Charlie Munger's 8 Principles
from the book <Poor Charlie's Almanack>
Hey guys, this is the 176th Heuton Letter.
Today, I want to introduce you to a book by Charlie Munger, who’s famously known as "Warren Buffett’s lifelong business partner." The book is called Poor Charlie’s Almanack.
When we say someone is a “great investor,” we instinctly think of the amount of wealth they've built or their return rate. But while reading this book, I started thinking differently.
I believe it’s more accurate to judge an investor's greatness by how long they have sustained their success (not just short-term wins) and how refined and logical their thinking process is. To add one more, I'd say it's their overall approach to work and life.
This book mainly dives into Charlie Munger’s investment philosophy. But it also shares his attitudes toward work and life.
In today’s letter, I want to share eight of his investment principles. Even though they’re investment-focused, I'm sure you can apply them to your own work.
Investment Principles Checklist
Charlie Munger outlines eight principles in his book. The order doesn’t reflect their importance. Also, each must be considered as part of the complex whole of the entire process.
While reading through it, think about how these apply to your work or life. I also recommend reading them slowly and deeply pondering each one instead of just skimming through.
*Note: Although the following words are quoted verbatim, I have intentionally omitted some for brevity.
1. Risk
- All investment evaluations should begin by measuring risk, especially reputational. Avoid dealing with people of questionable character.
- Avoid big mistakes; shun permanent capital loss.
2. Independence
- Objectivity and rationality require independence of thought.
- 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 your analysis and judgment.
- Mimicking the herd invites regression to the mean (merely average performance).
3. Preparation
- "The only way to win is to work, work, work, work, and hope to have a few insights."
- Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.
- If you want to get smart, the question you have to keep asking is “Why, why, why?”
4. Intellectual Humility
- Acknowledging what you don’t know is the dawning of wisdom.
- Identify and reconcile disconfirming evidence.
- Above all, never fool yourself, and remember that you are the easiest person to fool.
5. Allocation
- Remember that the highest and best use is always measured by the next best use (opportunity cost).
- Good ideas are rare—when the odds are greatly in your favor, bet (allocate) heavily.
6. Patience
- Resist the natural human bias to act.
- Never take action for its own sake.
- Enjoy the process along with the proceeds, because the process is where you live.
7. Decisiveness
- Be fearful when others are greedy and greedy when others are fearful.
- Opportunity doesn’t come often, so seize it when it does.
- Opportunity meeting the prepared mind—that’s the game.
8. Focus
- Keep things simple and remember what you set out to do.
- Remember that reputation and integrity are your most valuable assets—and can be lost in a heartbeat.
- Don’t overlook the obvious by drowning in minutiae.
Wrapping up
Maybe it’s because of the nature of his work, but he seems to have constantly honed and pursued better ways of thinking with objectivity and rationality. The book is full of tips and efforts on structuring your thoughts and looking at things from various angles.
To me personally, the principles that most stood out were: #2, #3, #4, and #8 and #7, and #5. Oh, #1 and #6 as well.
These eight principles might seem pretty obvious and even cliche. But once again realizing that I'm not even following these obvious truths makes me kind of ashamed of myself.
Catch you in the next letter!