Charlie Munger: The Complete Investor

AKA the gateway drug for more expensive Charlie Munger books


I was going to read Poor Charlie’s Almanack last week but balked at the price of nearly £90. According to one reviewer this may make me a poor investment decision-maker but we’ll come back to that later. Instead I read Charlie Munger: The Complete Investor by Tren Griffin on the basis that it was 10% of the price and I reckoned must contain 10% of the wisdom. Surely even Charlie would think that was a bargain?

Value investing has always fascinated me. I’ve read a lot about Ben Graham, Warren Buffett and Berkshire Hathaway but I’d never really read much specifically about Charlie Munger, Buffett’s ‘partner’ and Vice-Chairman of the company. Their straightforward, common sense approach to investment and way of doing business that values honesty, loyalty and growth over the long term has certainly influenced the way I do things.

(As an aside I think they’ve had massive blind spots because they haven’t thought about the future in any great detail — they famously ignore any projections or forecasts. It always amazes me they didn’t spot their investments were in part causing climate change or inequality for example. I think it has something to do with the psychological refusal to make any predictions about the way decisions will play out into the future.)

The way Munger has studied his own decision making is pretty impressive as well as all the time he’s set aside for studying other peoples’. The book is based on extracts from speeches, articles and interviews with Munger and outlines his various mental models and rules for making decisions.

The starting point of his approach is that the shortcut to being smart is often simply not to be stupid. Knowing what you don’t know is sometimes far more useful that being brilliant. This is a big part of what is perhaps the most important first filter for investments at Berkshire Hathaway. When assessing whether you can estimate the intrinsic value of an investment you should be able to very quickly put it in a basket for ‘yes’, ‘no’ or ‘too tough’ and unless you have a special insight, put it in the ‘too tough’ basket and move onto something where that’s inside your ‘circle of competence’.

Fundamentals of Graham investing

Both Buffett and Munger describe themselves as ‘disciples’ of the Ben Graham approach to investing. In this book Munger describes that approach as having four tenets:

  • Treat shares as proportional ownership of a business (not just pieces of paper or numbers in a spreadsheet) because that’s what they are.
  • Only buy when you have a significant ‘margin of safety’ on price so you know that you’re getting a good price compared to the price that others might pay.
  • Mr Market should be your servant not your master. Treat it as having a split personality — something that sometimes offers you lots of money for what you have (a bull market) and occasionally offers you something you want very cheaply (a bear market).
  • Apply the three rules above with consistency and discipline. This rule is the hardest of the four.

Know your own biases

A lot of the book focuses on Munger’s diagnosis and awareness of common psychological biases, including his own. Munger talked about these in a lecture he gave at Harvard back in 1995 outlining ‘18 causes of human misjudgement’ which you can read about here but the book does an excellent job of setting them out and collecting further Munger quotes from elsewhere.

Moats

Finally, the book has an interesting section on another important element of the Berkshire Hathaway investment strategy — this is the concept of the ‘moat’ that an individual company has to defend it from competition or somebody else try to do the same thing. Moats come in five forms:

  1. Supply side economies of scale — you have access to more of the thing that you’re selling than anyone else.
  2. Demand side economies of scale (Network effects) — your product or service becomes more valuable as more people use it.
  3. Brand — you have developed a story and reputation that means people are willing to pay significantly more for your product than others.
  4. Regulation — you’ve learned to understand regulation so well that it actually serves as a barrier to entry/moat for their competitors.
  5. Patents or protected intellectual property — you’re able to fend off competition because you’ve legally protected your innovation.

Overall, I really enjoyed the book. Munger’s a great person to learn about and I’ve taken the plunge and I ordered a second hand copy of Poor Charlie’s Almanac.

Start With Why

But probably don’t bother reading the book


My second ‘book a week’ of the year was ‘Start With Why’ by Simon Sinek. It’s linked to one of the most viewed TED talks of all time which I watched after reading the book (I’m not sure which came first — the book or the talk).

My short review would be ‘watch the talk rather than read the book’. I ploughed through it but didn’t enjoy it much. It’s very repetitive and the tone of voice is a bit grating. There’s no elegance to the writing compared to Black Box Thinking which I read the week before.

Digging a bit deeper into why I didn’t like it, I think it’s because when you work in the tech for good world, everyone starts with why. All the founders we work with have a social purpose and if they need convincing they should start with why, you’ve got something to worry about.

The strange thing is that Sinek often talks about companies that he says focus on the why but doesn’t say what their reason is for existing. I don’t disagree with the examples — Southwest Airlines, Apple, Microsoft are all good companies — but he doesn’t say what their real social ‘why’ is. It’s all a bit vague. Southwest is about letting people travel more. Apple is somehow about creativity. Microsoft about ‘a PC on every desk’. But the why of all those companies is much more dominated by ‘to make money’ than any real social purpose.

The other section of the book that I didn’t like was the one about mixing ‘why’ and ‘how’ . It’s very muddled. Sinek seems obsessed with the idea that the charismatic leader who defines the why can’t be involved in the how. Walt Disney needed his brother Roy. Steve Jobs needed Steve Wozniak. Maybe that was the case for those companies but it’s not a universal principle. The idea that as a ‘visionary’ you can just ignore all the practicalities and hand those over to someone else is a bit 20th century.

Of course you should start with why. I wholeheartedly believe that the world of business is gradually shifting to that conclusion but I don’t think this is the book you should read to help you on the journey.

Five podcasts I like at the moment


I’ve really upped the amount of time I spend listening to podcasts over the last twelve months. I think it’s partly that the quality and variety of what’s available has increased but it’s also displaced reading articles on the web as a lot of the sites and publications I used to read have become more aggressively advertising heavy and/or are surrounded by a toxic culture of debate that puts me off.

These are my five favourite podcasts at the moment:

  • BBC’s The Documentary — some of the best and most diverse stories from across the BBC World Service and their partners in other countries. Regularly updated and each episode is usually 30 mins.
  • Conde Nast Traveler’s Travelogue — I love to travel and the podcast is much more down to earth than the rather glitzy magazine. There are some genuinely useful tips and great recommendations for places to go.
  • Stephen Dubner’s Freakonomics Radio — each episode is so well researched and scripted. It always leaves me with lots to think about.
  • The Reboot Podcast with Jerry Colonna — long interviews bordering on therapy sessions between Jerry and tech founders or investors. The quality varies based a bit on who the guest is but there are some gems in there.
  • How I Built This — interviews with founders of some (now) well known companies. Reminds me very much of the ‘founder confidential’ talks we run for BGV.

What else should I be listening to?

Documentary of the week — Tickled


It’s pretty difficult to write about Tickled without giving too much away but if you want good documentary story-telling about something you probably know nothing about, then you should definitely watch it.

The story starts with New Zealand journalist David Farrier innocently finding a Youtube video and Facebook page for ‘endurance tickling competitions’ that involve contestants travelling expenses paid to America for trials. He thought it would make a good ‘and finally…’ type story so got in touch with the organisers to ask for an interview. Their response threatening legal action if he pursued the story took him by surprise though and got him wondering whether something more worrying was going on.

The film has hints of Louis Theroux but ultimately the story is even more sinister than that and has a stronger narrative as the team uncover what’s really going on and who’s behind it. It’s not just an ‘aren’t people weird’ piece— the team break a real story.

It’s a fantastic documentary and very brave journalism put together in a situation when a group of people really don’t want the outside world to find out what’s going on. Highly recommended.

Book of the week: Black Box Thinking


I’m giving the Book a Week thing a go and thoroughly enjoyed my first one of the year. It was Matthew Syed’s Black Box Thinking about the theory and practice of continuous improvement and marginal gains.

The opening story is a heart-rending example that shows how little is done in medicine to systematically learn from errors — a theme Syed comes back to throughout the book. As an aside, Freakonomics Radio’s series on Bad Medicine — which I just happened to listen to the same week — makes a great companion to Black Box Thinking. If anything Stephen Dubner is a little more positive about some of the initiatives that have been put in place. Syed is in no doubt that there’s still a massive cultural problem in health systems all around the world. We still live in an era of ‘eminence’ rather than ‘evidence’ based medicine.

Syed then goes on to explore the idea of cognitive dissonance. He writes about the US justice system and how difficult prosecutors found it to admit they were wrong when DNA evidence came along and showed that they’d sent thousands of people to jail who were innocent. There’s also a section about an experiment that examined why cult members can’t admit that they’ve been duped even after the cult leader’s predictions (alien invasion, end of the world etc) doesn’t come true. There’s some evidence that people are less likely to be able to recognise that they’ve made an error if the process of being convinced was traumatic or extreme in some way. It’s how initiation ceremonies work.

Although Black Box Thinking starts with plenty of examples of how not to do it, most of the book is very positive and Syed goes on to give some company-based examples of evidence based performance improvements. I knew a bit about Dyson, Team Sky and the Mercedes F1 team but the Unilever example was new to me and pretty compelling and clear cut. I’m all in favour of using tests as often as you possibly can and regularly iterating and trying out improvements.

Overall it’s a great book — excellent story-telling and a really good explanation of up-to-date innovation theory and practice. Highly recommended.