My wife and I recently had our second child and as such, I’ve been spending some time at home over the last few weeks. While having a newborn in the house doesn’t exactly allow for a lot of rest and relaxation, there has been downtime, some of which I’ve used to catch up on reading.
When our first child was born we’d just moved to Salt Lake from San Francisco and the only book within reach was the original Conan The Barbarian stories. 😏 Read one of them and you’ve read them all (actually, don’t even read one, not worth the time).
This time around, with all of our books unpacked I picked up Richard Zach’s Chasing the Last Laugh, a book about Mark Twain’s round-the-world speaking tour at age 60 to avoid bankruptcy and disgrace, and Peter Kaufman’s Poor Charlie’s Almanack, a compilation of speeches and interviews given by Charlie Munger, Warren Buffett’s right-hand man for the last 40 years.
The Twain book is hugely enjoyable (he was an absolutely HORRIBLE businessman, throwing away virtually all of his and his heiress wife’s fortune on poor investments by his late 50s), however, I wanted to share a bit from the Munger book.
If you’ve read anything about Warren Buffett or Charlie Munger, you’ve likely gathered that they have a very old school approach to all aspects of their life. Let’s be real, they are old school (codgers might be more accurate)!
Both are over 90 years old and still running Berkshire Hathaway, one of the most successful companies of the last 50 years (their current market cap is over $400B and they’ve taken virtually no outside capital since Buffett bought the company in 1964).
Speaking about Charlie (who is the subject of Poor Charlie’s Almanack) and like his idol Ben Franklin, his primary avocation is reading, voraciously (his children apparently referred to him as a book with two legs) with an aim towards “becoming a little smarter every day”.
The title of the book, Poor Charlie’s Almanack is a riff on Ben Franklin’s Poor Richard’s Almanack, chiefly remembered for being a repository of his aphorisms and proverbs.
One of the chapters in Poor Charlie’s Almanack is entitled An Investing Principles Checklist and it is just that, the checklist Charlie and Warren have and presumably still use (the book was last updated in 2005) to assess their potential investments.
I thought it was so good–in it’s relatedness to all aspects of life–that I typed it up so that I could share it with friends (including you) and print off a copy to tack to the wall of my office. Not all of us may be making billion-dollar investment decisions, however, we all make decisions, important decisions concerning our personal and professional lives.
While I don’t personally subscribe to the notion that all decisions can be assessed in some clinical framework, I do think this checklist is very helpful in reminding us of the questions we should be asking ourselves when making any decision of import, be it who to take on as a new client, who to hire, or who to go into business with.
Below is the checklist as it was written in Poor Charlie’s Almanack. I’ve also put it into a Google Doc, which you can download, print, and share. I hope you find it as insightful and thought-provoking as I have. Even if you don’t, I’d love to hear your thought. Leave a comment. Would enjoy chatting about it.
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 exposure
- 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
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 does
- 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 and boredom
- Don’t overlook the obvious by drowning in the minutiae
- 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