Charlie Munger: Investing Success from Mental Models & Checklists

Sunday, Feb 05 2012 by
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Charlie Munger Investing Success from Mental Models  Checklists

As many will know, Charlie Munger is Warren Buffett's confidant, partner and the Vice-Chairman of Berkshire Hathaway. Buffett credits him with much of the success of his investing approach: "Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me. This was the real impact Charlie had on me. It took a powerful force to move me on from Graham's limiting views. It was the power of Charlie's mind. He expanded my horizons.

Although less well-known than Buffett, Munger was also a first class investor in his own right before his years with Berkshire. He was lauded in Buffett's 1984 essay, "The Superinvestors of Graham-and-Doddsville". Although Charlie started out as a lawyer, he also ran an investment partnership of his own from 1962 to 1975 and generated compound annual returns of 19.8% during the 1962–75 period (vs. a 5.0% annual return for the Dow).

A very interesting distillation of Munger's approach can be found in "Poor Charlie's Almanack" (first published in 2004). Compiled by Peter Kaufman, the book is a collection of Munger's speeches over the years and a summary of his ideas. Munger is an admirer of Benjamin Franklin, and the book's title is apparently a tribute to Franklin's Poor Richard's Almanack.

Latticework of Mental Models

Munger is best known for  emphasising the power & importance of multi-disciplinary learning (or he calls it, "worldly wisdom") to become successful at stock-picking as well as life generally. He argues that investors should not just focus on a few narrow topics but expand their horizons to understand many different subjects. This allows savvy investors to avoid myopia - "If you have a hammer everything will start to look like a nail" - and profit from others' shortsightedness. 

The best example of this thinking was a speech he gave in 1994 to the University of Southern California Business School entitled "A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business". Rather than discussing the stock market specifically, he challenged the students to see the market, of finance, and of economics as part of a larger body of knowledge, that also incorporates psychology, engineering, mathematics, physics, and the humanities. To drive his point home, Charlie used a memorable metaphor to describe this interlocking structure of ideas: 

"You've got to have models in your head and you've…

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