Poor Charlies Almanack

You must clearly state who, when, where, why, and what will be done. If you write a note to a subordinate, instructing them to do something, but fail to explain the reason, Brown might fire you because he is very clear that people are most likely to accept an idea only if the reasons for that idea are meticulously laid out. Unfortunately, the tendency to value reasons is so powerful that even if the justification provided by a person is meaningless or inaccurate, it can make their commands and requests easier to comply with. A psychological experiment proved this point. In this experiment, the participant successfully cut in front of the long line waiting for the copier, giving the reason: “I need to copy a few things.” This unfortunate side effect of the tendency to value reasons is actually a conditioned reflex. This conditioned reflex occurs because most people believe that things with reasons are important. Naturally, certain commercial institutions and cult organizations often utilize various catchy justifications to achieve their hidden objectives.

Asymmetry of Pleasure and Pain The pleasure a person gains from $10 is not equal to the pain brought by losing $10. In other words, the damage caused by loss far exceeds the pleasure caused by gain. Furthermore, if a person is about to receive something they desperately desire, but this item is snatched away at the last moment, their reaction will be as if they had owned it for a long time only to have it suddenly taken away. ...

The brain’s tendency to resist change also leads people to prefer keeping certain things as they are: previous conclusions, loyalty, identity, social roles, and so on. If the tendency to avoid doubt, combined with the tendency to reject a decision once it has been made, is allowed to operate, it will cause modern people’s cognition to develop numerous errors. And the actual situation confirms this. We have all dealt with many obstinate people who cling stubbornly to the erroneous ideas they formed in childhood, refusing to let go even when they enter the grave. ...

Humans are easily fooled, whether by meticulously designed human tricks, accidental environmental factors, or highly effective techniques mastered through diligent practice; people can be easily tricked. One reason for this outcome is the micro-effect in human perception. If a stimulus is maintained below a certain level, humans will not notice its presence. Because of this reason, a magician can make the Statue of Liberty disappear after a flourish of movement in the dark. The audience does not know that they are sitting on a slowly rotating platform. This platform rotates very slowly, so no one can notice it. When the curtain on the platform is pulled back where the Statue of Liberty appeared, it looks like it has vanished. ...

If you are a Navy captain who has worked for 24 hours straight and needs to go to sleep, so you entrust the ship to a highly capable first mate in harsh conditions, and he runs the ship aground—which is clearly not your fault—they won’t send you to a military tribunal, but your naval career is over. ...

If you can remain calm when the people around you all become frantic and accuse you, If you can believe in yourself, even when everyone doubts you—let them doubt, If you endure waiting without growing weary from the wait, or suffer deception without retaliating with lies, or face hatred without striking back with hatred; if you can maintain your composure despite disappointment, and also remain genuine (without excessive flattery)… ...

Life is not just about shrewdly accumulating wealth. Most of the success in life and business comes from knowing what you should avoid: dying too early, bad marriages, and so on. Avoid contracting AIDS, getting hit by a car at an intersection, or doing drugs. Cultivate good psychological habits. Avoid wicked people, especially those sexually attractive opposite-sex individuals. If you are unpopular among those around you because of your uniqueness… then let them be. ...

The importance of Multidisciplinary Mental Models You must understand and master the key theories from important disciplines, and you must frequently apply them. You need to utilize all these mental models, not just rely on a few. Most people focus on only one discipline—for example, economics—and try to solve all problems with a single method. As the saying goes: “To the person holding a hammer, the world looks like a nail.” This is an inefficient way of thinking. ...

Patient Investing If you buy something because its value is undervalued, you must consider selling it when its price rises to your expected level. That is difficult. But if you can buy a few great companies, then you can sit back and relax. That is a great thing. We tend to put large amounts of money into places where we don’t need to make further decisions. Diversification The idea that investment should be as diversified as possible is a delusional concept. We do not believe that highly diversified investments produce good results. We believe that the diversification level of almost all good investments is relatively low. If you remove our 15 best decisions, our performance will be very mediocre. What you need is not a large amount of action, but extreme patience. You must stick to the principles, and when the opportunity comes, you must seize it forcefully. Over the years, Berkshire has made money by betting on things it is confident about.

What you need is not a lot of action, but a lot of patience What you need is not a lot of action, but a lot of patience. You must stick to your principles, and when the opportunity comes, you must seize it with force. There are many situations that are much worse than being swamped in cash and doing nothing. I remember the time when I lacked cash—I certainly don’t want to go back to that. —Charlie Munger ...

I. Mathematics and Logic Compound Interest Principle Probability Theory (Fermat-Pascal System) Permutations and Combinations Decision Tree Analysis Bayes’ Theorem Expected Value Calculation Random Walk Theory Game Theory Linear Regression Nonlinear Systems Critical Mass (Phase Transition Point) Power Law Distribution (Long Tail Theory) Pareto Principle (80/20 Rule) Butterfly Effect Fractal Geometry II. Microeconomics and Business Opportunity Cost Economies of Scale Moat (Competitive Advantage) Sunk Cost Fallacy Substitution Effect Diminishing Marginal Utility Supply and Demand Relationship Price Elasticity Agency Cost Information Asymmetry Network Effect Flywheel Effect Bilateral Market Anchoring Effect Cost Shifting (or Cost Pass-through) III. Psychology and Behavioral Science Confirmation Bias Loss Aversion Availability Bias Overconfidence Effect Conformity (or Herd Mentality) Social Identity Self-Serving Bias Hindsight Bias Mental Accounting Selective Attention Emotional Hijacking Contrast Effect Authority Bias Fear-Based Decision Making Pleasure-Pain Principle Cognitive Dissonance Attribution Bias Illusion of Control Adaptive Preference Decision Fatigue IV. Physics and Engineering Redundancy/Backup System Fracture Point Theory Law of Conservation of Energy Second Law of Thermodynamics (Entropy Increase) Tension and Stress Equilibrium Feedback Loop (Positive/Negative) System Stability Modular Design Fault Tree Analysis Safety Margin (Engineering) V. Biology and Evolution Survival of the Fittest Gene Competition Niche Theory (Ecological Niche Theory) Co-evolution Mutation and Selection Population Dynamics Metabolic Efficiency Immune System Principle Viral Transmission Principle of Competitive Exclusion VI. Statistics and Data Analysis Central Limit Theorem (CLT) Law of Large Numbers Regression Mean Sample Bias Correlation $\neq$ Causation Data Visualization Trap Spurious Correlation Significance Testing Data Overfitting Confounding Variable VII. Philosophy and Cognitive Science First Principles Inversion Thinking (Inversion) Occam’s Razor Black Swan Theory Falsifiability (Popper) Knowledge Transfer Metacognition Cognitive Load Theory Dual System Thinking (Fast/Slow Thinking) Humility Hypothesis VIII. Sociology and History Cultural Inertia Institutional Path Dependence Revolutionary Cycle Theory Technology Diffusion Curve Historical Recurrence (or Historical Repetition) Group Polarization Paradox of Power Concentration Interest Group Dynamics (or Game of Interest Groups) Laws of Civilization Rise and Fall Unintended Consequences Usage Guide: Dynamic Update: In practical application, the model needs to be expanded based on new fields (e.g., AI, Quantum Computing). Cross-Validation: For the same problem, multiple disciplines must be called upon (e.g., investment decisions require combining Compound Interest, Psychological Biases, Moats). Weight Adjustment: The importance of the model varies depending on the scenario (e.g., medical decisions emphasize probability, political negotiations emphasize Game Theory). These models do not exist in isolation; Munger emphasizes solving complex problems through the “Lollapalooza Effect” (the exponential effect generated by the superposition of multiple models). For example: ...

Investing is like going out to bet on horses. We are looking for a horse with a 50% probability of winning, and odds of 3-to-1. What you are looking for is a bet with mispriced odds. This is the essence of investing. You must possess enough knowledge to know whether the odds of the bet are mispriced. This is value investing.

Initially, we were Graham believers, and we achieved some success through this method. But over time, our investment eye became sharper. Breaking Graham’s Limitations We found that some stocks, even though their price is two or three times their book value, are still very cheap. This is because these companies possess unique market positions and hold the potential for sustained growth. Perhaps a specific company manager is exceptional, or the entire management system is outstanding. By breaking through Graham’s limitations and employing some quantitative methods—which might make Graham uneasy—to find undervalued stocks, we began focusing on higher-quality enterprises. ...

Patience: The Art of Patient Waiting Look at those hedge funds—do you think they know how to wait? They fundamentally don’t know how to wait! In my personal portfolio, I once held only $10 million to $12 million in government or municipal bonds for several consecutive years, and then I didn’t touch them, just quietly waited, waited… “As Jesse Livermore said: ‘The secret to making big money is not in buying and selling… but in waiting.’” ...

During WWII, Britain possessed radar capable of night targeting, but they didn’t want the Germans to find out. So, they claimed that their pilots gained extraordinary night vision abilities by eating large amounts of carrots. The grand principles you encounter are basically just teaching you to eat carrots. Open-ended funds charge an annual fee of 2%, and then those brokers make people switch back and forth between different funds, adding another 3% to 4% in fees. Poor ordinary fund holders hand their money over to professionals, only to receive terrible results. I find this disgusting. When people buy your product, you should be making their assets grow. But in this country, fund managers only care about making money for themselves. This industry is ridiculous because, looking at the net returns, the entire investment management industry collectively hasn’t provided added value to all its clients’ assets. That is how this industry operates.