Source: Kigaku Club

Introduction:

1. The Charlie Munger model of thinking that will benefit you for the rest of your life

Buffett said, “No one in the world can compare to Munger when it comes to how to see through the essence of a thing in 30 seconds.

Munger is superior to Buffett in three ways, so he can provide better insight and improve Buffett's investment decisions: First, Munger places more emphasis on erudition than Buffett. Second, Munger paid more attention to the quality of the company than Buffett. Third, Munger paid more attention to investment mentality than Buffett.

Munger said that the most successful training model is the pilot training model, because of the effectiveness of this model, the incidence of flight accidents is extremely low.

This model can be summed up as “blogging first, then concentrating without getting confused, check the list step by step.”

1. First, you must be knowledgeable and master the basic multidisciplinary thinking model

Buying stocks means buying a company. The company's business is diverse and involves many aspects. It is actually quite complicated, and the company survives and develops in a complicated world. If you want to better analyze the company's business, you need to analyze the whole world.

In Munger's words, you need to master basic thinking models in multiple subjects. In Chinese words, you must first be knowledgeable and talented.

According to Munger's speech, the 20 subjects investors should understand are divided into four categories according to the degree of software and hardness.

Hardest subjects: mathematics, physics, chemistry, engineering.

Harder disciplines: biology and physiology, medicine and medicine, ecology and environment, astrogeography and aerospace.

Softer subjects: economics, law, politics, society.

The softest subjects: psychology, literature, history, religion.

If you master the three or four most basic models of thinking in each subject and reach the entry level, you won't make a big mistake.

Munger attended the University of Michigan in 1941, majoring in mathematics. As a result, after taking the compulsory course in physics, he fell in love with physics all of a sudden. In 1943, after finishing his second year of college, Munger joined the US Army Air Force Officer Training Program. First, he went to the University of New Mexico's Albuquerque campus to study natural science and engineering, then he was sent to the prestigious California Institute of Technology, specializing in thermodynamics and meteorology, with the goal of becoming a meteorology expert in the Air Force. Arguably, Munger has received thorough training in hard subjects.

After retiring from the military in 1946, Munger applied to study at Harvard Law School. In 1948, he graduated as one of 12 outstanding graduates. In 1949, Munger was admitted as a lawyer. Since then, he has worked as a lawyer until 1965, and his career as a lawyer spanned 17 years. Studying law for 2 years and being a lawyer for 17 years, Munger was proficient in law, and also familiar with and understood all relevant soft subjects.

Later, Munger discovered that what he really loved was making money. In 1962, Munger and Wheeler co-founded a partnership private equity firm, which continued until 1975. In 1978, Munger became the vice chairman of Berkshire Hathaway and has been working with Buffett ever since.

In “The Poor Charlie Collection,” Munger mentioned the most about the multidisciplinary thinking model. He said it often, over and over again. “Succeed and then specialize” is the most important experience Munger has learned from his lifelong study and work experience: only if you learn first, you can specialize later; if you don't learn, it's difficult to specialize. It is because Munger is so knowledgeable that he can provide Buffett with important references.

2. Later, you need to specialize and be proficient in stock investment

The stock market is complex. It is necessary to better analyze the stock market, analyze individual stocks, study thoroughly, practice continuously, and evolve. Just like driving a car or flying a plane, you can't just understand the principles; you have to practice a lot. Practice, practice, practice, practice, practice, until you really master it.

Munger said that the economy is indeed very much like an ecosystem; there are many similar phenomena between the two. Animals can reproduce rapidly in places conducive to their own survival, and the population size is growing at an astonishing rate. Similarly, in the business world, people who specialize in a certain field and have excellent expertise can often get very high financial returns in this field.

In 1999, US online stocks were very popular, yet Buffett didn't buy any shares. why? Buffett said, “According to my ability to analyze online stocks, I'm not even ranked 1000th in the US stock market. Why should I compete with others in a location where others have a clear advantage?”

If you want to do a good job in stocks, you have to work hard; you have to know the industry and company you are investing in better than other investors.

First, you need to understand the following three points:

The market is complicated; good companies and good stocks are two different things.

Investment opportunities are complex. Some investment opportunities in the market are two different things from those you can seize.

Investment strategies are complex; temporary success and long-term growth are two different things.

3. If you don't get upset, you will make a big mistake if you are upset

Fluctuations in the stock prices of listed companies are ostensibly market fluctuations; in the long run they are fundamental fluctuations; in the short term, they are more psychological fluctuations.

Psychology is far more complex than the natural sciences of mathematics, physics, and chemistry. But if you want to learn how to act as a human being, studying psychology is even more important, especially when it comes to investing.

From the 20 types of psychological cognitive biases summed up by Munger, I can see why some people are quite smart and successful in their normal lives and work, but they can't do it once they make an investment. In fact, the key is that they can't get through the psychological barrier.

The first major psychological bias in investing: Overconfidence.

We usually work and live in a normal average world. Usually, the more successful we are in the past, and the more successful we are later, but the stock market is cyclical. The more successful we are now, the more likely we are to fail later. A bull market nurtures a bear market, and a bear market nurtures a bull market. The more the stock market soars, the more you earn and the more confident you are, the higher you will buy. As a result, at the top of the bull market, you are the most confident and bought the most. The market suddenly reverses, enters a bear market, and continues to plummet, causing huge losses. Most of those who drown are water savvy, and the majority of those who lose a lot of money are people who think they are particularly smart.

The second largest cognitive bias in investment psychology: loss aversion.

Now that you know your mistakes in analysis and judgment, why don't you stop losses in time and acknowledge your mistakes and quit? This stems from human loss aversion. Unwilling to admit failure, unwilling to accept losses. Those who don't get their money back and don't sell stocks actually have a sense of luck and think that if they don't sell, they still have a chance to get back their costs; if they sell, they lose their investment permanently.

The third biggest psychological perception bias in investing: the flock effect.

Why is it clear that everyone knows not to chase up from a high level or fall from a low level; only reverse investment can make money, but almost no one can do it? This is because human nature likes simplicity, ease, and conviviality. We would rather follow the public and fail than succeed against the public, because it is too stressful to do that. The mentality of following the crowd is a human instinct.

4. Establish an investment analysis checklist

The key reason why Munger is an intelligent person that both Buffett and Gates admire is his excellent analytical ability. Munger's specific analysis method is very complicated, but the format is simple and clear, that is, the matters to be considered are made into a list, and analyzed one by one.

First, analyze the company's fundamentals first.

Second, analyze the stock valuation side again.

Finally, a comprehensive analysis of the investment portfolio.

After the individual stock analysis is completed, it is also necessary to analyze the overall situation of the investment portfolio, especially the allocation of stocks and bonds. For Berkshire, a group whose preamble is the insurance business, liquidity is very important. It depends not only on investment returns, but also on liquidity to ensure that insurance policies can be paid promptly and in full. Furthermore, stock investment and merger and acquisition investment should be used together as equity investments for comprehensive analysis.

The above three levels of analysis are all rational analyses. Munger suggested that sometimes we think we are doing rational analysis; in fact, before we know it, we fall into psychological misunderstandings and cognitive biases occur. Therefore, Munger emphasized the need for a two-track analysis.

2. Buffett's investment principles

As an investor, the only way to determine how you're doing is to set up a proper formula and test it. As for how to do it, Buffett provided us with some methods:

1. Whether we have made a profit or loss this year is not a measure of whether we have done well or not.

2. Although I think 5 years is a more appropriate time period, I think 3 years is definitely the shortest period for judging investment performance.

To this day, these two simple methods still work very well for investors.

The first method measures return results compared to market performance each year — we don't have to focus on whether the investment itself appreciated or depreciated in a given year; instead, we are concerned about whether the year's performance was higher or lower than the average return on the market. Since the overall trend of the market is upward, if you can find a way to select some stocks, fall a little less when the stock market is sluggish and rise a little more when the stock market rises, then your earnings may be good. Investors just want to beat the average yield in the market as much as possible, accumulate step by step, and use this relativity as a basis to weaken the absolute return they may obtain by comparing it with the rise and fall of the market.

According to the second test view, to measure relative performance, the investment cycle span that should be tracked should be at least 3 years. If it can be tracked for 5 years, the results will be better. Once again, no matter what the reason, if after 3 to 5 years of long-term investment, you still haven't been able to achieve better performance than the market, then you should consider investing your funds in other projects.

Buffett insisted that all partners move closer to the agreement. Before investing the first capital, everyone must advance and retreat with his relative market and market standards and a 3-year tracking period.

Today at Berkshire—Hathaway, Buffett has continued to adhere to the 5-year relative performance standard, which has been and will continue to be a very high threshold.

1. Ambitious goals

The performance targets Buffett himself set for the partnership fund were not easy to achieve. After setting the standard, he has been trying to avoid investing below market level for 3 to 5 years. His goal is to achieve an average yield 10 points higher than the Dow Jones Index on average every year. This is the maximum excess yield he believes an individual can achieve, and he wants to achieve this. In other words, if the Dow Jones index falls 5% in a year, then it will have to reach a yield of +5%.

Although we don't know how the overall performance of the market was in any given year, you must remember that Buffett mentioned the average market yield of 5% to 7%. This 10% excess yield means that his goal is to achieve an average return of 15% to 17% per year. Based on a compound annual interest rate of 15 per cent, $100,000 would grow to $405,000 in 10 years and $1.6 billion in 20 years. This result would be surprisingly good.

In fact, every time performance is mentioned in a review, Buffett is talking about relative values.

To some extent, investors have learned to look at performance this way: if the overall market falls and your stocks fall even less, then you did a good job this year; vice versa. As long as your performance is only a little better than the market, regardless of whether the market rises or falls, you have achieved better results than the market, then that's excellent.

Although their partnership's investment never declined in any year, and there wasn't even a year where its performance was weaker than the market, Buffett taught investors to be mentally prepared for these two possibilities.

2. Time is the best test method

Investors should not expect a one-size-fits-all investment method; after all, Feng Shui takes turns. Buffett knows in his heart that the final relative performance of his portfolio may be uneven, but in years of poor performance, he still performed well and was able to achieve a yield of 10% higher than the market; while “time and place are favorable,” he thinks he can achieve an excess yield of 25%.

What Buffett thinks is critical is that investors should measure their investment performance over a period spanning several years. He believes that the shortest period of time is 3 years, while he himself favors 5 years. The best tests should be carried out during a smooth market period. In this way, factors affecting the entire market due to fervent speculation have been removed. He taught and reminded investors that even the relative performance achieved in any given year has a large part of luck. Because this short-term outcome depends on the “voting machine” attributes associated with short-term market fluctuations. And as you gradually broaden the time frame for evaluating your own performance, this kind of test will become more and more like a “scale.”

Buffett also told investors that in this New Year's Eve inspection, one important warning is that in the later stages of the bull market caused by speculation, poor performance is likely to occur. He has repeated this warning over and over again until today. The important thing is to reap relatively good returns when market conditions decline.

Buffett reminded investors not to change all principles, including the standards used to evaluate performance. He insists on using the minimum 3-year method to evaluate the performance of active investment managers and the market, even if this kind of evaluation is not carried out in the industry at all.

3. Buffett's educational wisdom

As a son of God, Peter Buffett said the only true legacy he inherited from his parents was a philosophy: find your own path. Following his passion, building his own business, and earning the self-esteem he deserves is a life creed that allows him to reap his own success.

1. Advocate the work itself, not the reward

In Buffett's way of working, what allows him to maintain a full state of mind all year round in the face of long working hours and painstaking decisions? For Buffett: As far as the essence of good professional conduct is concerned, the first thing is to dare to discover oneself, find things you love, and make work a thing that, even if extremely difficult, can make people happy or even feel a little sacred.

Despite the end result, the money came. The harvest of money is a by-product of work and is the icing on the cake. What matters is the essence of the work: to satisfy endless curiosity, verify your analysis in the real world, and embark on a fantastic journey to discover new values and open up new opportunities.

So what should be the right working attitude? A smart, enduring work philosophy doesn't focus on fickle rewards, but rather on the process itself, which is the level of enthusiasm, focus, and commitment to our goals.

2. Fairness is a myth

We are all born equal. Everyone seems to understand this principle, but in reality, this is not the case. Often, even people with a good starting point confuse life situations with the essence of a person. However, life situations can vary widely, yet the essence of human beings is the same. If you believe that anyone's life has dignity and value, including your own, then you should be able to acknowledge that every life has equal dignity and value.

Unfortunately, sometimes acts that appear to be well-intentioned change their flavor by deviating from this basic truth, although this deviation may have been an unintentional loss. If people think they are superior to the people they help in some way, then this kind of help is not really an act of kindness; it is a kind of condescending charity.

It relates to our ability to humbly acknowledge that our level of understanding of things and our ability to achieve results is limited.

We can only do our best to help others, but we can hardly determine whether our help actually works, and if so, to what extent. Insistence on getting results and looking forward to being thanked by others are not acts of kindness; these are due to selfishness. This is why the purest donors are anonymous donors.

3. Find your true career destiny

In most areas of life, being able to reach an average level is already very good. In fact, there are many benefits to being at an average level. It doesn't cause stress, and it also keeps people's expectations within control.

However, when it comes to true professional destiny, it seems difficult for a Chinese person to bear its weight.

Does everyone have a lifelong career mission?

In an ideal world, everyone can find their greatest happiness, and this place of happiness just happens to be the source of people's livelihood. In the real world, this isn't always the case. We can work hard to be successful at work, and we can work hard to develop ourselves as experts at work; but unfortunately, this isn't the same thing as loving work and finding our true self in it.

Professional destiny is: the kind of gravitational pull we feel that drags us towards a life that feels right and is truly our own.

4. It is necessary not only to seek, but also to create

Once we have found our career destination, what are we going to do with it?

In the midst of difficult times and years where you can't see the future clearly, I'm sure there are people who feel that their dreams and preferences are an unbearable luxury. There's nothing more important than getting a job and keeping that job. While this idea is completely understandable, I don't think it's a long-term path to happiness and self-respect.

If we want to stay true to our heart and fulfill our mission for a lifetime while also being able to pay rent and be able to afford three meals, we need to find the best location where our abilities and preferences meet the business world. We need to figure out what we really love to do, and at the same time make the world recognize its value and be willing to pay for it.

Another thing I've learned, in my opinion, applies to any professional in any field: insist on doing your job as the most important thing.

The first thing is to be fair to yourself. When you do something for a reward, there's a paradox: you sell it, but it's still a part of you. That piece of work that has not been carefully crafted will also be an embarrassment that one cannot let go of.

The second reason is more practical: it's the best way, and probably the only way to become a professional.

5. The criteria for success depend on yourself

The economic environment is difficult to predict. Investment bankers who received bonuses the previous year became unemployed overnight; in the eyes of people, corporate executives who are on the fast track of life will one day also discover that their company has gone bankrupt. When the billowing money valve is shut, does human success disappear instantly?

One bottom line to grasp is that blindly treating money as the basis for success is too dangerous. Not to mention that we also need to find a stronger, more personalized definition of success and its meaning, both ideologically and spiritually. Simply speaking from a prudent point of view, we should avoid using other people's payments to measure our worth.

A meaningful and resonant definition of success must vary from person to person.

Father Buffett said to his son, “Peter, do you know, actually we all do the same thing. Music is your canvas, Berkshire is my canvas, and I add a few strokes to it every day.”

Success doesn't have to be defined the same way, and the same “scoring” standards don't have to be used. What matters is not what kind of net return we get in the end, but rather that we all have shared experiences and are all searching for the things we love.

Edit/Jayden