Source: Red and Green

How to make a good decision? How to be a good investor? Formulating our own thoughts and choices in our thinking model is a good start. And building these mindsets is the key to making the right decisions.

1. You must not have only one “hammer” in your hand

A mental model is a prediction of the operation and development of things. To be clear, how you want things to develop is not a mental model, but how you think things will develop is your mental model.

If a person has a complete and sound mental model, he can make accurate predictions about the development of things, so he has the ability to make better judgments than others. When we describe people, we sometimes use vision and foresight to praise people whose mental models are more accurate than normal.

Wikipedia believes that the core of a mental model is that there must be multiple models. If you compare it to a tool, the more tools the better. It may not be possible to have many “tools” in reality, but you should allow your mind to have as many “tools” as possible in your “toolbox.”

Imagine what the outcome would be if you were to fix something and didn't have the right tools. Judging from my experience, if you have the right tools, you can solve problems better and do things better.

The same applies to mental models; the more mental models you have, the more you tend to make the right decisions.

This may seem natural on the surface, but in reality, it's not so natural in people's thinking. If people's brains aren't properly trained, then the brain is more likely to think about problems using patterns it knows and likes.

Munger's comment on this is to compare him to a person with only one hammer: “If a person only has a hammer as a weapon, then his way to solve all problems is to use only a hammer.”

When you're just used to using a mental model to think, you tend to cram everything into that mental model regardless of the circumstances. This can lead to dangerous thinking or wrong decisions.

How can it be avoided? Then you should try to add as many different models as possible to your existing mental model, and allow these models to compete and compare with each other.

At first, it's uncomfortable for the brain to operate like this, but you need to know that this is a different mental model at work.

Do you remember the first time you learned to ride a bike? At first, you probably didn't think or believe you could ride a bike, but in the end, you were able to ride a bike, and you can't imagine how to do it. Once you know how to do it, you'll never forget this skill.

Have a variety of different tools in your brain kit, don't be a person with just a “hammer.”

Charlie Munger said, “You must learn the essence in those major subjects, and use everything you learn regularly, not just a little bit. In reality, most people only learn a single subject and content. For example, many investors only learn economics and only use one method to solve all problems.”

Munger felt that thinking clearly was a response to a person's level of education. He believes that people's brains need exercise just like muscles.

Munger specifically mentioned these major disciplines that can help expand mental model thinking, and said that you don't need to know everything about these subjects, but you need to know the main content. These subjects are:

There are many subjects such as physics, psychology, biology, mathematics, philosophy, history, sociology, etc., but I won't list them all here.

II. Formulate an investment list

It is a must for investors to have their own checklist to check.

The inventory model helps investors make better investment decisions, but there is no law. Investors need to learn from their mistakes and keep adding new elements to their lists.

This checklist helps us, and helps investors stay rational in the face of uncertainty and chaos.

The successful investors we know, Seth Klarman (Seth Klarman, founder of Baupost, the fourth largest hedge fund in the world) and Monis Pabrai (MohnishPabrai, a disciple of Buffett, a new generation of value investors) are active users of the inventory method. They all say that using the inventory method in investing is a basic step in the decision-making process.

Munger himself has never said how he uses lists, but he has reminded us of the importance of lists through speeches, writing, and conversations on various occasions. He wants each of us to think for ourselves and make our own list that suits us.

3. Reverse Thinking

Munger said, “Learn to think things upside down. Thinking in reverse will help you find a lot of problems. Many of the problems were discovered and solved by thinking backwards and considering the problem backwards.”

In investing, do you want to profit by pursuing good results, or do you want to make yourself more successful by constantly training your risk aversion? To have a happy life is to try to avoid risky situations that put you in a bad situation.

Most people think big risk means big rewards, but Buffett earns his wealth by avoiding risk.

Munger once said that he and Buffett had such success not because of how smart they were, but because they did their best to “avoid being stupid.”

Here's an example relating to the stock market. If you find a stock and want to buy it, and after doing all the analysis, you deduce that you can buy it, you also need to think the opposite way and find out some reasons why you can't buy this stock.

By doing this, you can try to ensure that your research is comprehensive and that every aspect of this investment is thoroughly considered.

4. Good at learning from mistakes

This probably doesn't need much explanation. Be sure to learn from other people's and your own mistakes. The only way to make investors smarter is to keep learning from their mistakes. This is not only a question of attitude; it is also about raising one's own perspective on the issue.

After Edison invented the light bulb, some people told him that he had invented the light bulb with the most suitable material after 3,000 failures. Edison's answer was that he didn't fail 3,000 times; he just learned 3,000 ways he couldn't make a light bulb. That's an amazing level of looking at the problem.

Buffett has also said many times that he also learned many lessons from his failures. Buffett once invested millions of dollars to buy the Dexter shoe factory, and the factory went out of business a few years later. In the process of Buffett's later investigation of this company, he discovered his previous misthinking decisions, and since then he has summed up the “investment moat” theory. Buffett, a billionaire, also learned from mistakes and failures.

Recently, billionaire Pershing Square hedge fund founder Bill Ackman (Bill Ackman) experienced a setback in his investment. He invested in Valeant Pharmaceuticals, the pharmaceutical company's largest investor, and his investment in the company cost Aikman $1.09 billion.

Recently, he has appeared frequently on TV to explain his investment failure process and its impact on Pershing Funds. What we need to see is his humble attitude. Aikman is smarter and richer than many other investors in the world. He also publicly acknowledged his mistakes on TV shows. Every investor should have this attitude.

There are also investors in our lives who haven't done much actual research themselves and simply follow the advertisements of newspapers and other media to invest. Such investments have the potential to pay off, but this is just good luck.

Ultimately, blindly following will surely lead you to a loss situation. We need to learn from it, and if we don't do real research and research ourselves, we need to keep reminding ourselves that we may make mistakes.

5. Find a very good person to follow

Charlie Munger said, “I've spent my whole life looking for exceptional people to watch their investments. I'm very interested in what happened to them.

What you observe and learn will increase the success of your investment. Learning and emulating these amazing people must not stop at the surface; emulate their nonlinear thinking and style. This kind of imitation and learning will have a positive effect.”

Munger specifically recommended that investors take their free time to watch the movie “The Big Short”. This film is not only very entertaining, but also a true picture of what is happening in the real world of investing in real life.

6. Reading makes people rational

We are becoming more and more rational in investing. Nor does this rationality come overnight. If you have to be patient and practice how to think about problems using a different mental model, you will improve little by little every day.

Reading is one of the tricks of learning, and rationality is a learned form of behavior. We all have natural preferences for certain behaviors and ideas, but investors can teach themselves to be more rational by learning.

If you want to read the works of famous investors, you can find out what “functional disorders” you have in terms of thinking through comparison. Reading can also help you find ways to overcome these “dysfunctional disorders”, and also find the right direction for development.

7. Training falsification skills

Learn to think against your own ideas. It's easy for people to choose stocks they subconsciously like and filter out the opposite ideas that prevent them from choosing a stock before making a decision to buy.

But always remember that the stock market doesn't care how much you love that stock; the market is the most ruthless.

Mr. Munger highly praised Charlie Darwin's spirit of falsification. At the opening ceremony of the American Ivy League School in 2007, he commented that Darwin was an example of rational and objective thinking, particularly his ability to constantly correct his initial conclusions.

Munger said, “We need to learn Darwin's amazing analytical spirit. When Darwin had his initial ideas, he quickly put down his books to find evidence that could contradict his own. If you can keep practicing like Darwin, you'll also be an amazing perfect thinker rather than just studying what you originally thought.”

How do you apply this to investing? Munger explained, “Investing should take the same approach. When you find a company you like or an idea you think is great, you must first break down the idea and try your best to prove that you are wrong. If you can't prove that your investment idea is wrong, then you will have a good investment.”

Editor/jayden