Book: The Tao of Charlie Munger by David Clark
Be honest, read a lot, stay within your circle of competence, don’t forecast, be patient, keep cash, avoid debt, buy companies with a growing competitive advantage at a fair price, and keep them forever.
- Work in a field you are passionately interested in, to be able to succeed.
- Work in a field that has a positive impact on the world to avoid feeling empty (ie: avoid speculating).
- Focus intensely. Don’t multitask.
- Don’t work for anyone you don’t respect and admire. Work only with people you enjoy.
- Stay away from people you don’t trust. It applies to family members, friends, and business partners.
- Sell only what you would buy yourself.
- Deserve what you want.
- Be frugal and live within your means. It’s also a good hedge against inflation. You don’t care if the price of things you don’t want raises.
- Never complain about your situation, always take responsibility.
- Stay away from envy and jealousy, they are not even fun.
- Don’t let a tragedy become 2 or 3 by the failure of will.
- Don’t worry about things you can’t avoid, like death or an earthquake.
Buy great companies at fair prices
- Not fair companies at a great price.
- Beginners should buy into an index fund during a bear market and hold it until they retire and sell as needed.
Circle of competence
- Know the limits of your knowledge, and don’t talk or invest outside.
- Avoid being stupid. It’s more important than being smart.
- Be humble and recognize your mistakes.
- Never lie to yourself. Don’t try to justify your bad acts.
- Never lie to others also.
- Change if you learn new facts or if you discover you made a mistake.
- Don’t fall in love with an idea, and avoid extreme ideas.
- Force yourself to consider the arguments of the other side.
- Overconfident smart people make disastrous mistakes.
- The finance academic’s world is full of witchcraft.
- Don’t lose common sense.
- Reading is life. Learn a little bit every day, all your life — knowledge compounds. Keep reading and thinking every day and you won’t have to work.
- Investment is the only field where you can get better by learning, even well into your 90s.
- You’ll be better off reading 100 business biographies than 100 books on investing. You should also read about accounting, economics, and central banks. And at least 300 annual reports a year, plus the Wall Street Journal every day.
- Specialization is easier to monetize than being a generalist because it brings barriers to entry to the competition.
- Use mental models routinely, the big ideas from big disciplines. Avoid being narrow-minded with a limited set of intellectual tools.
Be patient, don’t forecast, and keep cash.
- Patience is king in value investing. And it’s the hardest part to resist buying or selling.
- You need to be able to handle emotionally a temporary 50% decline in the value of your assets.
- Index funds bought at height of bull markets means possible decades until the market value comes back.
- Avoid forecasting stocks prices. They are very hard to predict because they are partly based on the aggregate emotions of millions of investors seeing them going up or down.
- Always keep cash to be able to buy in a good market.
- 1930’s demoralized generation created a two decades wonderful period to buy stocks.
Few bets, big bets, long term
- Avoid having more than a couple of transactions a year.
- Few transactions are also good from a tax perspective.
- Bet heavily on the rare good opportunities.
- Only invest in no-brainer opportunities.
- Invest to hold forever.
- Great companies have a growing competitive advantage, like a strong brand, low cost, etc.
- A strong brand owning a piece of customers’ minds like See’s Candies allows raising price 10% a year without anyone complaining, or at least keeping up with inflation like Coca-Cola.
- Coca-Cola is a great company. Money flows in by doing nothing.
- Great businesses are usually trying to be extreme on one metric, like cost reduction.
- Good businesses bring a string of easy decisions, while bad businesses bring a string of painful decisions.
- Bet on a good business more than good management, with rare exceptions (Nebraska Furniture Mart).
- If a technology doesn’t kill a company, it will be a burden if the company sells a commodity or a good thing if their customers don’t buy on prices.
- Size and market domination raise the cost of entry for competitors, which is a competitive advantage (Iscar carbide metal cutting tools)
- Airlines companies are terrible. They are constantly competing on price, and have fuel and unions problems.
- The automobile is a bad industry because it competes a lot on price with commoditized features.
- Stay away from financial companies unless you have a deep insight into management practices. Their books are full of derivatives hiding their real risk exposition.
- Businesses that need constant reinvesting of a big chunk of the profits just to stay competitive are bad.
- Most businesses will eventually die, from technological obsolescence to cheap offshore labor competition.
- Have plans to solve specific problems, but avoid having a “master plan” for the future of the company because the market is rapidly changing in unpredictable ways.
- Decentralize by default, only centralizing if there is a big measurable benefit doing so.
- You can’t duplicate a structure or culture that worked in one company to another. Don’t move a manager from one business unit to a completely different one.
- Incentives play a big role in pushing people in one direction or another. Wall Street is incentivized to take risks since most investors only look at returns without really understanding risk. CEO are incentivized to retain earnings if they are paid in stock options without regard to profit distribution. FedEx employees are incentivized to work fast because they are paid by shift and not hourly. General Electric was incentivizing old-product sales instead of the new ones because of their commission system.
- A good company acquiring a bad one is a mistake.
Don’t trust financial institutions.
- Hedge fund business models are pressured to take big risks because institutional investors put the money on the ones with the biggest returns, hiding risks.
- Banks need to be regulated because they are incentivized to take risks through risk-hidden derivatives and keep the profit while sharing the losses by being bailed out during the crisis.
Debt and derivatives are dangerous.
- Debt is dangerous in itself and even more in incompetents or unsolvable hands.
- Carry-trade, borrowing money at a cheaper rate to invest it in higher-yield risky assets is dangerous. (Lehman’s Brother, AIG / General Electric)
- Derivatives can bring market liquidity but come with much bigger problems (hiding colossal risks and threatening the whole economy any second).
- Inflation exists in part because politicians over-spend to keep power and print money to compensate.
- Banks earn more during inflation with commissions on bigger loans, and insurances also earn more with fees indexed on higher asset prices.
- FED often lets bubbles grow and then passes the bill to cash holders via inflation by printing money.
- Economic collapse leads to world wars.
- As a strategic resource, US reserves of oil should be saved.
Capitalism is good
- Wealthy people’s money is invested in the real economy, to the benefit of the less wealthy people.
- McDonald’s taught more people good work habits than Harvard did.
- Losing the fear of not working leads to decline.
- Hard work raised Korea and China from nothing.
- Low corporate taxes and high consumption taxes are better for businesses.
- Corruption is widespread in Asia, but authoritarian regimes can ensure a relative order.
- Trade is what prevents a China-US war.
- Charlie Munger has two role models: Benjamin Franklin and Lee Kuan Yew (Singapore prime minister from 1959 to 1990), of which he has bronze busts in his office.