10 lessons from from Charlie Munger's Investing Principles Checklist

Wednesday, May 22 2019 by
10 lessons from from Charlie Mungers Investing Principles Checklist

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…

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8 Comments on this Article show/hide all

coniston 22nd May 1 of 8

Within those 10 rules is a lifelong of building knowledge,dedication & having the right temperament ,very few will ever come close to achieving that greatness.The Mungers & Buffetts come along once in a lifetime.

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covkid 22nd May 2 of 8

Great article - I wonder whether these guys always thought this stuff or whether they now see it as they reflect on their achievements ? When they first set out did they see things this way then ? Or did they grope their way thro' the murkiness just like some of us do.................

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shipoffrogs 22nd May 3 of 8

In reply to post #477916

Covkid - I think they cover this in the 3rd principle.

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covkid 22nd May 4 of 8

In reply to post #477976

Good point shipoffrogs.............

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Peter Craven 23rd May 5 of 8

True wisdom.

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iwright7 23rd May 6 of 8

For those of you interested there is another great book about Charlie Munger... Charlie Munger: The Complete Investor  which is also available as a CD or audio download. It is Charlie who steered Warren Buffett away from Cigar Butt Investing and I suspect is at least as important as Warren in Berkshire Hathaway's success.


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jonesj 23rd May 7 of 8

Poor Charlie's Almanac is a great read.
Also sources tell me that a free pdf can be found if you are prepared to scroll to the second or third page of Google search results.

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mathorp 27th May 8 of 8

That is a good summary, although I think number 3 should suggest a wide range of disciplines, not disciples.

Some of these principles are also good for other areas of endeavour - for example read them again thinking about politics!

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