Our friend Louis Lu Li penned a great article about what he learned from his teacher Charlie Munger, Vice Chairman of Berkshire Hathaway.
My Teacher: Charlie Munger
When Charlie thinks about things, he starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable; to examine how business become big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. His way of thinking comes from the saying in the farmer’s philosophy: I want to know is where I’m going to die, so I will never go there.
Charlie constantly collects and researches the notable failures in each and every type of people, business, government, and academia, and arranges the causes of failures into a decision-making checklist for making the right decisions. Because of this, he has avoided major mistakes in his decision making in his life and in his career. The importance of this on the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized enough.
Charlie's mind is original and creative, never subject to any restrictions, shackles, or dogmas. He has the curiosity of children and possesses the qualities of a top-notch scientists and their scientific research methods. He has a strong thirst for knowledge throughout his life and is interested in practically all areas. To him, with the right approach, any problem can be understood through self-study, building innovations on the foundation laid by those who came earlier. His thinking radiates out to every corner of business, life, and [areas of] knowledge. In his view, everything in the universe is an interactive whole, and all of human knowledge are just pieces to the study of the comprehensive whole. Only by combining of these knowledge through a latticework of mental models can they become useful in decision-making and in developing the proper understanding of things. So he advocates studying all the truly important theories in all disciplines, and building on this foundation the so-called “worldly wisdom” as a tool for studying the important issues in business and investments.
Charlie’s way of thinking is based on being honest about knowledge. He believes that in this complex and changing world, there will always be limitations to human cognition and understanding, so you must use all the tools at your disposal. And, at the same time, you must constantly collect new verifiable evidences, correcting and updating your knowledge, and knowing what you know and what you don’t know.
But even so, the true insights a person can get in life is still very limited, so correct decision-making must necessarily be confined to your "circle of competence". A “competence” that has no defined borders cannot be called a true competence. How do you define your own circle of competence? Charlie said, if I want to hold a view, if I cannot refute or disprove this view better than the smartest, most capable, most qualified person on Earth, then I’m not worthy of holding that view. So when Charlie truly holds a certain point of view, his thinking is not only original and unique, but also almost never wrong.
A beautiful lady once insisted that Charlie use one word to sum up the source of his success, Charlie said it was being “rational.” However, he has a more stringent definition of rationality. It is this kind of “rationality” that grants him the sensitive and unique vision and insight. Even in a completely unfamiliar territory, with just one look he could see through to the essence of things. Buffett calls this characteristic of Charlie the “two-minute effect” -- he said Charlie can, in the shortest time possible, unravel the nature of a complex business and understand it better than anyone else can. The process of Berkshire’s investment in BYD Auto is an example. I remember in 2003, when I first discussed about BYD with Charlie, despite having never met Wang Chuanfu (Chairman of BYD Auto), visited BYD’s factory, and being relatively unfamiliar with the Chinese market and culture, his questions and comments about BYD remains, till this day, the most pertinent questions a BYD investor need to ask.
Everyone has blind spots, and even the brightest people are no exceptions. Buffett said: “Benjamin Graham taught me to only buy cheap stocks, Charlie allowed me to change my thinking. That’s the real impact Charlie had on me. I needed a powerful force to walk out of the limitations imposed by Graham’s theories. Charlie’s ideas were that source of power -- he expanded my horizons.” I’ve also had this profound experience. Charlie pointed out the blind spots in my thinking; if it weren’t for his help, I’ll still be still in process of evolution, slowly crawling along.
Charlie spent a lifetime studying disastrous human mistakes and is particularly fond of catastrophic errors caused by human psychological tendencies. The most valuable contribution is that he predicted the disastrous consequence of the spread of financial derivatives and the loopholes in the accounting and auditing system. Back in the late 1990s, he and Mr. Buffett already raised the disastrous potentials of financial derivative products. They escalated their warnings with the proliferation of financial derivative products, calling financial derivative products finance-based weapons of mass destruction; if they were not stopped in a timely and effective manner, they would have a devastating impact on the modern society. The financial tsunami and global economic recession in 2008 and 2009 unfortunately validated Charlie’s far reaching vision and insights.
Compared with Buffett, Charlie has a far wider range of interests. For instance, he has strong interests and has done extensive studies in almost all fields of sciences and social sciences, integrating them to form the original and unique Munger ideology. Compared to anything coming from within the ivory towers’ system of thinking, Munger’s doctrines are built to solve practical problems. For example, as far as I know, Charlie was the first to propose and systematically study human psychological tendencies and its huge impact on decision-making processes in investments and business. Now, tens of years later, behavioral finance has become a popular area of research in economics, with behavioral economics winning the recognition of the Nobel Prize. The theoretical framework Charlie describes in the final chapter of this book, “the Psychology of Human Misjudgment," may become more widely understood and applied by people in the future.
Charlie is naturally full of energy. Charlie was 72 years old when I first met him in 1996. He is 86 years old this year. In the tens of years I’ve known Charlie, his level of energy has never changed. He is always energetic and is an early riser. Breakfast meetings always begin at 7:30 am. At the same time, because of dinner events, his spends less time sleeping than the average people, but that does not affect his exuberant energy. His memory is also amazing. He still remembers BYD's operating figures I discussed with him many years ago while my memories have already blurred.
The 86-year-old man has a better memory than this young man. These are his innate advantages, but he acquired through hard work the unusual qualities that contributed to his success. Once Charlie found one thing he wants to do, he can do it for a lifetime.
To me, Charlie is not just a partner, he is also an elder, a teacher, a friend, a role model for success and a role model in life. Not only did I learn from him the principles of value investing, I also learned from him how to live life. He made me understand that a person's success is not accidental. Timing and opportunities are, of course, important, but the inherent qualities of people are even more important.
Charlie likes to meet people for breakfasts, usually starting at 7:30 am. I remember the first time I had breakfast with Charlie, I arrived on time, only to find Charlie sitting there, finished with the day’s newspapers. While it was only a few short minutes away from the 7:30, but I felt bad letting an elderly man I respected wait for me. For our second date, I arrived about fifteen minutes earlier and still found Charlie sitting there, reading the newspaper. For our third meeting, I arrived half an hour earlier and Charlie was still reading the newspaper, as if he had been waiting there all year round and had never left the seat. For the fourth meeting, when I arrived an hour early at sat there to begin waiting at 6:30 am, and at 6:45 am, Charlie leisurely walked in with a pile of newspapers and sat down, not even looking up, completely unaware of my existence. Afterwards, I came to understand that Charlie will always be arrive early for meetings. But he doesn’t waste time either, he will take out the newspaper he prepared to read.
In my interactions with Charlie, there was another thing that made a big impact on me. One year, Charlie and I were attending an out-of-state meeting. After the event, I was hurrying to get back to New York and unexpectedly met Charlie at the airport terminal. When his huge body passed through the security detector, for some unknown reason the detector kept being set off. Charlie returned to again and again for the security check. He finally passed through the security checkpoint after a long and laborious effort, but, by then, his plane had already departed.
But Charlie was not in a hurry. He took out a book he carried with him and sat down to read while he waited for the next plane. Incidentally, my flight was also delayed so we waited for our flights together.
I asked Charlie: “You have your own private jet and so does Berkshire, why do you bother going through the trouble of flying commercial?”
Charlie replied:”Firstly, it is a waste of fuel for me to fly in my private jet. Secondly, I feel safer flying in a commercial aircraft.” However, the real reason is Charlie’s third reason, “I want to live an engaged life. I don’t want to be isolated.”
What Charlie can’t tolerate is to lose contact with the world because of money and wealth. To isolate yourself in a single room behind a labyrinth of offices, to require layers after layers of approvals to setup meetings, and to hide behind a complicated bureaucracy so you become hard to reach for anyone - that is how you lose touch with the realities of life.
"As long as I have a book in my hand, I don’t feel like I’m wasting time." Charlie always carries a book on him. Even if he’s sitting in the middle seat in economy class, as long as he has a book, he’ll have no complaint. Once he went to Seattle to attend a board meeting, taking the economy class as usual, he sat beside a Chinese girl who was doing her calculus homework throughout the flight. He was impressed with this Chinese girl because he has difficulty imagining American girls of the same age having such power of concentration to ignore noise on the aircraft and concentrate on studying. If he was aboard a private jet, he would have never had the opportunity to come into close contact with these stories of ordinary people.
Though Charlie has very strict self-discipline, he is very generous with others and treat people he cares and love really well. He is not stingy with money, always hoping others will benefit more. For his own travels, whether for business trips or for personal trips, he always flies economy class, but when traveling with his wife and family, he would take his own private jet. He explained: my wife brought up so many children in her lifetime and has given me so much. Now that her health isn’t as good as it used to be, I must take good care of her.
Charlie spent his lifetime studying the causes of human failures, so he has a profound understanding of the weaknesses of human nature. Because of this, he believes people must be strict and demanding on themselves, continuously improving their discipline in life in order to overcome the innate weaknesses of human nature. This way of life is, to Charlie, a moral requirement. To an outsider, Charlie might seem like a monk; but to Charlie, this process is both rational and pleasant and it allows people to having a successful and happy life.