6 Outstanding Ideas from the Book 'Poor Charlie's Almanack'

I just finished reading 'Poor Charlie's Almanack', written or transcribed from speeches by Charlie Munger, business partner of Warren Buffett. I found many of the ideas in this book simply outstanding. In order to improve my recall of these ideas as well as for the sake of bringing value to you, I am stitching together this article of quotes. 

My grade of the book: A (using American grading system) - highly recommended!

There are some parts that I found skippable, but the gems of deep wisdom that I could find more than paid off for that. Most of the ideas are business-related, but half are touching upon more fundamental issues. I apologise for a tremendous amount of quotes, I came to a conclusion that this would be the best way to express those ideas. Without further ado, here are the ideas I found most impactful:

Big idea #1: Integrity is paramount

Remember that reputation and integrity are your most valuable assets - and can be lost in a heartbeat.

Big idea #2: Distill wisdom into checklists

How can smart people be so wrong? Well, the answer is that they don't do what I'm telling you to do - which is to use a checklist to be sure you get all the main models and use them together in a multimodular way. No pilot takes off without going through his checklist: A, B, C, D. And no bridge player who needs two extra tricks plays a hand without going clown his checklist and figuring out how to do it... If they used a checklist, they'd realize the Milgram experiment harnesses six psychological principles, at least - not three. All they'd have to do is to go down the checklist to see the ones that they missed.

There's only one right way to do it: You have to get the main doctrines together and use them as a checklist. And, to repeat for emphasis, you have to pay special attention to combinatorial effects that create lollapalooza consequences.

Big idea #3: Pay attention to the system design that corrupts

All human systems are gamed, for reasons rooted deeply in psychology, and great skill is displayed in the gaming because game theory has so much potential... Gaming has been raised to an art form. In the course of gaming the system, people learn to be crooked. Is this good for civilization? Is it good for economic performance? Hell no. The people who design easily–gameable systems belong in the lowest circle of hell.

Let's say you have a desire to do public service. As a natural part of your planning, you think in reverse and ask, "What can I do to ruin our civilization?" That's easy. If what you want to do is to ruin your civilization, just go to the legislature and pass laws that create systems wherein people can easily cheat. It will work perfectly.

Take the workers' compensation system in California. Stress is real. And irs misery can be real. So you want to compensate people for their stress in the workplace. It seems like a noble thing to do. But the trouble with such a compensation practice is that it's practically impossible to delete huge cheating. And once you reward cheating, you get crooked lawyers, crooked doctors, crooked unions, etc participating in referral schemes. You get a total miasma of disastrous behavior. And the behavior makes all the people doing it worse as they do it. So you were trying to help your civilization. But what you did was create enormous damage, net. 

Also needed in system design is an admonition: dread, and avoid as much you can, rewarding people for what can be easily faked. Yet our legislators and judges, usually including many lawyers educated in eminent universities, often ignore this injunction. And society consequently pays a huge price in the deterioration of behavior and efficiency, as well as the incurrence of unfair costs and wealth transfers. If education were improved, with psychological reality becoming better taught and assimilated, better system design might well come out of our legislatures and courts.

Big idea #4: Wait for an opportunity, strike hard when it arrives

Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.

Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts.

When 'Warren lectures at business schools, he says, I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches - representing all the investments that you get to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better. - Warren Buffett

A great business at a fair price is superior to a fair business at a great price.

We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of it’s intrinsic value. That’s hard. But, if you can buy a few great companies, then you can sit on your ass. That’s a good thing. 

Big idea #5: Multidisciplinarity is key for operating in a complex world

I've long believed that a certain system–which almost any intelligent person can learn–works way better than the systems that most people use. What you need is a latticework of mental models in your head. And, with that system, things gradually get to fit together in a way that enhances cognition.

The truly big ideas in each discipline, learned only in essence, carry most of the freight. And they are not so numerous, nor are their interactions so complex, that a large and multidisciplinary understanding is impossible for many, given large amounts of talent and time.

You must both rank and use disciplines in order of fundamentalness.

Another idea that I got and this may remind you of Confucius too, is that wisdom acquisition is a moral duty, it’s not something you do just to advance in life.

I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines, they go to bed every night a little wiser than when they got up and boy does that help particularly when you have a long run ahead of you.

In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero. You'd be amazed at how much Warren reads--and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.

A special version of this “man with a hammer syndrome” is terrible, not only in economics but practically everywhere else, including business. It’s really terrible in business. You’ve got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there’s no precise numbering you can put to these factors. You know they’re important, but you don’t have the numbers. Well practically everybody (1) overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and (2) doesn’t mix in the hard-to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that. Economics should emulate physics’ basic ethos, but its search for precision in physics–like formulas is almost always wrong in economics.

If, in your thinking, you rely entirely on others, often through purchase of professional advice, whenever outside a small territory of your own, you will suffer much calamity… It is not usually the conscious malfeasance of your narrow professional adviser that does you in. Instead, your troubles come from his subconscious bias. His cognition will often be impaired, for your purposes, by financial incentives different from yours. And he will also suffer from the psychological defect caused by the proverb: “To a man with a hammer, every problem looks like a nail."

Big idea #6: Understand the tremendous power of the psychology of human misjudgement 

Personally, I've gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful but often malfunction?

25 Misjudgment biases:

1. Reward and Punishment Superresponse Tendency 

2. Liking/Loving Tendency 

3. Disliking/Hating Tendency 

4. Doubt-Avoidance Tendency 

5. Inconsistency-Avoidance Tendency (change resistance)

6. Curiosity Tendency 

7. Kantian Fairness Tendency (do what you want everyone to do - courtesy)

8. Envy/Jealousy Tendency 

9. Reciprocation Tendency 

10. Influence-from-Mere Association Tendency (high price, past result, pictures)

11. Simple, Pain-Avoiding Psychological Denial 

12. Excessive Self-Regard Tendency (appraisal-of-our-own-possession)

13. Over optimum Tendency (wishful thinking)

14. Deprival-Super reaction Tendency (loss >> gain)

15. Social-Proof Tendency (action/inaction, +/-)

16. Contrast-Imprecation Tendency (quick comparison) 

17. Stress-Influence Tendency 

18. Availability-Misweighing Tendency (extra-vivid images)

19. Use-It-or-Lose-It Tendency 

20. Drug-Misinfluence Tendency 

21. Senescence Misinfluence Tendency (old age)

22. Authority Misinfluence Tendency 

23. Twaddle Tendency 

24. Reason-Respecting Tendency 

25. Lollapalooza Tendency - The Tendency to Get Extreme Confluences of Psychological Tendencies Acting in Favor of a Particular Outcome

You can find more about the list here.

Perhaps the most important rule in management is "Get the incentives right."

As you go out into a profession that frequently puts a lot of procedure and a lot of precautions and a lot of mumbo jumbo into what it does, this is not a fast form which civilization can reach. A fast form which civilization can reach is a seamless web of deserved trust. Not much procedure just totally reliable people correctly trusting one another. That’s the way an operating room works at the Mayo clinic. If a bunch of lawyers were to introduce a lot of process, the patients would all die. So never forget when you’re a lawyer that you may be rewarded for selling this stuff but you don’t have to buy it. In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has 47 pages my suggestion is do not enter.

If you would persuade, appeal to interest and not to reason. - Benjamin Franklin

Other business-related ideas

So we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business. And we tell our managers we want the moat widened every year. That doesn't necessarily mean the profit will be more this year than it was last year because it won't be sometimes. However, if the moat is widened every year, the business will do very well. When we see a moat that's tenuous in any way -it's just too risky. We don't know how to evaluate that. And, therefore, we leave it alone. We think that all of our businesses - or virtually all of our businesses -- have pretty darned good moats. And we think the managers are widening them. - Warren Buffett

Adding success factors so that a bigger combination drives success, often in non-linear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often results are not linear. You get a little bit more mass, and you get a lollapalooza result. And of course I’ve been searching for lollapalooza results all my life, so I’m very interested in models that explain their occurrence.

There are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy. The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers.

Granny's Rule is the requirement that children eat their carrots before they get dessert. And the business version requires that executives force themselves daily to first do their unpleasant and necessary tasks before rewarding themselves by proceeding to their pleasant tasks.

I realized very early that non-egality would work better in the parts of the world I wanted to inhabit. You want to get the power into the right people.

I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people do who are supporting it. I think only when I reach that stage am I qualified to speak.

Problems frequently get easier and I would even say usually are easier to solve if you turn around in reverse. In other words if you want to help India, the question you should ask is not “how can I help India?”, you think “what’s doing the worst damage in India? What would automatically do the worst damage and how do I avoid it?"

In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero. You'd be amazed at how much Warren reads--and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.

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