April 15, 2024 • 26 mins
Dive deep into the well of wisdom with us as we trace the remarkable steps of Charlie Munger, a titan of investment whose life is a playbook for triumph over adversity and shrewd business acumen. Today, we unfold the Midwestern values that powered Munger's rise to the pinnacle of financial success, and how his principles are a beacon for the professional painting industry, instilling a blueprint for unwavering reliability. As we recount how Munger's personal struggles fortified his professional journey, you'll gain a rich perspective on the indispensable role of community and resilience, turning personal trials into a fertile ground for growing a prosperous ethos.
Venture further into the psychological mechanisms that can transform your business strategies, where the forces of reciprocation, incentive bias, and social proof reveal the hidden levers of consumer behavior. By tapping into these principles, you'll sharpen your sales prowess and advocate for ethical performance that pays dividends. Plus, learn why confining your ambitions to your circle of competence is the secret to sustaining innovation and mastery in your field. Join us as we navigate these waters of wisdom, guided by the sage advice from Munger's "Poor Charlie's Almanack," and ready your sails for the waves of opportunity that await the bold and the knowledgeable.
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Speaker 1 (00:00):
Welcome to the Profitable Painter Podcast
biography edition, where wedelve into the lives of some of
history's most successfulindividuals to uncover to the
strategies, tactics and mindsetsthat propelled them to
greatness.
Today we're exploring thisextraordinary life of a figure
whose keen observations andcommon sense led to one of the
greatest massings of wealth inthe last 100 years.
Join me as we navigate thejourney of this remarkable
(00:22):
individual and extractinvaluable lessons you can apply
to elevate your professionalpainting business.
Get ready to be inspired tolearn and to transform the way
you think about success andleadership in your own
entrepreneurial journey.
Charlie Munger is an Americaninvestor, businessman and
philanthropist, best known asthe vice chairman of Berkshire
(00:45):
Hathaway, the conglomeratethat's led by Warren Buffett.
He was born in Omaha, nebraska,in 1924.
Munger is revered for his sharpwit, profound wisdom on
investment in life and hisstraightforward approach to
business and economics.
Alongside Buffett, he played acrucial role in growing
(01:07):
Berkshire Hathaway from astruggling textile company into
one of the largest and mostsuccessful corporations in the
world, with a diverse portfolioof businesses and investments.
Munger is also celebrated forhis multidisciplinary approach
to problem solving and decisionmaking, often drawing on a wide
(01:28):
range of disciplines beyondeconomics, including psychology,
history and physics.
Beyond his businessachievements, he is noted for
his significant philanthropicefforts, having donated millions
to various causes andinstitutions.
I read Poor Charlie's Almanacthis past week and it was a
(01:53):
highly recommend book.
It has a lot of good wisdom inthere that I was able to extract
.
I'm going to go through it withyou today.
Poor Charlie's Almanac is abiography in the beginning and
(02:14):
then it goes into severaldifferent talks that Charlie
gave, where he's giving adviceto people on how to live their
lives and make money.
Here's a quote from the book.
The quotes, talks and speechespresented here are rooted in the
old-fashioned Midwestern valuesfor which Charlie has become
(02:34):
known Lifelong learning,intellectual curiosity, sobriety
, avoidance of envy andresentment, reliability,
learning from the mistakes ofothers, perseverance,
objectivity and willingness totest one's own beliefs.
So let's dive into Charlie'slife.
Here's a quote from the book.
Charlie's teachers remember asmart kid who was also inclined
(02:58):
to be a bit of a wise, awiseacre.
He enjoyed challenging theconventional wisdom of teachers
and fellow students with hisever-increasing knowledge gained
through voracious reading,particularly biographies.
So Charlie started readingbiographies from an early age
(03:19):
and he's known for having a hugelibrary and is able to recall
and give examples of famouspeople throughout history to
prove his points.
So he is an avid reader, thathe's basically a walking
encyclopedia or he was.
I should note that CharlieMunger did pass away late last
(03:43):
year and definitely a great loss, but he did live a full life
and he did pass on a lot oflessons to us.
So here's another quote fromthe book.
Charlie's grandfather was arespected federal judge.
Charlie's immediate family wasnot dramatically affected by the
depression, but some members ofCharlie's extended family were.
This era provided real learningexperiences for young Charlie.
(04:04):
He witnessed the generosity andbusiness acumen of his father
as he helped rescue a small bankthat was owned by Charlie's
uncle, tom.
Because of the miserableeconomy and drought damaged
crops, the bank's farm-basedclients were defaulting on loans
.
Tom had rolled up 35,000 inuncollectible notes.
(04:25):
When he called upon GrandpaMunger for support, the judge
risked nearly half of his assetsby exchanging 35,000 in sound
first mortgages for the bank'sweak loans, thus enabling Tom to
open his doors afterRoosevelt's bank holiday.
The judge eventually recoveredmost of his investment, but not
(04:45):
until a great many years later.
Judge Munger also sent hisdaughter's husband, a musician,
to pharmacy school and helpedhim buy a well-located pharmacy
that had closed because of thedepression.
The business prospered andsecured the future for Charlie's
aunt.
Charlie learned that bysupporting each other the
(05:06):
mongers weathered them worsteconomic collapse in nations
history.
So, basically, I think thetakeaway for this is you need to
have a mission that's largerthan just yourself.
Right, you want to bedependable for your family and
maybe extend that to family andfriends.
You want to be a dependableperson for your, your tribe, and
(05:30):
this is this is what I try todo in my life, and I think it
definitely pays to do this.
It's it's.
It's not just selfless, it's, Ithink it's self-serving as well
, because if you're helpingothers, they want to help you,
and so goes on.
You know Charlie's life wasn'tall sunshine's and, ray Bose, he
(05:52):
definitely had some challengesin his life.
Here's a quote from the bookdespite outward appearances and
all was not sunny in Charlie'sworld, his marriage was in
trouble and he and his wifefinally divorced in 1953 Now not
long after, charlie learnedthat his adored son Teddy was
terminally ill with leukemia.
It was a significant burden for29 year old Charlie.
(06:15):
In that area, era before bonemarrow transplants, there was no
hope.
A A friend remembers thatCharlie would visit his son
dying in the hospital and thenwalk the streets of Pasadena
crying.
So definitely probably one ofthe worst things that you could
experience in your life is thedeath of your child, especially
(06:37):
at such a young age.
So Charlie definitely had somechallenges throughout his life
and he didn't actually meetWarren Buffett until he was in
his, his 30s.
He you know, charlie Mungerstarted out as a lawyer.
He got a degree from HarvardHarvard who he actually never
(07:00):
got a bachelor's degree, but hewas still accepted into Harvard
Law School and then he started alaw firm.
But then he eventually MetWarren Buffett, and so this is a
quote from the book out of thatmeeting.
So during homecoming Homecomingdinner, charlie and Warren
realized they share many ideas.
(07:22):
It also became evident toothers at the table that he was
going.
This is going to be a two-wayconversation.
As the evening progressed, thetwo young men, warren 29, and
Charlie, 35, became engrossed ina wide-ranging dialogue
covering many aspects ofbusiness, finance and history.
Where one was knowledgeable,the other was just excited to
(07:43):
learn.
Warren was an unenthusiasticabout Charlie's continued
practice of law.
He said that while law might bea good hobby for Charlie, it
was far less promising businessThen what Warren was doing.
Warren's logic helped Charlieto decide to quit the law
practice at the earliest pointhe had afford to do so.
When Charlie returned to LosAngeles, the conversations
(08:04):
continued via telephone andlengthy letters, sometimes as
long as nine pages.
It was evident to both thatthey were meant to be in
business together.
There was no formal partnershipor contract, contractual
Relationship.
The bond was created by ahandshake and backed by two
Midwesterners who understood andrespected the value of one's
words.
So this is the the firstmeeting from between Warren
(08:29):
Buffett and Charlie Munger, andI think Charlie was quoted as
saying trust is the greatesteconomic force on earth, and I
think he this was gained byexperience.
You know the relationshipbetween Charlie and Warren is
basically a handshake and theygo into business together and
(08:51):
they've had that business, youknow, going on decades and
decades and they've made aridiculous amount of money doing
this venture together.
And I think you know when, ifyou're ever going into business
with someone else, you probablyshould kind of look at what's
worked in the past, because alot of partnerships do not end
(09:12):
well and so it's.
It's very risky to go into part, go into business with a
partner, so you really need tomake sure you trust that person
and you there.
They make you a better personand you have Just basically like
a marriage.
You want to treat a partnership, basically Like you're gonna
marry this person because youare from a business perspective.
(09:33):
So I think Charlie and Warrendefinitely Gelled quite well and
they've proven that that it wasa good marriage to go forward
with.
So Now I'm gonna kind of shiftinto kind of taking pieces out
of the book on different themes.
One of the themes is learning.
(09:56):
Charlie was, is a lifetimelearner he's.
He was quoted as saying youknow, you should wake up each
day or go to bed each day alittle wiser than you were the
day before, and here's a quotefrom the book.
Charlie's affinity for BenBenjamin Franklin's expansive
career in government, business,finance and industry Can be
found in his many speeches andwhenever he holds an audience,
(10:19):
large or small.
At the 75th anniversaryanniversary of C's candies,
charlie said I am a biography,not myself, and I think when
you're trying to teach the greatconcepts that work, it helps to
tie them into the lives andpersonalities of people who
develop them.
I think you learn economicsbetter if you make Adam Smith
your friend.
That sounds funny, makingfriends among the eminent dead.
(10:42):
But if you go through lifemaking friends with the eminent
dead who had the right ideas, Ithink it will work better for
you in life and work better ineducation.
It's a way.
It's way better than justgiving the basic concepts.
So this is kind of what we'redoing right now.
Right, we're going throughbiographies and connecting ideas
(11:03):
with people and their story andit kind of Helps things to sink
in better, at least for me, andit appears like it did so for
Charlie as well.
There's another quote for thebook Is insatiable appetite for
learning, is uncanny ability toevaluate businesses using simple
frameworks that produce morereliable analysis than complex
(11:24):
financial statements, and hispartnership with Buffett.
He, he was always learning andhe was able to Grab mental
models from other, from multipledisciplines, and kind of use
them in his decision-makingprocess in a checklist format to
evaluate his thinking and tomake wise decisions and in an
(11:45):
execute Good judgment.
So that was kind of hissuperpower and we're gonna go
more into mental models here ina bit.
First I want to cover one ofthe other themes is avoiding
misery.
He did a whole talk on how youcan avoid misery.
It was a speech he gave at auniversity in graduation.
He actually modeled it off of atalk or a speech that Johnny
(12:09):
Carson did before and he justkind of took that same idea and
expanded on it.
Instead of doing a talk on howto be happy, he did a inverse of
that and said how to guaranteemisery.
So his talk was on how toguarantee misery.
So this is one of the mentalmodels that he uses a lot, which
(12:31):
is inverse.
You always look at it from aninverse perspective to get
better insight into it.
He talks about how to guaranteemisery.
There's four things Basically.
One you want to be unreliableif you want to guarantee misery,
not be dependable.
Number two you want to ignorethe best work done by others.
(12:55):
Basically, you don't want tolearn from the past.
You just want to ignore that.
Don't learn from history, justdo whatever comes to mind to you
and don't worry about whathappened in the past.
So obviously that's definitelya way to guarantee misery,
because humans have learned somuch over thousands of years and
(13:16):
we should definitely use thatto our advantage as we grow and
go through our lives.
So we want to look back on whatothers have done to improve our
own lives.
Number three was to give up atthe first setback.
If you want to guarantee miseryand give up at the first
setback, number four is approachproblems in a standard way and
only believe information thatagrees with your previous
(13:39):
conclusion.
So obviously this is numberfour.
It's kind of you're notlearning and you're not
evaluating your thinking andyou're just kind of going with a
confirmation bias and onlyfinding information that
supports your current conclusion.
So those are the four thingsthat he said that you should do
(13:59):
if you want to guarantee miseryBe unreliable, ignore the best
work of others, give up at thefirst setback and approach
problems in a standard way andlook at information that
supports your previousconclusion.
So that kind of goes into thenext theme of the book, which is
(14:20):
mental models.
So I'm going to read a quotefrom the book.
These models supply theanalytical structure that
enables him to reduce theinherent chaos and confusion of
a complex investment probleminto a clarified set of
fundamentals.
Especially important examplesof these models include the
redundancy and back up systemmodels from engineering, the
(14:43):
compound interest model formathematics, the break point,
tipping moment and auto callousmodels from physics and
chemistry, the modern Darwiniansynthesis model from biology and
cognitive misjudgment modelsfrom psychology.
So Charlie basically thoughtthat you should have a bunch of
(15:04):
these models in your mind and sowhenever you're faced with any
problem, you kind of go throughthose models.
And the models don't have to be, you don't have to know the
details of everything, you justhave the big ideas in your head.
So you can kind of test theproblem against those ideas,
those big picture ideas in yourhead, and kind of make sure
(15:27):
you're thinking through thingsclearly.
So I'm going to go through someof the tendencies.
These are like psychologicaltendencies.
He kind of used thesepsychological tendencies as a
checklist for his own thinkingto make sure he wasn't making
bad decisions.
This was in talk 11, which istowards the end of the book.
One of the tendencies wasreciprocation tendencies.
(15:48):
So people tend to feelobligated to reciprocate favors
or gifts, even when it may notbe in their best interest, and
he has a lot of anecdotes onthese.
Basically, you can use thisreciprocation tendency to
protect yourself If somebody, ifyou go to a car salesman and
they're treating you all nice,to give you a cup of coffee and
sit you down in a nice chair andall that stuff.
(16:11):
The tendency for humans is tobasically kind of pay.
Try to want to pay that carsalesman back by maybe agreeing
to the initial price, notwanting to negotiate as much.
So you can keep that in mindwhen you're going through those
experiences and try to protectyourself against that.
(16:33):
Also, you can use it to youradvantage in your sales process,
like providing a gift to aprospective client.
When you go over an estimate.
Bring over a nice little giftto thank them for the
opportunity to provide them anestimate and you can kind of
exploit the reciprocationtendency for your own purposes.
(16:57):
Another Okay Bias or tendencywas the incentive caused bias.
So people's behavior can beheavily influenced by incentives
, sometimes leading to unethicalor irrational decisions.
So incentives was a big thingthat Charlie hit on a lot,
making sure you get theincentives right in your
business, especially because ifyou can get the incentives right
(17:20):
, it's like a superpower foryour business.
It will.
That's the rocket fuel if youcan get everybody on the same
page, moving the same Samedirection.
But if you get the incentiveswrong, that's also bad.
Or if the incentives can befaked, if you can fake the
numbers, you know you that'sgonna be bad as well, because
people are gonna do things thatare in there that are in their
(17:41):
interest.
So you got to get theincentives right.
Number three, with social proof,individuals often look to the
Actions of others to determinetheir own behavior, especially
in uncertain situations.
So this is the social prooftendency If everybody else is
doing it, maybe I'll do it tookind of thing.
You can use this to youradvantage, this tendency to your
(18:03):
advantage, when you're in yoursales process, for example.
If you have stacks and stacksof social proof of all the
people have used your, yourbusiness, you know that's gonna
be very compelling because it'sexploiting that reciprocation
tendency.
And if you can stack all the alot of these tendencies together
, if you're doing providing agift, you're doing social proof,
(18:23):
you're providing some sort ofincentive for them to sign up
with you today.
If you're stacking these, thesetendencies in your sales
process, for example, orwhatever situation, it's gonna
have what Charlie Munger CharlieMunger calls a lot Lollapalooza
effect, where it's just gonnabe overwhelmingly compelling for
(18:44):
that person to act.
So that's something really coolthat you can kind of go through
.
Talk 11 goes through all thesetendencies.
Those are three of the 25 hegoes through.
Now the next topic I'm gonnatalk about is the incentives.
I'm gonna read a quote from thebook here.
Almost everyone thinks he'sfully recognized Fully
(19:05):
recognizes how importantincentives and disincentives are
in changing cognition andbehavior.
But this is not often so.
I think I've been in the top 5%of my age cohort almost all my
adult life and understanding thepower of incentives.
Yet I've always underestimatedthat power.
Never a year passes.
(19:25):
But I get some surprise.
That pushes a little further myappreciation of incentive
superpower.
One of my favorite cases aboutthe power of incentives is the
federal express case.
The integrity of the federalexpress system.
It requires that all packagesbe shifted rapidly among
airplanes in one central airporteach night.
(19:45):
The system has no integrity forthe the customers if the night
work shift can't accomplish itsassignment fast.
And Federal Express had onehell of a time getting the night
shift to do the right thing.
They tried moral Suasion, theytried everything in the world
without luck and finallySomebody got the happy thought
that it was foolish to pay thenight shift by the hour, when
(20:09):
the employer wanted Was notmaximize billable hours of
employee service but fault-free,rapid performance of a
particular task.
Maybe this the person thoughtif they paid the employees per
shift and Let all night shiftemployees go home when all the
planes were loaded, the systemwould work better.
And lo and behold, thatsolution worked.
(20:31):
Early in the history of Xerox,joe Wilson Wilson had a similar
experience.
He couldn't understand why it'snew machine was selling so
poorly in relation to its olderand inferior machine.
He found out that thecommission arrangement with the
salesmen gave a larger andperverse incentive to push the
inferior Machine on customers.
This maximum is a wise guide toa great and simple precaution
(20:56):
in life Never, ever, think aboutsomething else when you should
be thinking about the power ofincentives.
The most important rule inmanagement is get the incentives
right.
So this, just this one idea youcan implement in your business.
When I heard it, this part ofthe book, it just made me
(21:16):
rethink my incentive structures,structures in my business.
So making sure your, your, yourcrews are incentivized to
perform work that is efficientand providing good service.
Make making sure your, your,your sales team is incentivized
to close work that is profitable, and Making sure you've
(21:38):
incentivized your productionmanagers to produce work that is
efficient, but also getting youhigh customer satisfaction
ratings.
So those you have to build inthose things you know bonuses,
performance pay system somethingto get everybody on the same
page, moving towards the samegoals.
And then the last thing here,last note, is the focus and
(22:02):
patience.
There are huge advantages forearly birds this is a quote from
book huge advantages for earlybirds.
When you're an early bird,there's a model that I call
surfing.
When a surfer gets up andcatches the wave and just stays
there, he can go a long, longtime, but he gets off the wave,
he becomes mired in the shallows.
But people get long runs whenthey're right on the edge of the
wave, whether it's markets,microsoft, intel or all kinds of
(22:23):
people, including national cashregister.
Surfing is a very powerfulmodel.
So, basically, once you're in a, once you get a good business
going.
The whole thing is surfing,staying there, improving,
continuing.
People get distracted and theywant to.
Oh, I'm doing really good here,maybe I'll do something else
too.
They get distracted and theystart diversifying their efforts
(22:47):
and their focus, and that isnot a good thing to do.
People who are get massivesuccess is because they focused
on one thing for a long time.
And so here's an example Disneyis an example of auto-catalysis
.
So auto-catalysis is thereaction, where a product of
(23:08):
itself acts as a catalyst forthe reaction, so it's like
self-reinforcing.
And there's a quote from thebook about Disney here.
Disney is an amazing example ofauto-catalysis.
They had all those movies inthe can and just as Coke could
prosper when refrigeration came.
(23:29):
When the videocassette wasinvented, disney didn't have to
invent anything or do anythingexcept take the thing out of the
can and stick it in thecassette, and every parent and
grandparent wanted hisdescendants to sit around and
watch that stuff at home onvideocassette.
So Disney got this enormoustailwind from life and it was
(23:51):
billions of dollars worth oftailwind.
Obviously, that's a marvelousmodel if you can find it.
You don't have to inventanything.
All you have to do is sit therewhile the world carries you
forward.
By the time it's done, the LionKing alone is going to do
plural billions and by the way,when I say when it's done, I
(24:11):
mean 50 years from now orsomething, but plural billions
from one movie.
So basically, the takeaway Ithink from this quote is, if you
stay in the game long enough,you can get lucky and ride a
wave, and you can potentiallyget in a situation where you're
just getting results fed to you.
(24:33):
But the key is you get to stayin the game and be in there for
the long term and not kind ofjump around and get distracted
and pursue other opportunities.
Then the final theme here is acircle of competence.
So the circle of confidence issimple, and this is a quote from
Charlie Munger.
(24:54):
Each of us, through experienceor study, has built up useful
knowledge on certain areas ofthe world.
Some areas are understood bymost of us, while some areas
require a lot more speciality toevaluate.
And then he goes on.
I think about things where Ihave an advantage over other
people.
I don't play in a game wherethe other people are wise and
I'm stupid.
I look for a place where I'mwise and they're stupid.
(25:17):
You have to know the edge ofyour own competency.
I'm very good at knowing when Ican't handle something.
You have to figure out whatyour own aptitudes are.
If you play games where otherpeople have the aptitudes and
you don't, you're going to lose,and that's as close to certain
as any prediction that you canmake.
You have to figure out whereyou've got an edge and you've
(25:40):
got to play within your owncircle of competence.
So not only do you need to stayengaged in the same endeavor for
a long period of time, butduring that period of time
you're probably going to getthat circle of competence.
You're going to gain a greatdeal of competence in that area
(26:02):
and it behooves you to stay inthat competence area because
you're going to be wiser thanother people, you're going to be
making better decisions, doingmore creative strategies and so
on.
So it's going to beself-reinforcing to stay in that
.
So it's just a common thingthat I've fallen into in my own
life is, once you get moresuccessful, there's other
(26:25):
opportunities that presentitself and those can seem very
attractive and you might want tojump ship in your own, the
thing that got you to success,to go pursue another opportunity
because it looks really thegrass is always greener, but
that's usually not the rightmove.
Just staying focused on yourarea of expertise and where
(26:50):
you've made your success isprobably the right move to stay
in that area and continue toimprove, get better, develop
that circle of competence andcontinue that focus.
So overall, this book is justfull of lessons from Charlie
Munger.
So I highly recommend you pickup a copy of poor Charlie's
(27:13):
almanac and just get some of thelife lessons that he passes on.
He had a long life and he had ahuge amount of success that
he's directly passing on to you.
So it's definitely worth thefew dollars of investment to
grab the book and get somepointers from Charlie Munger
himself, and with that we'll seeyou next week.
Welcome to the Profitable Painter Podcast
biography edition, where wedelve into the lives of some of
history's most successfulindividuals to uncover to the
strategies, tactics and mindsetsthat propelled them to
greatness.
Today we're exploring thisextraordinary life of a figure
whose keen observations andcommon sense led to one of the
greatest massings of wealth inthe last 100 years.
Join me as we navigate thejourney of this remarkable
(00:22):
individual and extractinvaluable lessons you can apply
to elevate your professionalpainting business.
Get ready to be inspired tolearn and to transform the way
you think about success andleadership in your own
entrepreneurial journey.
Charlie Munger is an Americaninvestor, businessman and
philanthropist, best known asthe vice chairman of Berkshire
(00:45):
Hathaway, the conglomeratethat's led by Warren Buffett.
He was born in Omaha, nebraska,in 1924.
Munger is revered for his sharpwit, profound wisdom on
investment in life and hisstraightforward approach to
business and economics.
Alongside Buffett, he played acrucial role in growing
(01:07):
Berkshire Hathaway from astruggling textile company into
one of the largest and mostsuccessful corporations in the
world, with a diverse portfolioof businesses and investments.
Munger is also celebrated forhis multidisciplinary approach
to problem solving and decisionmaking, often drawing on a wide
(01:28):
range of disciplines beyondeconomics, including psychology,
history and physics.
Beyond his businessachievements, he is noted for
his significant philanthropicefforts, having donated millions
to various causes andinstitutions.
I read Poor Charlie's Almanacthis past week and it was a
(01:53):
highly recommend book.
It has a lot of good wisdom inthere that I was able to extract
.
I'm going to go through it withyou today.
Poor Charlie's Almanac is abiography in the beginning and
(02:14):
then it goes into severaldifferent talks that Charlie
gave, where he's giving adviceto people on how to live their
lives and make money.
Here's a quote from the book.
The quotes, talks and speechespresented here are rooted in the
old-fashioned Midwestern valuesfor which Charlie has become
(02:34):
known Lifelong learning,intellectual curiosity, sobriety
, avoidance of envy andresentment, reliability,
learning from the mistakes ofothers, perseverance,
objectivity and willingness totest one's own beliefs.
So let's dive into Charlie'slife.
Here's a quote from the book.
Charlie's teachers remember asmart kid who was also inclined
(02:58):
to be a bit of a wise, awiseacre.
He enjoyed challenging theconventional wisdom of teachers
and fellow students with hisever-increasing knowledge gained
through voracious reading,particularly biographies.
So Charlie started readingbiographies from an early age
(03:19):
and he's known for having a hugelibrary and is able to recall
and give examples of famouspeople throughout history to
prove his points.
So he is an avid reader, thathe's basically a walking
encyclopedia or he was.
I should note that CharlieMunger did pass away late last
(03:43):
year and definitely a great loss, but he did live a full life
and he did pass on a lot oflessons to us.
So here's another quote fromthe book.
Charlie's grandfather was arespected federal judge.
Charlie's immediate family wasnot dramatically affected by the
depression, but some members ofCharlie's extended family were.
This era provided real learningexperiences for young Charlie.
(04:04):
He witnessed the generosity andbusiness acumen of his father
as he helped rescue a small bankthat was owned by Charlie's
uncle, tom.
Because of the miserableeconomy and drought damaged
crops, the bank's farm-basedclients were defaulting on loans
.
Tom had rolled up 35,000 inuncollectible notes.
(04:25):
When he called upon GrandpaMunger for support, the judge
risked nearly half of his assetsby exchanging 35,000 in sound
first mortgages for the bank'sweak loans, thus enabling Tom to
open his doors afterRoosevelt's bank holiday.
The judge eventually recoveredmost of his investment, but not
(04:45):
until a great many years later.
Judge Munger also sent hisdaughter's husband, a musician,
to pharmacy school and helpedhim buy a well-located pharmacy
that had closed because of thedepression.
The business prospered andsecured the future for Charlie's
aunt.
Charlie learned that bysupporting each other the
(05:06):
mongers weathered them worsteconomic collapse in nations
history.
So, basically, I think thetakeaway for this is you need to
have a mission that's largerthan just yourself.
Right, you want to bedependable for your family and
maybe extend that to family andfriends.
You want to be a dependableperson for your, your tribe, and
(05:30):
this is this is what I try todo in my life, and I think it
definitely pays to do this.
It's it's.
It's not just selfless, it's, Ithink it's self-serving as well
, because if you're helpingothers, they want to help you,
and so goes on.
You know Charlie's life wasn'tall sunshine's and, ray Bose, he
(05:52):
definitely had some challengesin his life.
Here's a quote from the bookdespite outward appearances and
all was not sunny in Charlie'sworld, his marriage was in
trouble and he and his wifefinally divorced in 1953 Now not
long after, charlie learnedthat his adored son Teddy was
terminally ill with leukemia.
It was a significant burden for29 year old Charlie.
(06:15):
In that area, era before bonemarrow transplants, there was no
hope.
A A friend remembers thatCharlie would visit his son
dying in the hospital and thenwalk the streets of Pasadena
crying.
So definitely probably one ofthe worst things that you could
experience in your life is thedeath of your child, especially
(06:37):
at such a young age.
So Charlie definitely had somechallenges throughout his life
and he didn't actually meetWarren Buffett until he was in
his, his 30s.
He you know, charlie Mungerstarted out as a lawyer.
He got a degree from HarvardHarvard who he actually never
(07:00):
got a bachelor's degree, but hewas still accepted into Harvard
Law School and then he started alaw firm.
But then he eventually MetWarren Buffett, and so this is a
quote from the book out of thatmeeting.
So during homecoming Homecomingdinner, charlie and Warren
realized they share many ideas.
(07:22):
It also became evident toothers at the table that he was
going.
This is going to be a two-wayconversation.
As the evening progressed, thetwo young men, warren 29, and
Charlie, 35, became engrossed ina wide-ranging dialogue
covering many aspects ofbusiness, finance and history.
Where one was knowledgeable,the other was just excited to
(07:43):
learn.
Warren was an unenthusiasticabout Charlie's continued
practice of law.
He said that while law might bea good hobby for Charlie, it
was far less promising businessThen what Warren was doing.
Warren's logic helped Charlieto decide to quit the law
practice at the earliest pointhe had afford to do so.
When Charlie returned to LosAngeles, the conversations
(08:04):
continued via telephone andlengthy letters, sometimes as
long as nine pages.
It was evident to both thatthey were meant to be in
business together.
There was no formal partnershipor contract, contractual
Relationship.
The bond was created by ahandshake and backed by two
Midwesterners who understood andrespected the value of one's
words.
So this is the the firstmeeting from between Warren
(08:29):
Buffett and Charlie Munger, andI think Charlie was quoted as
saying trust is the greatesteconomic force on earth, and I
think he this was gained byexperience.
You know the relationshipbetween Charlie and Warren is
basically a handshake and theygo into business together and
(08:51):
they've had that business, youknow, going on decades and
decades and they've made aridiculous amount of money doing
this venture together.
And I think you know when, ifyou're ever going into business
with someone else, you probablyshould kind of look at what's
worked in the past, because alot of partnerships do not end
(09:12):
well and so it's.
It's very risky to go into part, go into business with a
partner, so you really need tomake sure you trust that person
and you there.
They make you a better personand you have Just basically like
a marriage.
You want to treat a partnership, basically Like you're gonna
marry this person because youare from a business perspective.
(09:33):
So I think Charlie and Warrendefinitely Gelled quite well and
they've proven that that it wasa good marriage to go forward
with.
So Now I'm gonna kind of shiftinto kind of taking pieces out
of the book on different themes.
One of the themes is learning.
(09:56):
Charlie was, is a lifetimelearner he's.
He was quoted as saying youknow, you should wake up each
day or go to bed each day alittle wiser than you were the
day before, and here's a quotefrom the book.
Charlie's affinity for BenBenjamin Franklin's expansive
career in government, business,finance and industry Can be
found in his many speeches andwhenever he holds an audience,
(10:19):
large or small.
At the 75th anniversaryanniversary of C's candies,
charlie said I am a biography,not myself, and I think when
you're trying to teach the greatconcepts that work, it helps to
tie them into the lives andpersonalities of people who
develop them.
I think you learn economicsbetter if you make Adam Smith
your friend.
That sounds funny, makingfriends among the eminent dead.
(10:42):
But if you go through lifemaking friends with the eminent
dead who had the right ideas, Ithink it will work better for
you in life and work better ineducation.
It's a way.
It's way better than justgiving the basic concepts.
So this is kind of what we'redoing right now.
Right, we're going throughbiographies and connecting ideas
(11:03):
with people and their story andit kind of Helps things to sink
in better, at least for me, andit appears like it did so for
Charlie as well.
There's another quote for thebook Is insatiable appetite for
learning, is uncanny ability toevaluate businesses using simple
frameworks that produce morereliable analysis than complex
(11:24):
financial statements, and hispartnership with Buffett.
He, he was always learning andhe was able to Grab mental
models from other, from multipledisciplines, and kind of use
them in his decision-makingprocess in a checklist format to
evaluate his thinking and tomake wise decisions and in an
(11:45):
execute Good judgment.
So that was kind of hissuperpower and we're gonna go
more into mental models here ina bit.
First I want to cover one ofthe other themes is avoiding
misery.
He did a whole talk on how youcan avoid misery.
It was a speech he gave at auniversity in graduation.
He actually modeled it off of atalk or a speech that Johnny
(12:09):
Carson did before and he justkind of took that same idea and
expanded on it.
Instead of doing a talk on howto be happy, he did a inverse of
that and said how to guaranteemisery.
So his talk was on how toguarantee misery.
So this is one of the mentalmodels that he uses a lot, which
(12:31):
is inverse.
You always look at it from aninverse perspective to get
better insight into it.
He talks about how to guaranteemisery.
There's four things Basically.
One you want to be unreliableif you want to guarantee misery,
not be dependable.
Number two you want to ignorethe best work done by others.
(12:55):
Basically, you don't want tolearn from the past.
You just want to ignore that.
Don't learn from history, justdo whatever comes to mind to you
and don't worry about whathappened in the past.
So obviously that's definitelya way to guarantee misery,
because humans have learned somuch over thousands of years and
(13:16):
we should definitely use thatto our advantage as we grow and
go through our lives.
So we want to look back on whatothers have done to improve our
own lives.
Number three was to give up atthe first setback.
If you want to guarantee miseryand give up at the first
setback, number four is approachproblems in a standard way and
only believe information thatagrees with your previous
(13:39):
conclusion.
So obviously this is numberfour.
It's kind of you're notlearning and you're not
evaluating your thinking andyou're just kind of going with a
confirmation bias and onlyfinding information that
supports your current conclusion.
So those are the four thingsthat he said that you should do
(13:59):
if you want to guarantee miseryBe unreliable, ignore the best
work of others, give up at thefirst setback and approach
problems in a standard way andlook at information that
supports your previousconclusion.
So that kind of goes into thenext theme of the book, which is
(14:20):
mental models.
So I'm going to read a quotefrom the book.
These models supply theanalytical structure that
enables him to reduce theinherent chaos and confusion of
a complex investment probleminto a clarified set of
fundamentals.
Especially important examplesof these models include the
redundancy and back up systemmodels from engineering, the
(14:43):
compound interest model formathematics, the break point,
tipping moment and auto callousmodels from physics and
chemistry, the modern Darwiniansynthesis model from biology and
cognitive misjudgment modelsfrom psychology.
So Charlie basically thoughtthat you should have a bunch of
(15:04):
these models in your mind and sowhenever you're faced with any
problem, you kind of go throughthose models.
And the models don't have to be, you don't have to know the
details of everything, you justhave the big ideas in your head.
So you can kind of test theproblem against those ideas,
those big picture ideas in yourhead, and kind of make sure
(15:27):
you're thinking through thingsclearly.
So I'm going to go through someof the tendencies.
These are like psychologicaltendencies.
He kind of used thesepsychological tendencies as a
checklist for his own thinkingto make sure he wasn't making
bad decisions.
This was in talk 11, which istowards the end of the book.
One of the tendencies wasreciprocation tendencies.
(15:48):
So people tend to feelobligated to reciprocate favors
or gifts, even when it may notbe in their best interest, and
he has a lot of anecdotes onthese.
Basically, you can use thisreciprocation tendency to
protect yourself If somebody, ifyou go to a car salesman and
they're treating you all nice,to give you a cup of coffee and
sit you down in a nice chair andall that stuff.
(16:11):
The tendency for humans is tobasically kind of pay.
Try to want to pay that carsalesman back by maybe agreeing
to the initial price, notwanting to negotiate as much.
So you can keep that in mindwhen you're going through those
experiences and try to protectyourself against that.
(16:33):
Also, you can use it to youradvantage in your sales process,
like providing a gift to aprospective client.
When you go over an estimate.
Bring over a nice little giftto thank them for the
opportunity to provide them anestimate and you can kind of
exploit the reciprocationtendency for your own purposes.
(16:57):
Another Okay Bias or tendencywas the incentive caused bias.
So people's behavior can beheavily influenced by incentives
, sometimes leading to unethicalor irrational decisions.
So incentives was a big thingthat Charlie hit on a lot,
making sure you get theincentives right in your
business, especially because ifyou can get the incentives right
(17:20):
, it's like a superpower foryour business.
It will.
That's the rocket fuel if youcan get everybody on the same
page, moving the same Samedirection.
But if you get the incentiveswrong, that's also bad.
Or if the incentives can befaked, if you can fake the
numbers, you know you that'sgonna be bad as well, because
people are gonna do things thatare in there that are in their
(17:41):
interest.
So you got to get theincentives right.
Number three, with social proof,individuals often look to the
Actions of others to determinetheir own behavior, especially
in uncertain situations.
So this is the social prooftendency If everybody else is
doing it, maybe I'll do it tookind of thing.
You can use this to youradvantage, this tendency to your
(18:03):
advantage, when you're in yoursales process, for example.
If you have stacks and stacksof social proof of all the
people have used your, yourbusiness, you know that's gonna
be very compelling because it'sexploiting that reciprocation
tendency.
And if you can stack all the alot of these tendencies together
, if you're doing providing agift, you're doing social proof,
(18:23):
you're providing some sort ofincentive for them to sign up
with you today.
If you're stacking these, thesetendencies in your sales
process, for example, orwhatever situation, it's gonna
have what Charlie Munger CharlieMunger calls a lot Lollapalooza
effect, where it's just gonnabe overwhelmingly compelling for
(18:44):
that person to act.
So that's something really coolthat you can kind of go through
.
Talk 11 goes through all thesetendencies.
Those are three of the 25 hegoes through.
Now the next topic I'm gonnatalk about is the incentives.
I'm gonna read a quote from thebook here.
Almost everyone thinks he'sfully recognized Fully
(19:05):
recognizes how importantincentives and disincentives are
in changing cognition andbehavior.
But this is not often so.
I think I've been in the top 5%of my age cohort almost all my
adult life and understanding thepower of incentives.
Yet I've always underestimatedthat power.
Never a year passes.
(19:25):
But I get some surprise.
That pushes a little further myappreciation of incentive
superpower.
One of my favorite cases aboutthe power of incentives is the
federal express case.
The integrity of the federalexpress system.
It requires that all packagesbe shifted rapidly among
airplanes in one central airporteach night.
(19:45):
The system has no integrity forthe the customers if the night
work shift can't accomplish itsassignment fast.
And Federal Express had onehell of a time getting the night
shift to do the right thing.
They tried moral Suasion, theytried everything in the world
without luck and finallySomebody got the happy thought
that it was foolish to pay thenight shift by the hour, when
(20:09):
the employer wanted Was notmaximize billable hours of
employee service but fault-free,rapid performance of a
particular task.
Maybe this the person thoughtif they paid the employees per
shift and Let all night shiftemployees go home when all the
planes were loaded, the systemwould work better.
And lo and behold, thatsolution worked.
(20:31):
Early in the history of Xerox,joe Wilson Wilson had a similar
experience.
He couldn't understand why it'snew machine was selling so
poorly in relation to its olderand inferior machine.
He found out that thecommission arrangement with the
salesmen gave a larger andperverse incentive to push the
inferior Machine on customers.
This maximum is a wise guide toa great and simple precaution
(20:56):
in life Never, ever, think aboutsomething else when you should
be thinking about the power ofincentives.
The most important rule inmanagement is get the incentives
right.
So this, just this one idea youcan implement in your business.
When I heard it, this part ofthe book, it just made me
(21:16):
rethink my incentive structures,structures in my business.
So making sure your, your, yourcrews are incentivized to
perform work that is efficientand providing good service.
Make making sure your, your,your sales team is incentivized
to close work that is profitable, and Making sure you've
(21:38):
incentivized your productionmanagers to produce work that is
efficient, but also getting youhigh customer satisfaction
ratings.
So those you have to build inthose things you know bonuses,
performance pay system somethingto get everybody on the same
page, moving towards the samegoals.
And then the last thing here,last note, is the focus and
(22:02):
patience.
There are huge advantages forearly birds this is a quote from
book huge advantages for earlybirds.
When you're an early bird,there's a model that I call
surfing.
When a surfer gets up andcatches the wave and just stays
there, he can go a long, longtime, but he gets off the wave,
he becomes mired in the shallows.
But people get long runs whenthey're right on the edge of the
wave, whether it's markets,microsoft, intel or all kinds of
(22:23):
people, including national cashregister.
Surfing is a very powerfulmodel.
So, basically, once you're in a, once you get a good business
going.
The whole thing is surfing,staying there, improving,
continuing.
People get distracted and theywant to.
Oh, I'm doing really good here,maybe I'll do something else
too.
They get distracted and theystart diversifying their efforts
(22:47):
and their focus, and that isnot a good thing to do.
People who are get massivesuccess is because they focused
on one thing for a long time.
And so here's an example Disneyis an example of auto-catalysis
.
So auto-catalysis is thereaction, where a product of
(23:08):
itself acts as a catalyst forthe reaction, so it's like
self-reinforcing.
And there's a quote from thebook about Disney here.
Disney is an amazing example ofauto-catalysis.
They had all those movies inthe can and just as Coke could
prosper when refrigeration came.
(23:29):
When the videocassette wasinvented, disney didn't have to
invent anything or do anythingexcept take the thing out of the
can and stick it in thecassette, and every parent and
grandparent wanted hisdescendants to sit around and
watch that stuff at home onvideocassette.
So Disney got this enormoustailwind from life and it was
(23:51):
billions of dollars worth oftailwind.
Obviously, that's a marvelousmodel if you can find it.
You don't have to inventanything.
All you have to do is sit therewhile the world carries you
forward.
By the time it's done, the LionKing alone is going to do
plural billions and by the way,when I say when it's done, I
(24:11):
mean 50 years from now orsomething, but plural billions
from one movie.
So basically, the takeaway Ithink from this quote is, if you
stay in the game long enough,you can get lucky and ride a
wave, and you can potentiallyget in a situation where you're
just getting results fed to you.
(24:33):
But the key is you get to stayin the game and be in there for
the long term and not kind ofjump around and get distracted
and pursue other opportunities.
Then the final theme here is acircle of competence.
So the circle of confidence issimple, and this is a quote from
Charlie Munger.
(24:54):
Each of us, through experienceor study, has built up useful
knowledge on certain areas ofthe world.
Some areas are understood bymost of us, while some areas
require a lot more speciality toevaluate.
And then he goes on.
I think about things where Ihave an advantage over other
people.
I don't play in a game wherethe other people are wise and
I'm stupid.
I look for a place where I'mwise and they're stupid.
(25:17):
You have to know the edge ofyour own competency.
I'm very good at knowing when Ican't handle something.
You have to figure out whatyour own aptitudes are.
If you play games where otherpeople have the aptitudes and
you don't, you're going to lose,and that's as close to certain
as any prediction that you canmake.
You have to figure out whereyou've got an edge and you've
(25:40):
got to play within your owncircle of competence.
So not only do you need to stayengaged in the same endeavor for
a long period of time, butduring that period of time
you're probably going to getthat circle of competence.
You're going to gain a greatdeal of competence in that area
(26:02):
and it behooves you to stay inthat competence area because
you're going to be wiser thanother people, you're going to be
making better decisions, doingmore creative strategies and so
on.
So it's going to beself-reinforcing to stay in that
.
So it's just a common thingthat I've fallen into in my own
life is, once you get moresuccessful, there's other
(26:25):
opportunities that presentitself and those can seem very
attractive and you might want tojump ship in your own, the
thing that got you to success,to go pursue another opportunity
because it looks really thegrass is always greener, but
that's usually not the rightmove.
Just staying focused on yourarea of expertise and where
(26:50):
you've made your success isprobably the right move to stay
in that area and continue toimprove, get better, develop
that circle of competence andcontinue that focus.
So overall, this book is justfull of lessons from Charlie
Munger.
So I highly recommend you pickup a copy of poor Charlie's
(27:13):
almanac and just get some of thelife lessons that he passes on.
He had a long life and he had ahuge amount of success that
he's directly passing on to you.
So it's definitely worth thefew dollars of investment to
grab the book and get somepointers from Charlie Munger
himself, and with that we'll seeyou next week.
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