As we all know, Charlie Munger uses mental models to look at issues and problems. He’s got hundreds of them but the selected core models handle most of the freight.
What then are Charlie Munger’s Keys Investment Principles?
- Take Into Account Your Personality and Own Psychology.
CM: Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilize a very conservative patterns of investment and saving all your life.
- If You Can Find Three Good and Super Investments, That Can Be Good Enough. (Caveat Emptor: Are you and me who are mere mortals as good as Charlie Munger? If not, we may need more than three.)
CM: My own inquiries on that subject were just to assume that I could find a few things, say three, each which had a substantial statistical expectancy of outperforming averages without creating catastrophe. If I could find three of those, what were the chances my pending record wouldn’t be pretty damn good. I just sort of worked that out by iteration. That was my academic study—high school algebra and common sense.
- Odds Must Be In Your Favor And You Are Not Risking Everything On A Penalty Shoot-Out
CM: This great emphasis on volatility in corporate finance we regard as nonsense. Let me put it this way; as long as the odds are in our favor and we’re not risking the whole company on one throw of the dice or anything close to it, we don’t mind volatility in results.
- Go For An Index Fund If You Are Average Investor
CM: Does that mean you should be in an index fund? Well, that depends on whether or not you can invest money way better than average or you can find someone who almost surely will invest money way better than average.
- Achieve The Optimal Position Of A Few Great Investments and Sit Back
CM: There are huge advantages for an individual to get into position where you make a few great investments and just sit back. You’re paying less to brokers. You’re listening to less nonsense. If it works, the governmental tax system gives you an extra one, two, or three percentage points per annum with compound effects.
- Read, Not Just A Little, But A Lot
CM: I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.
- Invest In A Way That Does Not Require Continuing Intelligence
CM: Berkshire’s assets have been lovingly put together so as not to require continuing intelligence at headquarters.
CM: Invest in a business any fool can run, because someday a fool will. If it won’t stand a little mismanagement, it’s not much of a business. We’re not looking for mismanagement, even if we can withstand it.
- For Companies ([Sic] And In Many Things In Life), There Is No One Size Fits All
CM: You need a different checklist and different mental models for different companies. I can never make it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life.