Poor Charlie's Almanack - My Sword I Leave to Him Who Can Wear It

This book has all the wit and humour that you expect from Charlie Munger. However, by reading the 11 talks given by Charlie over 21 years, you get a deep understanding of his character and philosophy of life. The book lays out Charlie's principles and method of living a rational, ethical, and thoughtful life, which are to acquire worldly wisdom by lifelong learning over a diverse range of disciplines to build a latticework of mental models. By integrating insights from fields like psychology, economics, history, physics, biology, and more, you can develop a multidisciplinary approach that allows you to think more effectively and navigate complex problems.

Mental Models - 90% of the World's Wisdom in 100 or so Ideas

Munger regularly refers to one hundred or so mental models that contain about 90% of the world's wisdom. Charlie believes that by mastering a set of core mental models, which are the big ideas from various disciplines, one can better understand the world and make more rational decisions. Munger argues that by recognising patterns and applying these fundamental principles, one can effectively navigate complex situations in both business and life. Here are six mental models, with their explanations in Charlie's words:

1. Opportunity Cost

"Smart people make decisions by considering opportunity costs. In other words, they weigh the value of what they give up compared to what they gain. One of the most important things to recognise is that knowing what to avoid is just as important as knowing what to do. I often use the idea of opportunity cost when evaluating investments. If I put money into one stock, I can't use that same money to buy another. So, I always ask myself: Is this the best possible use of my capital? This principle, which comes from economics, can be applied across multiple areas of life."

I often use our approach to investments at Berkshire Hathaway as an example. When we decide not to invest in something, it's not just about rejecting that opportunity—it's about choosing something better. Take the time when we passed on investing in tech companies during the dot-com boom. Everyone was talking about the growth of the internet, but we saw valuations that didn't make sense and better places to put our money, so we chose to focus on other opportunities.

2. Inversion

One of the best ways to solve problems is to look at them backwards. Instead of only thinking about what you want to achieve, consider what you want to avoid. Inversion is powerful because it forces you to think differently and see what you might overlook. "All I want to know is where I'm going to die, so I'll never go there." That's inversion. When looking at an investment, I ask myself, "How could this go wrong?" rather than just focusing on how it could go right. This way, I avoid getting blindsided by obvious risks.

Consider the classic example of building a successful life. Instead of asking, "How do I live a happy life?" you invert the question to, "What would make my life miserable?" Things like addiction, poor relationships, dishonesty—avoid those, and you'll probably end up with a good life.

3. The Margin of Safety

Investing, like life, is full of uncertainties. One way to deal with these uncertainties is to have a margin of safety. This concept, borrowed from engineering, means leaving room for error by avoiding extreme risk. It means only engaging in actions where the worst-case scenario is still acceptable. When Warren Buffett and I invest, we look for businesses that are so solid that even if our analysis is slightly wrong, we're still unlikely to lose much. We want to avoid situations where if one or two things go wrong, we're in deep trouble.

A great example is our investment in See's Candies. We bought it at a price that was reasonable enough that, even if the company faced headwinds, it was unlikely to result in a large loss. Over the years, that margin of safety paid off handsomely.

4. Mr. Market

Imagine the stock market as a manic-depressive who comes by each day to quote a price at which he'll buy your shares or sell you his. Most days, he's wildly optimistic or pessimistic. Mr. Market is there to serve you, not to guide you. This mental model helps you avoid being swayed by market volatility and instead focus on the intrinsic value of the business. If a company's value is stable, what difference does it make if Mr. Market thinks differently? You don't have to play his game. Instead, take advantage of his irrationality.

One good example was during the 2008 financial crisis. Mr. Market was incredibly pessimistic, and we saw great companies being sold for a fraction of their intrinsic value. We took the opportunity to buy when others were fearful.

5. Circle of Competence

Understanding what you know and, more importantly, what you don't know is key to making smart decisions. Each of us has a circle of competence. The size of that circle isn't very important; knowing its boundaries, however, is vital. Staying within your circle of competence means you don't venture into areas where you have no expertise or understanding, which can lead to mistakes. Instead, you make decisions based on areas where you have the most knowledge and confidence.

For example, when Warren and I invested in Coca-Cola, we understood its business model, its brand power, and its consumer loyalty very well. We stayed within our circle of competence, and it paid off handsomely over the years. We avoided technology companies for many years because we didn't fully understand them, and that caution kept us out of trouble during the tech bubble.

6. The Lollapalooza Effect

The Lollapalooza Effect happens when multiple biases, tendencies, or mental models act in concert and reinforce each other. When this happens, the combined effect can be far greater than the sum of the individual effects. It can lead to extreme outcomes, both good and bad. One classic example I gave was the marketing of the 'cocaine of the poor'—lotteries. Here, several psychological biases come into play: social proof (everyone is buying lottery tickets), reinforcement (occasional wins encourage more playing), scarcity (big jackpots create urgency), and loss aversion (people don't want to miss out on a chance to win). When these forces combine, you get an overwhelming force leading millions to participate in something with a highly negative expected value. It's an extraordinary example of the Lollapalooza Effect.

Challenge to Reach for Answers

If you study Charlie enough, you will find countless examples of him speaking cryptically or posing a question and leaving it unanswered. By doing so, he provides enough to spark curiosity and "encourages his listeners to "reach" for the answers themselves and, as a result, better learn and retain the information they discover. Charlie says his father routinely used the same technique with him, with results that still benefit him today."??

At the end of talk ten (last in chronological order), at the USG Gould School of Law Commencement Address (2007) at age 83, he concluded the address by saying, "My Sword I Leave to Him Who Can Wear It". As if to say I have explained what you need to and those willing to put in the effort will benefit. This statement may be the best example of Charlie challenging listeners to reach the answers themselves.

Charlie, Can You Give Us the List of Mental Models?

Here is Charlie's response: I'm always asked this question: "Spoon-feed me what you know)." And, of course, what they are often saying is, "Teach me how to get rich with soft white hands faster. And not only let me get rich faster but teach me faster, too. I get requests for pointers to easy learning all the time. And I'm trying to provide a little easy learning today. But one talk like this is not the right way to do it. The right way to do it would be in a book. I don't have much interest in writing a book myself. Plus, it would be a lot of work for somebody like me to try and do it in my seventies. And I have plenty else to do in life. So, I'm not going to do it. My Sword I Leave to Him Who Can Wear It

If you want to wear the sword, it appears that there are no shortcuts, and it can only be achieved through a lifetime of curiosity and continued learning.

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