completely unexpected. As the old saying goes, even a blind squirrel finds a nut once in a while.
  6. Curiosity Tendency
    Many things in life involve tradeoffs. source of what is good in life can also be a source of is bad in life. That inevitable tradeoff applies to curiosity—and there is nothing like failure and mistakes to teach a person the right approach to curiosity. The wise investor will acquire a sort of muscle memory about curiosity based on actual experience. Curiosity about life and restraint about difficult decisions are part of Munger’s approach to life. Seeking more information about a topic, even though it has no present value to a person, is a natural human drive. One can speculate that having this information has option value. However, the price of too much curiosity can be high. Finding the right balance in things involving tradeoffs like curiosity is a key part of acquiring wisdom.
  7. Kantian Fairness tendency
    The craving for perfect fairness causes a lot of terrible problems in system function. Some systems should be made deliberately unfair to individuals because they’ll be fairer on average for all of us. Tolerating a little unfairness to some to get a greater fairness for all is a model I recommend to all of you. Humans will often act irrationally to punish people who are not fair. In other words, investors may react irrationally when presented with a situation that they feel is unfair. For example, some people would rather Iose money in an investment than see another person benefit from unfairness. Another way this tendency may arise is when people sometimes reject systems that arc not fair to an individual, evcn though the system in question is best for a group or society. Munger points to such a rule in the U.S. Navy which dictates that your career is over if you make a big mistake.
  8. Envy/Jealousy Tendency
    The idea of caring Chat someone is making money faster [than you] is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley? Missing out on some opportunity never bothers us. What’s wrong with someone getting a little richer than you? It’s crazy to worry about this.
  9. Reciprocation Tendency
    “People will help if they owe you for something you did in the past to advance their goals. That’s the rule of reciprocity.” 8 The reverse is also true if you have done something that negatively affects a person. The urge to reciprocate favors and disfavors is so strong that even someone smiling at you is hard not to reciprocate. The indebted feeling that humans have when they receive a gift tends to make a person feel uncomfortable until he or she can extinguish the debt. The urge to reciprocate in some way so as to cancel the debt is so strong that it can even make people give up substantially more than they would if the process was fully rational. In other words, the desire to reciprocate often results in an unequal exchange of value. Compliance professionals have learned to use this feeling of reciprocity to their advantage. For example, a Hare Krishna fundraiser has been trained to give away a “gift,” like a flower, when he or she approaches a person for a donation. The free weekend at a time-share condominium has a similar purpose for the salespeople who offer it to potential buyers. The investment promoter who gives away a “free” lunch wants the person who attends the event to reciprocate in a very disproportionate way. As an aside, a person who enjoys the free lunch and does not take the bait and buy the investment may be disparaged by the promoter as a “plate licker.”
  10. Influence-from-Mere-Association Tendency
    Humans are programmed to be pattern seekers. They look for patterns to obtain what they believe is guidance about how to make decisions. For example, when a well-known actor pitches an investment firm’s services on television, it is likely that the actor knows next to nothing about investing; yet people tend to respond positively merely because the actor may be associated with something positive, like acting skill. Unfortunately, people can be misled by mere association too easily, and that can lead to investing errors. This tendency is similar to the liking tendency, except only association is required. Liking tendency is more about being blind to the faults of people we like. With association theory, the compliance professional is trying to get you to do something like buy a financial service because it is endorsed or used by a famous actor. Because compliance professionals know this human weakness, advertisers spend huge amounts of money to associate their products and services with favorable images.
  11. Simple, Pain-Avoiding Psychological Denial
    A projection prepared by anybody who stands to earn a commission or an executive trying to justify a particular course of action will frequently be a lie—although it’s not a deliberate lie in most cases. The man has come to believe it himself. And that’s the worst kind. Projections should be handled with care, particularly when they’re being provided by someone who has an interest in misleading you. Failure to handle psychological denial is a common way for people to go broke.
  12. excessive Self-regard Tendency
    People tend to vastly overestimate their own capabilities. This is a problem for many investors and a major part of the reason staying within a circle of competence is so important. This hook has made the point repeatedly that the most effective way to genuinely reduce risk is to know what you’re doing. Part of being a genuine expert is to know the limits of your own competence. Unfortunately, this is far too often not the case. Daniel Kahneman believes: “Confidence is a feeling, one determined mostly by the coherence of the story and by the ease with which it comes to mind, even when the evidence for the story is sparse and unreliable. The bias toward coherence favors overconfidence. An individual who expresses high confidence probably has a good story, which may or may not be true. ” ” In responding to a survey, 70 percent of students said they were above average in leadership ability, and only 2 percent rated themselves as below average in relation to their peers.12 In rating their athletic skiJJs, 60 percent saw themselves above the median and only 6 percent below the median. Companies are not immune from this excessive self-regard tendency
  13. Over-optimism Tendency
    In the 4th century B.C., Demosthenes noted that “what a man wishes, he will believe.” And in self-appraisals of prospects and talents it’s the norm, as Demosthenes predicted, for people to be ridiculously over-optimistic. Investor over-optimism—and its evil twin, over-pessimism—are what make Mr. Market bipolar. The good news for people who can keep their level of optimism at rational levels is that the unpredictable but inevitable gyrations between these two states create opportunities for Graham value investors. Staying rationally optimistic as the market gyrates is very difficult.
  14. Deprival Super-Reaction Tendency
    People tend to be too conservative in seeking gains and too aggressive in seeking to avoid losses. The most important point to remember about this tendency is that it causes investors to do things like sell stocks too early and hold on to them for too long. It is very common for investors to hold on to losing stocks in the hope that somehow the price will vise and they will somehow break even.
  15. Social Proof Tendency
    Social-proof tendency is one major cause of financial bubbles. Social-proof tendency is often used by fraudsters. For example, Ber- nie Madoff was a master at using social-proof tendency to get inves- tors to give him their money. He worked hard to make it known that he managed money for famous people who were considered to be “smart money.” One odd fact of life is that people tend to follow famous investors into deals even though the famous person is not even remotely famous for his or her investing skill. Learning to ignore the crowd and think independently is a trained response. Munger is a big proponent of independent thinking in investing. In thinking independently, it’s wise to remember Seth Klarman’s view that a Graham value investor is a marriage between a contrarian and a calculator. Falling in with the crowd due to social proof means it is mathematically impossible to outperform the market. Independent thinking can be an opportunity to arbitrage the tendency of people to follow the crowd. Profit can be made by sometimes zigging when the crowd zags if you see a wager in which the odds are substantially in your favor. It is not enough to be contrarian; you must also be sufficiently right in terms of the magnitude of the positive outcome that out perform the markets.
  16. Contrast Mis-reaction Tendency
    Munger points to real estate brokers who may first show clients unattractive properties at inflated prices in order to increase the probability that clients will buy a subsequently viewed property at an inflated price as an example of this tendency. In other words, if your real estate broker starts the tour with a dog of a deal, they are very likely trying to train you to buy what is coming next. No one should buy an investment merely because it’s better than the lousy one you just saw or owned. Similarly, when you buy an asset, it should be the best investment of all the investments that are available to you anywhere. For example, the fact that Y is a better stock than X is not enough information to make an investing decision. Is Y the best investment of all the investments you could possibly make anywhere? Thinking about the world through an opportunity-cost lens is a simple but often-ignored idea.
  17. Stress-Influence Tendency
    Some level of stress can actually increase a person’s performance. However, people under too much stress tend to make really lousy decisions. For example, a salesperson with highly developed compliance skills can cause people to make big investment mistakes by putting the sales prospect under stress. One of the more infamous examples of this sales approach is the sale of a time-share in a resort condominium. Often, a friendly salesperson operates in tandem with a person who specializes in applying stress (this is known as a “good-cop/bad- cop” approach). I would rather drop a cinder block on my foot than accept a free weekend in a time-share condominium. Do not make decisions while under stress. It’s just that simple.
  18. Availability-Mis-weighing Tendency
    The great algorithm to remember in dealing with this tendency is simple: an idea or a fact is not worth more merely because it’s easily available to you.
  19. Use-it-or-love-it Tendency
    This tendency is pretty simple to understand; a skill degrades unless it is practiced regularly. For example, flying an airplane is not something you should do once in a while. If you’re not flying often as a pilot, you should not be flying as a pilot. Similarly, investing is not something you want to do once in a while. In the context of investing, it is both a out an appliance than picking an investment or investment fund. To be a successful investor, a person must regularly devote the necessary time and effort. Even if you once felt that you knew a lot about invest- it does not mean your skills are current. Maintaining a circle of competence requires constant work and diligence. As a 2014 study concluded, We find that interventions to improve financial literacy explain only 0.10/0 of the variance in financial behaviors studied, with weaker effects in low-income samples. Like other education, financial education decays over time; even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention.
  20. Drug Mis-Influence Tendency
    Three things ruin people: drugs, liquor, and leverage. Sense-scene
  21. Mis-Influence Tendency
    Munger’s own life IS support for the view that if have the right genetics and consciously hard to remain physically and men- tally can stay sharp as age. Luck certainly plays an important part in outcomes related to aging, but there is no excuse for not working to do the best you can with the luck you have. Staying is essential to mental and physical health. As just one example, nothing is more fun for people like Munger than learning—and nothing helps learning more than reading. When it comes to health, do not be passive. As an example of Munger not accepting deteriorating health passively, when he was confronted with a diagnosis that he might lose all of his sight, he began studying Braille. It is far better to wear out from work than rust out from inactivity.
  22. Authority Mis-Influence Tendency
    You get a pilot and a co-pilot. The pilot is the authority figure. They don’t do this in airplanes, but they’ve done it in simulators. They have the pilot do something where the co-pilot, who’s been trained in simulators a long time—he knows he’s not to allow the plane to crash—they have the pilot do something where an idiot co-pilot would know the plane was going to crash, but the pilot’s doing it, and the co-pilot is sitting there, and the pilot is the authority figure. 25 percent of the time, the plane crashes. I mean, this is a very powerful psychological tendency. People tend to follow people who they believe are authorities, especially when they face risk, uncertainty, or ignorance. Professor Cialdini described the authority tendency this way: “When people are uncertain…they don’t look inside themselves for answers—all they see is ambiguity and their own lack of confidence. Instead, they look out- side for sources of information that can reduce their uncertainty. The first thing they look to is authority.” Compliance professionals have learned to convey their authority before they start working to influence people. For example, they will talk about their professional degrees, awards, and achievements.
  23. Twaddle Tendency
  24. Reason-Respecting Tendency
  25. Loollapalooza Tendency

The Right Stuff for an investor

  1. Patient
  2. Disciplined
  3. Calm but courageous and decisive
  4. Reasonably Intelligent but not misled by their high IQ
  5. Honest
  6. Confident and non-ideological
  7. Long-term oriented
  8. Passionate
  9. Studious
  10. Collegial
  11. Sound Temperament
  12. Frugal
  13. Risk Averse

The seven variables in the Graham value investing

  1. Determining the appropriate intrinsic value of a business
  2. Determining the appropriate margin of safety
  3. Determining the scope of an investor’s circle of competence
  4. Determining how much of each security to buy
  5. Determining when to sell a security
  6. Determining how much to bet when you find a mispriced asset
  7. Determining whether a quality of a business should be considered
  8. Determining what business to own (in whole or part)

The right stuff in a business

  1. Capital Allocation Skills
  2. Compensation systems that create alignment with shareholders
  3. Moat-widening skills
  4. Management already in place with integrity
  5. The Rare exceptional manager