Charlie Munger, the highly respected investor and business partner of Warren Buffett, once said that “no wise pilot, no matter how great his talent and experience, fails to use his checklist.”
His point was that in aviation - as in any discipline - it’s foolish to be complacent, no matter how good you think you are. A checklist approach - covering every important step - can save you from making costly mistakes.
While Munger is much more publicity-shy than Buffett, his personal principles have nonetheless become a major source of inspiration for many investors. Not only is he equally credited for the long-term success of Berkshire Hathaway, he’s also rated as one of the world’s foremost thinkers on the psychology and discipline of investing.
Part of what makes him interesting is the way he uses what he calls a “latticework of multiple mental models” to analyse potential investments. It’s essentially the way he gathers, processes and acts on information.
In Poor Charlie’s Almanack - which is the definitive guide to how Munger thinks - his approach is characterized as an effort to grasp the most relevant factors comprising an investment’s internal and external environment. It involves applying the most appropriate models in each case - which are grounded in disciplines as diverse as psychology, physiology, mathematics, engineering, biology, physics, chemistry, statistics and economics.
Helpfully, the book also provides Munger’s 10-point Investing Principles Checklist, which summarises his methodology. Here’s a rundown…
#1 Risk - All investment evaluations should begin by measuring risk - especially reputational
Munger’s approach to risk is both quantitative (incorporate a margin of safety) and qualitative (avoid dealing with people of questionable character). At a higher level, the overall thrust of his risk warning is to avoid big mistakes and shun permanent loss of capital.
#2 Independence - Only in fairy tales are emperors told they are naked
Munger says that in order to avoid average performance you have to be prepared to go against the herd. But it’s also important to realise that just because people agree or disagree with you, it doesn’t make you right or wrong. Ultimately, the key to this point is to be as objective and rational as possible - and to be accurate in your analysis.
#3 Preparation - The only way to win is to work, work, work, and hope to have a few insights
Munger was once…
