I recently finished reading this outstanding classic book “Poor Charlie’s Almanack” from Charlie Munger. By reading this book, I gradually understand how this great investment wizard sees the world different from most of us and how he made his shrewd investment decisions. I learn about his intellect, integrity, timeless investment insights and best of all, the rational thought process on how to avoid the mishap caused by the psychology of human misjudgement. I also learn that every investor should better equip with multidisciplinary knowledge inside and outside of the investment world since everything is closely interconnected.
The most important lesson that I learned is his 10 points “Investing Principles Checklist” as follow,
Risk – All investment evaluations should begin by measuring risk, especially reputational
- Incorporate an appropriate margin of safety
- Avoid dealing with people of questionable character
- Insist upon proper compensation for risk assumed
- Always beware of inflation and interest rate exposures
- Avoid big mistakes; shun permanent capital loss
Independence – “Only in fairy tales are emperors told they are naked”
- Objectivity and rationality require independence of thought
- Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
- Mimicking the herd invites regression to the mean (merely average performance)
Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights”
- Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
- More important than the will to win is the will to prepare
- Develop fluency in mental models from the major academic disciplines
- If you want to get smart, the question you have to keep asking is “why, why, why?”
Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom
- Stay within a well-defined circle of competence
- Identify and reconcile disconfirming evidence
- Resist the craving for false precision, false certainties, etc.
- Above all, never fool yourself, and remember that you are the easiest person to fool
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”
–Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions
- Determine value apart from price; progress apart from activity; wealth apart from size
- It is better to remember the obvious than to grasp the esoteric
- Be a business analyst, not a market, macroeconomic, or security analyst
- Consider totality of risk and effect; look always at potential second order and higher level impacts
- Think forwards and backwards – Invert, always invert
Allocation – Proper allocation of capital is an investor’s number one job
- Remember that highest and best use is always measured by the next best use (opportunity cost)
- Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
- Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven
Patience – Resist the natural human bias to act
- “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
- Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
- Be alert for the arrival of luck
- Enjoy the process along with the proceeds, because the process is where you live
Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction
- Be fearful when others are greedy, and greedy when others are fearful
- Opportunity doesn’t come often, so seize it when it comes
- Opportunity meeting the prepared mind; that’s the game-
Change – Live with change and accept unremovable complexity
- Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
- Continually challenge and willingly amend your “best-loved ideas”
- Recognize reality even when you don’t like it – especially when you don’t like it-
Focus – Keep things simple and remember what you set out to do
- Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
- Guard against the effects of hubris (arrogance) and boredom
- Don’t overlook the obvious by drowning in minutiae (the small details)
- Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
- Face your big troubles; don’t sweep them under the rug
We can boil down the above guiding principles and also Charlie’s fundamental philosophy of life into four simple words: Preparation. Discipline. Patience. Decisiveness.
In addition, here are some of my other favorite quotes,
“Read all the time”
“Be prepared, act promptly, in scale, on a few major opportunities.”
“Our game is to recognize a big idea when it comes along, when it doesn’t come along very often. Opportunity comes to the prepared mind.”
“Big money is made in the waiting”
“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities”
“You need to have a passionate interest in why thing are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have that cast of mind your destined for failure even if you have a high I.Q.”
Another thought and quote that I extremely favor is as follow, 
I believe this directly speaks to me about the psychology on when and how to sell the stocks. By carefully reviewing of my past two years’ portfolio performance, I find that 70% of my investment mistakes come from my bad timing of selling the stocks, not by buying the stocks! This is quite shocking to me! When I prepared to sell the stocks, I always waited for the moment when the stock price approaching around 100% of the intrinsic value and totally ignore the obvious imminent volatility of the market overall and the company themselves, and I always hoped that since the prices went higher, they can go higher and higher since they are so good companies (Status quo bias). However, the reality is always the opposite, most of the time way before the stock prices approaching the intrinsic value, due to the obvious volatility (not fully speculated volatility), the stock price pulled back, and I have to wait for very long time to make my portfolio to break even… I missed a lot of opportunities to sell the good stocks at the right time (of about the right time), this is demonstrated in my selling of ADGF, BAC and AIG. If can overcome this psychology misshape, my portfolio can be at least 70% better than it is right now.
To sum it up of my review of this book,
I think this book should be used as an excellent reference tool. In order to master the concepts and make consistent & handsome profit in my investment, I need to chew on it and implement/practice the powerful principles again and again in my daily investment activities. It will not be a one time or one year reading and then let the book perish on bookshelf, instead, it will be a many years’ worthwhile learning and adventure. So I should always be Prepared, Disciplined, Patient, Decisive, and I am confident that I will be constantly changed and improved by the learning.
