Charlie Munger has a system that flips things on their head in a way that makes complete sense. He refers to it as inversion, and when combined with avoidance, it works wonders.
For example, instead of studying successful people in the hopes of also being successful, study what it takes to be unsuccessful and do the opposite. You may never be a huge success, but your chance of total failure decreases dramatically. And by studying unsuccessful people, you avoid any problems of confusing success with the role luck played in some people’s lives.
Munger explains his system like this:
My system in life is to figure out what’s really stupid and then avoid it.
Last week I finished transcribing the Daily Journal Meeting held a few weeks back. Examples of Munger’s system of inversion and avoidance run throughout, which are highlighted below, along with a couple of other important lessons that stood out.
On uncommon sense.
It’s amazing how well Berkshire Hathaway and the Daily Journal, for that matter, have succeeded with nothing more than basic morality and sturdy common sense. But of course, when people talk about common sense, they mean uncommon sense. Every time you hear that somebody has a lot of common sense, it means he’s got uncommon sense. And it is much harder to have common sense then it is generally thought.
On the power of avoidance.
How do you scramble out of your mistakes without them costing too much? And we’ve done some of that too. If you look at Berkshire Hathaway, think of its founding businesses. A doomed department store, a doomed New England textile company, and a doomed trading stamp company. Out of that came Berkshire Hathaway. Now, we handled those losing hands pretty well when we bought into them very cheaply. But of course, the success came from changing our ways and getting into the better businesses. It isn’t that we were so good at doing things that were difficult. We were good at avoiding things that were difficult.
My system in life is to figure out what’s really stupid and then avoid it. It doesn’t make me popular, but it prevents a lot of trouble.
On doing less and being okay with it.
We tried to do less. We never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about canned soup and aerospace and utilities and so on and so on and so on. We never had that dream. We never thought we could get really useful information on all subjects like Jim Cramer pretends to have.
And we always realized that if we worked very hard, we can find a few things where we were right. And the few things were enough. And that that was a reasonable expectation. That is a very different way to approach the process.
On having a too-hard pile.
Part of our secret is that we don’t attempt to know a lot of things. I have a pile on my desk that solves most of my problems. It’s called the too-hard pile. And I just keep shifting things to the too-hard pile. Every once in a while, an easy decision comes along and I make it. That’s my system. Everything in the too-hard pile, except for a few easy decisions which I make promptly.
We’re just trying to have that uncommon sense I’m talking about. And part of our uncommon sense is just to refer a lot of stuff to the too-hard pile.
On human nature.
Part of the secret of a long life, that’s worked as well as mine, is not to expect too much of human nature. It’s almost bound to be a lot of defects and problems. And to have your life full of seething resentments and hatreds, it’s counterproductive. You’re punishing yourself and not fixing the world. Can you think of anything much more stupid than trying to fix the world in a way that ruins yourself and doesn’t fix the world? It’s pretty stupid.
On obsessing over mistakes.
We can all go back and make some decision better. But it’s the nature of things. You’re going to blow one occasionally. My general idea is, there’s no point in fretting too much about what you can’t fix.
On defining being properly educated.
My definition of being properly educated is being right when the professor is wrong. Anybody can spit back what the professor tells you. The trick is to know when he’s right and when he’s wrong. That’s the properly educated person.
On the problem created by index funds.
Another issue, of course, that’s happened in the world of stock picking, where all this money and effort goes into trying to be rational, is that we’ve had a really horrible thing happen to the investment counseling class. And that is, these index funds have come along and they basically beat everybody. And not only that, the amount by which they beat everybody is roughly the amount of cost of running the operation and making the changes in investments. So you have a whole profession that is basically being paid for accomplishing practically nothing. This is very peculiar… That a whole profession, where the chosen activity they’ve selected, they can’t do anything… When a whole profession that works so hard…just can’t do what the profession is really trying to do, which is get better than average results.
On the real impact of high fees.
If you make 5% and pay two of it to your advisors, you’re not losing 40% of your future. You’re losing 90%. Because over a long period of time, that little difference causes a 90% disadvantage to you. So it’s hugely important for somebody who’s a long term holder not to be paying a big annual toll out of the performance.
On living simply, a lesson from Mozart.
Now there’s another Mozart story. Here’s the greatest musical talent, maybe, that ever lived. And what was his life like? Well, he was bitterly unhappy and he died young. That’s the life of Mozart. What the hell did Mozart do to screw it up? … Well, he did two things that are guaranteed to create a lot of misery. You overspend his income, scrupulously. That’s number one. That is really stupid. Then the other thing was, he was full of jealousies and resentments. If you’ll overspend your income and be full of jealousy and resentments, you can have a lousy, unhappy, life and die young. All you gotta do is learn from Mozart.
This business of controlling the costs and living simply and — that was the secret. How much money — Warren and I had tiny little bits of money. We always underspent our incomes. We invested. Well, you know, you live long enough, you end up rich. It’s not very complicated.
On the risk of missing or being late to an opportunity.
The minute you point out there’s a big tension between good ideas yet overdone so much they’re dangerous, and good ideas that still have a lot of runway ahead. Once you have that construct in your head and start classifying opportunities into one category or the other, you’ve got the problem half solved. You don’t need me. You’ve already figured it out. You’ve gotta be aware of both potentialities and the tensions.
Transcript: Daily Journal Meeting 2019
Charlie Munger on Concentration
Big Ideas from Charlie Munger at the DJCO Meeting
Charlie Munger on Dexter Shoes and Handling Mistakes