Source: Kigaku Club
Author: Yao Bin

The author of this article carefully read Munger's impromptu conversation excerpted from the third chapter of “The Poor Charlie Collection”. Using the chapter title “Munger Doctrine,” he discussed his specific understanding from three aspects, and also listed some books that can be used as supporting references, which are worth learning from.

Currently, there are only two monographs on Charlie Munger's ideology. One is “Poor Charlie's Collection” and the other is “Exploring Wisdom.” But he didn't write either of them himself. His important ideas were presented either in a few speeches or in his responses to shareholders' letters and shareholders' meetings.

Investors love to listen to Munger's speech because by listening to his teachings, they can deeply understand human nature, the current state of the world, how to think rationally, and most importantly, how to live an honest, happy, and kind life.

In the third chapter of “The Poor Charlie Collection,” Whitney Tillson extracted the term “Mungerism” (Mungerism) from Munger's conversations at the 2001-2006 Berkshire Hathaway and Secco Financial Company annual meetings.

However, Tillson did not specify what exactly is the meaning of Munger Doctrine. So we need to concretize it.

A so-called “doctrine” is an assertion or doctrine that is vigorously promoted. Munger gradually formed his “Munger Doctrine” over his long period of thought and practice. I think the Munger Doctrine manifests itself in at least three aspects: important theories in important disciplines, a universal investment philosophy, and great business ideas.

Mungerism 1: Key Theories in Important Subjects

We must keep in mind the “big idea” of Munger's “important theory of important subjects.” Munger recommended using thought models frequently, and not just a few. Most people develop thinking models in one discipline — economics, for example — and try to solve all problems using one method. However, “the world looks like a nail to someone with a hammer in their hands.” That's a dumb way to handle the problem.

When you encounter different companies, you need to examine different factors, use different thinking models, and summarize them, and cultivate them deeply in your brain for the rest of your life. If you only use the kind of study methods that many students use, then you won't be able to grasp the “100 ideas” you need.

Munger appreciates the spirit of not deceiving oneself. The spirit of not deceiving oneself is the best spirit; it is very powerful because it is so rare. However, most people are absurdly misconceptions.

John Maynard Keynes said, “It's not very difficult to accept new ideas; the hard part is getting rid of those old ones.”

Being able to gain systematic common sense is a powerful tool. The common problem is that people calculate too much and think too little. In fact, having common sense means not only the ability to discern intelligence, but also the ability to reject foolishness.

The more basic knowledge you have, the more new knowledge you need to learn. If you rule out many things, you won't make a mess of yourself. Munger saw firsthand that there isn't a single smart person who doesn't read a lot of books. However, reading books alone is not enough; you must have a personality that can grasp ideas and do reasonable things. Most people can't grasp the right ideas or don't know how to apply them.

Munger invented the word “lollapalooza effect,” which we translated as “supercritical effect.”

Lollapalooza is a famous Western pop festival. One of its key ideas is to combine music with non-musical art. Participants in the festival can not only enjoy music, but also see art performances such as dance and comedy. This kind of superposition of art and simultaneous performances enhances the artistic atmosphere of the festival, allows art to explode during the festival, and makes people feel the impact of modern art.

Due to the unique concept of the Lollapalooza Music Festival, it received a lot of attention from Munger, and introduced this concept into investment behavior, creating a unique concept “lollapalooza effect”.

In Munger's case, supercritical effects refer to combining several models to form several forces acting in the same direction. When a certain level of critical mass is reached, a “nuclear explosion” can be triggered; otherwise, nothing can be obtained.

In other words, when diversified thinking is taken to the extreme, it may quickly enter a “supercritical” state. Because this effect is often greater than the sum of these forces, it can produce a kind of spectacle. Once you get the hang of this effect, whether investing or engaging in other businesses, you can get incredible results. Therefore, “lollapalooza” represents the most essential and central ideological theme of Munger Doctrine.

Most of the speeches and articles in “Poor Charlie's Book” are about the investment sector. But it is clear that the wisdom contained in the “Munger Doctrine” extends beyond the field of expertise of investing.

So, from this perspective, Munger's wisdom, like Benjamin Franklin, has been elevated to the experience of universal wisdom. As Munger himself said,

I am fascinated by wisdom, I am fascinated by the pursuit of accuracy and the satisfaction of curiosity... I am willing to serve values that transcend my short life.

Munger Doctrine II: A Universal Investment Philosophy

1. Personality, patience, and desire to learn are extremely important

One of the key factors for successful investing is having a good personality. Success means being extremely patient and knowing to be proactive when it's time to act.

However, a good personality alone is not enough; it is also necessary to have a strong desire for knowledge over a long period of time. In other words, there must be a strong interest in understanding the reasons behind what is happening. The more diverse your sources of lessons are, and the better you can be if you don't just learn from your own bad experiences.

If you can maintain this mentality for a long time, then your ability to pay attention to reality will gradually improve; if you lack this mentality, even if you have a high IQ, you are bound to fail.

2. Munger pursues a strategy of concentrated investment

Concentrated investment means there may be only 10 companies to invest instead of 100 or 400. When good investment projects appear, they must be recognizable, because good projects don't come up very often, and opportunities only benefit those who are prepared.

Because good projects are rare, we need to focus our money on a few projects. “It's a great idea in my opinion,” Munger said. The rule of investing is to wait for good results to appear.

3. Forget the crazy theories in academia

The beta coefficient, modern portfolio investment theory, capital asset pricing models, etc. have no reason in Munger's opinion; they are all wrong investment courses. What Munger wants to do is buy companies that have a sustainable competitive advantage at a low price, or even a reasonable price.

Regarding this, as Buffett said,

My overall view of academia is probably wrong (I see it this bad) because the people who deal with me have a crazy set of theories.

4. Investments with a high degree of diversification may not necessarily produce good results

Almost all good investments have a relatively low level of diversification. If you put$Berkshire Hathaway-A (BRK.A.US)$If the 15 best decisions are eliminated, then their performance will be very mediocre. What they need is not a great deal of action, but a great deal of patience.

To that end, we must adhere to principles and wait until opportunities arise to seize them vigorously. For many years, they made money by betting on things they were sure of.

5. The “sit and wait investment method” means buying and holding for a long time

This is an important investment idea. It determined that the best investment strategy is to buy the stock of a company with excellent economic benefits and then hold it for many years. The operation method of trying to predict market trends and frequently buy or sell is much worse than sitting back and forth.

For companies with excellent economic benefits, time is an investor's best friend; for ordinary companies, time may be a curse for investors.

6. Buy when the stock price falls

Really good investment opportunities don't come often or last long, so be prepared to act. Over the past few decades, Munger and Buffett have often done this: if the stock of a company they are optimistic about falls, they will buy more.

Sometimes, however, special circumstances arise, and once they realise they might have made a mistake this time, they opt out.

7. Investment requires a continuous learning process

If a person intends to become an investor, there will always be areas of investment that he does not fully understand. But if he studies hard and continues to improve, then his investment is guaranteed to produce good results.

The key is self-discipline, hard work, and practice, just like playing golf — you have to practice hard. If you don't keep learning, others will soon catch up and surpass.

8. Building a circle of competency and its boundaries is critical

For the ability circle, Munger has three options: Yes, No, Too Hard. Unless he's particularly fond of a project, he'll categorize them as “too difficult” options. He said,

All we need to do is find a specific area of competence and focus our energy on it. If you do have abilities, you'll know very well where the boundaries of the ability circle are.

An ability without boundaries cannot be called an ability at all.

9. Long-term holdings will inevitably experience a sharp drop in stock prices over a certain period of time

Munger saw Berkshire Hathaway's share price drop by 50% three times. If he sells his stock during any downturn, then its net asset value will be just a fraction of his current wealth.

For an investor who can't face all of this calmly, then it's not appropriate to be a common shareholder. Compared to those who are more temperamental and more calm about market fluctuations, he deserves mediocre results.

10. One of the most successful strategies is to become a reverse investor and buy when others sell

Some people always buy stocks at a price higher than their long-term intrinsic value; this is a question about human animal nature. Investors can get more if they just wait.

Therefore, you have to be very patient and wait until something happens before you find out that the price you have paid is worth it.

...

Munger's great investment ideas are far more than those. David Clark specifically explains this issue in the book “Charlie Munger's Investment Thoughts”, which can be read.

Munger Doctrine 3: Great Business Ideas

Tillson specifically listed the topic of Munger's discussion on Berkshire Hathaway, with the intention of clarifying Berkshire Hathaway's excellent business model, thus becoming the basis for deriving the Munger Doctrine.

An excellent company

Undoubtedly, Munger thinks Berkshire Hathaway is an “excellent” company. It knows a truth: being able to absorb floating funds at a 3% interest rate and then invest them in a company that can bring 13% profit is a good business.

This is true of Berkshire Hathaway. The business it bought can bring a return before tax of 13%, and a little more. Over the years, Berkshire has added so many great businesses. Reflected in the compound annualized rate of return, in the 57 years from Buffett joining Berkshire Hathaway in 1965 to 2021, the company's average compound annualized return reached 20.1%, far exceeding the S&P 500 yield of 10.5% during the same period.

The culture is very old school

Berkshire Hathaway's culture is very old school, like Benjamin Franklin or Andrew Carnegie's. And many of the companies it bought were also wacky and old school like Berkshire Hathaway.

Munger believes Berkshire Hathaway is a very, very reliable place that can withstand disasters better than most other places, and won't expand blindly like others. Berkshire Hathaway will endeavour to maintain a reasonable growth rate while avoiding unreasonable risks and liabilities.

In the business world, two-thirds of the acquisitions failed, but Berkshire Hathaway's acquisition was successful because they never tried to buy for the sake of an acquisition — they waited for opportunities that they knew would be successful without much thought.

Berkshire Hathaway bought business after company because it admired the founders of those companies and what those founders had achieved in their lives. In the vast majority of cases, they will stay and never disappoint. Berkshire Hathaway is full of people who are particularly passionate about their career—passion is more important than mental ability.

Executives of Berkshire Hathaway's companies attend shareholders' meetings every year, not to learn management skills, but because it's a fun place, and they want to be a part of it.

Berkshire Hathaway will choose people that Buffett and Munger really admire to manage their company. They're easy to get along with. It's up to them to decide what kind of corporate culture they should have in their company; Buffett and Munger won't interfere. They are always proactive and can correct past mistakes in a timely manner. There are virtues owned by Berkshire Hathaway's companies. Bamman doesn't create virtues; he only chooses companies that already have these virtues.

Bamang places no barriers to the businesses they manage. This makes them happy because they don't have to waste 25% of their time on various activities they don't like. Over the past few decades, Berkshire Hathaway has been surprised to have fired fewer employees, far fewer than other companies. Munger praised Berkshire Hathaway for doing a pretty good job. 90% of his net worth is in Berkshire Hathaway shares.

Why has no one imitated it?

Notably, Berkshire Hathaway did something different, yet no one has ever followed suit them.

Tran Griffin talks about the building elements of Berkshire's Hathaway Moat in the “Five Essential Elements of a Moat” appendix to “Charlie Munger's Principles.” These elements are actually a concentrated expression of Munger's great business ideas: Berkshire Hathaway is a tax-efficient company; has low daily expenses; is the company of choice for private buyers; has permanent capital; and can outperform the market when the stock market falls.

Donald Keogh wrote in “The Ten Commandments of Management”, why do we feel so excited when reading Warren Buffett's legendary company annual report? Because if the company's performance in a certain year does not exceed the previous year or does not meet expectations, Buffett will soon honestly say, “This year's performance is not good; this is my fault.” Although Buffett's outstanding performance in investment history is unrivaled, he never felt invincible or invincible.

Common sense and morality are the keys to success

The reason why Berkshire Hathaway has achieved such an enduring performance is directly related to Baman's “key to success.” As Munger said,

(a) They make money by remembering the obvious rather than mastering the esoteric. They never tried to be very smart, but they continued to try not to be stupid, and over time they gained a huge advantage.

(b) They don't claim to be moral people, but at least there are many things they don't care to do, even if they are legal. There's a huge gap between what they think they should do and what they do won't be punished by law. What they have to do is stay away from that line. This kind of working principle helps them make more money. Even if this way of doing business doesn't make a lot of money, it won't do anything bad. But more often than not, you make more money by doing the right thing.

Editor/jayden