Billionaire Investor — Charlie Munger Says You Must Adopt His Investing Mindset He Learned Playing Cards
If you don’t use a mental model when investing, you’ll become a person with a hammer, thinking everything is a nail.
Source — Charlie Munger YouTube
Charlie Munger is an American billionaire, investor, and businessman best known for being Warren Buffett’s business partner.
Buffett is the 3rd richest person in the world with a net worth of $88.9 Billion and once described Munger as his closest partner and right-hand man.
Charlie Munger and Warren Buffett have a long and successful history of collaboration in business and investing.
Their partnership has helped make Berkshire Hathaway one of the world’s most successful and influential companies.
Munger says he developed most of his investing skills from playing cards and uses the same approach in business.
Charlie Munger:
“You have to learn to fold early when the odds are against you, or if you have a significant edge, back it heavily because you don’t get a considerable advantage often.
Opportunity comes but doesn’t come often, so seize it when it does come.”
Munger also used a card analogy to explain day trading, something he and Buffett avoid.
He says treating shares of a company like baseball cards is a losing strategy because it requires you to predict the behaviour of irrational and emotional human beings.
He learned his card-playing prowess in the army and says playing cards can teach a person various skills, including strategic thinking, pattern recognition, and risk management.
These skills can be helpful in many different fields, including investing.
For example, strategic thinking can help a person make better decisions about where to invest their money, while pattern recognition can help them identify trends in the market.
Risk management, meanwhile, can help a person avoid making costly mistakes with their investments.
Mental Model
Munger is a proponent of the psychological concept of “mental models,” which involves using various frameworks to help make better decisions.
Mental models are how we understand the world. They shape what we think and how we understand the connections and opportunities we see.
Mental models are how we simplify complexity, why we consider some things more relevant than others, and how we reason.
A mental model is simply a representation of how something works. We cannot keep all of the details of the world in our brains, so we use models to simplify the complex into understandable and organisable chunks.
Charlie Munger:
“The more models we have, the better we can solve problems. But if we don’t have the models, we become the proverbial man with a hammer.
To the man with a hammer, everything looks like a nail.
If you only have one model, you will fit whatever problem you face to the model you have.
If you have more than one model, however, you can look at the problem from various perspectives and increase the odds you come to a better solution.”
What Charlie Monger is saying is that most of us are specialists.
Instead of a latticework (intertwining) of mental models, we focus on the one from our discipline.
Each specialist sees something different.
For example, by default, a typical Engineer will think in systems.
A psychologist will think in terms of incentives.
A biologist will think in terms of evolution.
Munger says that by putting these disciplines together in our heads, we can walk around a problem three-dimensionally.
If we’re only looking at the problem one way, we’ve got a blind spot. And Munger says blind spots in investing can wipe you out.
Value Investing
Charlie Munger is a well-known advocate of Value investing, an investment strategy involving buying undervalued stocks and holding onto them for the long term.
He avoids day trading like the plague.
Munger believes Value investing is superior to other forms of investing and is the key to achieving long-term success in the stock market.
Value investing is the principle that the Value of a stock price isn’t reflected in its price.
Munger believes analysing a company’s current financial health and prospects is how you identify undervalued stocks in the market.
By buying these stocks at a discount, investors can earn higher returns over the long term, provided the market corrects.
Munger adds to this by saying it’s essential to be patient and have discipline in Value investing.
He believes that value investors need to be willing to hold onto their stocks long-term, even if the market is volatile or the stock price falls in the short term.
Value investors can achieve superior returns over the long term by sticking to their investment plan and avoiding the temptation to sell in a panic.
Munger encourages investors to carefully analyse companies, identify undervalued stocks, and hold onto them for the long term.
It Would Be Best if You Adopted the Munger Mindset.
The mental model developed by Charlie Munger often referred to as the “Munger mindset”, is based on the idea that having a broad range of knowledge and understanding multiple mental models from different disciplines can help inform decision-making and problem-solving.
To apply this Munger Mindset, you can expand your knowledge in various subjects, including psychology, economics, physics, and biology, and look for ways to integrate concepts and ideas from these different fields to better understand the world around you.
Additionally, you can regularly reflect on your decision-making processes and see if there are any mental models you can apply to help improve your thinking and reasoning.
This approach is based on the belief that the world is complex and that trying to understand it using a single mental model or perspective is often inadequate.
Munger says, Instead, by drawing on multiple mental models, we can gain a more nuanced and accurate understanding of the world around us which will help us immeasurably when investing.
Final Thoughts
Charlie Munger is a brilliant and accomplished individual who has made significant contributions as a world-class stock picker.
While you can never discredit him, there is the counterargument that Value investing may only sometimes work in limited market conditions.
It relies on the assumption that markets are efficient and that prices will eventually reflect the intrinsic Value of a company.
Value Investing may not hold in times of uncertainty or market volatility.
Some critics argue that the Value investing approach needs to be more flexible and allow flexibility in changing market conditions.
The lack of flexibility leads to missed opportunities or the failure to adapt to shifts in the market.
Mainly the growing crypto movement, which, Munger says, is “disgusting and contrary to the interests of human civilisation.”
Warren Buffett and Charlie Munger say mental models may only apply to some investors or situations.
Each individual has a unique perspective and way of thinking, and what works for one person may not work for another.