Reviewing Poor Charlie's Almanack
A book review written in memory of the late and great Charlie Munger
Like most other people, I mostly knew of Charlie Munger as that guy who's next to Warren Buffett in every Berkshire conference. He was Buffett's number two, and the only person who can keep up with the once-in-a-lifetime investing genius. It wasn't until Charlie Munger passed away and the news came out with dozens of articles all talking about his philanthropy, integrity, and sharp insight that I started to get the feeling that I ought to try and learn a bit more about this guy.
Poor Charlie's Almanack written by Charlie Munger, edited by Peter D. Kaufman, is less like a memoir and more like a big collection of Munger's speeches paired with many interviews from his friends, family, and co-workers. It's a long, winding, and oftentimes repetitive book, but according to the internet, it's the best source on Munger there is. These are the main ideas I got out of Poor Charlie's Almanack, some of them about making money, most of them unrelated, but all of them important to know if you want to live a fulfilling life.
Be a learner, be reliable, and have integrity
When it comes to the traits that bring success, Munger is adamant that if you strive to be a bit wiser every day, if you are reliable to those around you, and you live your life with integrity, "most people get what they deserve" (pg 141). It sounds perhaps too simple, and perhaps too easy. Surely there is more to success than being honest, being reliable, and actively learning? Perhaps so. Or perhaps the richly experienced and astoundingly successful life of Charlie Munger is enough to convince you of the value of these simple precepts. So goes Benjamin Franklin's quote, as oft repeated by the late Mr. Munger, "It's hard for an empty sack to stand upright."
Be multidisciplinary
There is one example oft repeated in the book to explain the folly of only studying one discipline: if all you have is one hammer, then all your problems look like nails. One of the main things Munger is constantly ragging on academia (despite being a big fan of academia) is the way it likes to section students into majors and the PhDs into specializations. Munger strongly believes in the value of multidisciplinary knowledge. This means developing a foundational understanding of mathematics, physics, chemistry, biology, history, psychology, economics, and so on and so forth. Very smart people can make very dumb mistakes due to "man with a hammer syndrome." A broad repertoire of tools in your toolkit, Munger says, is the only way to avoid dumb mistakes.
A system to organize ideas
Munger keeps track of his knowledge via a "lattice" of ideas. It's far easier to remember ideas when they're grouped into logical sets. To make sure that important ideas aren't forgotten, Munger stresses the value of checklists, wherein every time a problem arises, instead of answering with the first thing that comes to mind, he methodically works through a checklist and tries to apply every tool (what Munger calls "mental models") in his tool bag (or "lattice") to make sure he isn't missing anything important. As Munger would say, it is only by recognizing and effectively tackling all the factors that contribute to a problematic behavior that we can actually solve the issue.
Munger's Mental Models
I very briefly mentioned Munger's mental models and I want to expand on them a bit more here. The remarkable insight that Charlie Munger is able to bring is owed fully to his system of mental models. While Munger has over a hundred mental models gathered from a slew of different disciplines, in Poor Charlie's Almanack, he offers 25 of his psychological mental models as demonstration. For the purposes of this review/post, I'll focus on 5 of my favorites:
Reciprocation Tendency - The idea that something given/taken should be repaid somehow.
Munger offered one example where an economics student at Harvard, Victor Niederhoffer wanted to get A's without working hard. He realized that the graduate economics students are organized, hardworking, and responsible for all the boring work that the professors didn't have time for. Out of gratitude for the favor, professors always gave A's in advanced graduate courses. By only signing up for these courses, Niederhoffer was able to obtain straight A's while skipping most of his classes. This is the reason why older religions would sometimes sacrifice animals or people to the gods, they believed there would be equivalent reciprocation in the form of a bountiful harvest.
2) Social Proof - As it's been said time and again, humans are social animals, thus our behavior is very strongly influenced by the behavior of other humans.
This trait is frequently demonized but in truth, there are a lot of benefits to following the crowd. As Munger points out, there's no easier way to find the entrance or exit of a sports stadium than to be swept up in the tide of people. And sometimes the public does have the right idea, there's no need to reinvent the wheel when the method is public knowledge. That said, it's also true that following the crowd can lead to terrible outcomes, such as the bystander effect or even something as devastating as the Nazi regime. When combined with the bystander effect, an authority figure can convince people into heinous actions they never think themselves capable of.
3) Inconsistency Avoidance - The human mind craves consistency so whenever an inconsistency arises in our behavior, we will perform subconscious mental gymnastics to force things back into place.
This is most evident in 2 psychological effects you're likely familiar with: the foot in the door effect and sunk cost fallacy. If a stranger begins by making a small request, and you comply, you will likely begin to think more fondly of them. After all, why would you lend a book to someone you disliked? Similarly, if you already waited half an hour for the bus, might as well wait another ten minutes to justify our earlier behavior. This is why "fake it 'till you make it" is so effective. Our personalities and beliefs are malleable, so if we behave in a way that we aspire to be rather than the way we actually perceive ourselves to be, our self-perception will catch up.
4) Excessive Self-Regard - Or to put it more bluntly, we are all programmed to be selfish so we tend to overvalue things in our ownership and undervalue what we do not own.
We believe we're more skilled than we really are (the majority of people believe they are above average drivers), and more knowledgeable than we really are. This also extends to our social circle. It's been found that we hold higher opinions of people who share our traits, which makes for excessive hostility towards new ideas. When it comes to possessions, there is something called the "endowment effect," where we value an item more highly simply because we own it. Generally there is no issue with this, but suppose that you own stock of a failing company, then a combination of the endowment effect and loss-aversion will make it excessively difficult to sell, even though by all logic you should.
5) Lollapalooza Effect - A term coined by Munger, meaning the result of many factors coming together all working in the same direction.
Munger offers the McDonnell Douglas Airliner evacuation test as an example. As per government mandate, new airliners must pass a realistic evacuation test. In response, McDonnell Douglas set up a plane full of elderly passengers in a darkened hangar. The result was as you'd expect - 20 serious injuries and failure to keep to the time limit. So how does McDonnell Douglas respond? By running the exact same test again that very day, resulting in an additional 19 serious injuries, and one case of permanent paralysis.
What could have caused McDonnell Douglas's egregious lack of common sense? Running through our checklist of psychological tendencies, we can identify two factors that contributed to the debacle. Firstly, Inconsistency Avoidance -- after already running the evacuation once, McDonnell Douglas was psychologically driven to double down and justify their previous actions. Secondly, Social Proof -- anyone who may have doubts about the evacuation is pressured into keeping quiet because the authority ordered it and everyone else is going along.
There are of course other psychological tendencies at play as well, in the book Munger listed 25 in all, but even with just two we can see the beginnings of concerning synergization. Beyond psychology, Munger also considers factors from economics, chemistry, mathematics, physics, and much more. To solve a lollapalooza problem, all factors must be tackled, and to effect a lollapalooza result, many factors must be meticulously built up and pieced together.
Pros: The book lays out a lot of common wisdom (and some uncommon wisdom to boot) in a new light. It seems so obvious in hindsight that any one thing in the universe will affect every other thing, that an action will cause an effect and the effect will have an effect which will have an effect. The reason I missed it is probably the same reason why most other people miss these ideas - it's too much trouble to think about. This book serves as a much-needed kick in the behind.
Cons: At times this book is rather scattered and disorganized, which might bother some readers, and it's something that I made an effort to amend in this review. It's also not exactly a personal finance book, but then again it's not trying to be. The issue here is that I read it and really wanted to share it so that's more my problem not Charlie Munger's.
Personal thoughts: If it wasn't clear enough from the glowing summary, I had a blast with Poor Charlie's Almanack. I would very much like to get into Munger's views on aging and to relay more of the vivid examples he provides to make his point but this post/review is quite long enough already. I will leave you with the firm recommendation to go read the book for yourself.