Worldly Wisdom for 2022
10 Lessons from the Lives of Warren Buffett & Charlie Munger
I read a lot about Charlie Munger and Warren Buffett in 2021 (the full list can be found at the bottom of the article).
They’ve both lived extraordinary lives: they’ve mastered investing, donated billions and pledged to donate many more billions to various charities, and above all, they’ve used their platforms to educate millions of people in all manner of subjects from investing to marriage advice.
This list exists largely to consolidate my own learning. However, I also strongly believe that the world would be a slightly better place if more people chose Munger & Buffett as their role models. So, in writing this, I hope their gems of wisdom can inspire others to read further into some of the materials mentioned in the bibliography.
Without further ado, here are 10 lessons I picked up in 2021 from Charlie Munger and Warren Buffett…
1. Don’t Wrestle with Pigs
“Never wrestle with a pig because if you do you’ll both get dirty, but the pig will enjoy it.” — Charlie Munger
One recommendation that both Charlie and Warren have given countless times is to engage with high-quality people.
Spend time with people who are better than you
Buffett once advised that “one of the best things you can do in life is to surround yourself with people who are better than you are. You will move in the direction of the people that you associate with. So it’s important to associate with people that are better than yourself.”
Ask yourself whether the people you engage with are helping to make you a better person, or are dragging you down. You don’t have to be ruthless, but you can choose to spend more time with people who make you better, and less time with those who bring out your worst.
Do business with trustworthy people
Munger stated that “our basic rule has always been that we won’t deal with assholes.” Not only will you have a happier life by working with people you like, but you’ll also save yourself a lot of headaches. Buffett has previously acknowledged that even when signing legally binding contracts, you can never be fully protected from all eventualities, so avoiding crooks and dishonourable people is a large part of your defence against getting into difficult situations.
Additionally, working with trustworthy people can allow you to delegate more tasks to those around you, allowing you to focus more on areas in which you can add value. As an example, Berkshire Hathaway is one of the top 10 companies in the world by market cap, but it’s managed by around two-dozen people. They achieve this because they have in place managers of each of their operating businesses in whom they can place a tremendous amount of trust. This allows them to be much more hands-off than most CEOs and focus on their job of investing excess funds.
2. Tapdance to Work
“Find your passion. I was very, very lucky to find it when I was seven or eight years old… You’re lucky in life when you find it. — Warren Buffett
Steven Levitt, co-author of Freakonomics once explained how he hires people to work for his department: “When I interview young professors and try and decide if we should hire them. I’ve evolved over time to one basic rule: if I think they love economics and it’s fun for them I am in favour of hiring them. No matter how talented they seem otherwise if it seems like a job or effort or work then I don’t want to hire them.”
In the equation of your success in life, one of the dominating variables will be how much you enjoy what you do. If you enjoy your work, you’re going to approach it with more care, motivation, and passion to improve than someone who is in it purely for the money.
Compound Interest
It takes a long time to master anything, but small, continuous improvements, when aimed in a specific direction, will amount to incredible progress over a long enough time period. The commitment and consistency required for mastery will be a lot easier to achieve if you enjoy the process.
3. Spend Less Than You Make
“Spend less than you make” could, in fact, have been the Buffett family motto, if accompanied by its corollary, “Don’t go into debt.” — Alice Schroeder, The Snowball
“Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer.” — Charlie Munger
Given that we’re talking about two of the best investors of all time, this advice goes without saying. But since we’re stating 10 important lessons from Buffett and Munger, it needs to be on the list.
For some people, I expect their situation is such that saving isn’t as easy as Munger suggests. However, a lot of people are in a position where they could cut back a small amount on their expenditures to increase their savings amount without a noticeable decline in their quality of life.
Research your country’s tax-efficient savings options and regularly put some money away.
4. Be Open-minded to the Extreme
Any year that you don’t destroy one of your best-loved ideas is probably a wasted year. — Charlie Munger
When the facts change, I change my mind. What do you do? — John Maynard Keynes (possibly)
Charlie Munger is often given a large share of the credit for the success of Berkshire Hathaway because of some advice he gave to Buffett early in their relationship. Buffett was focused on buying what he called cigar butts- average or poor businesses that are selling too cheaply because the investing public has lost faith in them.
When Munger first became involved in investing alongside Buffett, he encouraged him to focus more on finding terrific businesses that will continue to be terrific but aren’t selling at an exorbitant price. This change in style is what’s responsible for Berkshire Hathaway’s investments in Coca-Cola, Apple, GEICO, and almost every other business they’ve acquired in the last 50 years.
If Buffett had been unwilling or unable to fundamentally alter his investment approach, it’s very unlikely that he’d have been able to build something comparable to the Berkshire Hathaway we see today.
The world is too complex for us to thoroughly research every decision we make. But, if we don’t take time to reflect on our current understanding of the world, particularly as it relates to any major decisions we have to make (e.g. where to invest our money, how to approach projects in work, how to improve our interactions with other people), then we’re wasting opportunities to improve ourselves and our actions.
5. Don’t Fool Yourself
“The first principle is that you must not fool yourself — and you are the easiest person to fool” — Richard Feynman
Circle of Competence
In life, and especially in investing, it’s vital to know what you know. It’s very easy to fool ourselves into overestimating our abilities. As Munger has previously opined: “if you think your IQ is 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120".
Buffett refers to this as his circle of competence:
What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. — Warren Buffett
One way of understanding your circle of competence is to use the Richard Feynman Learning Technique, outlined in this article by Farnam Street (Shane Parrish). This technique involves writing down what you know about a subject in plain English without any jargon as if explaining it to a child. It sounds simple, but it’s an incredibly powerful method to understand where the limits of your knowledge lie.
Play to Your Strengths
I took thermodynamics at CalTech by Professor Homer J. Stewart and I knew that no matter how hard I studied I will never be as good as Dr. Stewart in thermodynamics. I tried other fields with the same results. So, I kept going until I ended up here [investing]. — Charlie Munger
Another aspect of not fooling yourself is in understanding not just what you currently know, but your own abilities. Understanding your own strengths and weaknesses, and playing to them. In economics, this is called comparative advantage.
Jeff Bezos has also explained how he realised he was on the wrong career path when he saw a classmate instantly solve a partial differentiation problem he had struggled with for three hours. This realisation led him to immediately switch his major from physics and go into business: “I saw the writing on the wall, and I changed my major very quickly to electrical engineering and computer science”.
6. Don’t Lose Money
“The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.” — Warren Buffett
High Probability Events
One of the key pillars of Buffett and Munger’s investment philosophy is to only bet on events that they believe have a high probability of occurring. Since there are many, many, companies whose futures we cannot predict with any certainty, Buffett and Munger start by focusing their efforts on companies within their circle of competence, and within that set of companies, they look for the ones with durable competitive advantages.
By focusing on companies that are able to do something their competitors can’t copy, and in industries they understand, the pair believe (and their investment record has shown) that they can predict the outcome for businesses with a good enough batting average to make very handsome returns in the long-run.
Margin of Safety
The three most important words in investing are margin of safety. — Warren Buffett
Whilst the duo identify investment opportunities by focusing on companies whose futures they believe they can predict with reasonable accuracy, they don’t buy-in at any price.
Buffett has previously said that The Intelligent Investor is the best investing book ever written. He specifically recommends investors read these two chapters in particular when faced with turbulent markets.
By not overpaying for companies currently in the favour of the market they remove one of the possible ways to incur a permanent loss of capital. They’ve missed out on a lot of great investment opportunities because of this approach, but they don’t think it’s a big deal to miss out on some opportunities if you can’t assess the risk involved.
Leverage
“If you’re smart you don’t need it and if you’re dumb you shouldn’t be using it” — Warren Buffett, discussing leverage
One of the most consistent messages Buffett and Munger have delivered over the decades has been don’t use leverage in investing. Buffett has gone as far as saying “It is crazy to borrow money on securities”.
Without using leverage, if you’re a good investor, you’ll compound your money over the years well enough. With using leverage, even if you are a good investor, you can still end up being forced to sell your shares due to the extreme volatility of the market.
Being forced to sell shares is in fact what happened to a third investor who used to deal closely with Buffett and Munger in the early days of Berkshire Hathaway. Mohnish Pabrai has previously commented on this situation:
He said, Rick was just as smart as us, but he was in a hurry. And so actually what happened — some of this is public — was that in the ’73, ’74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls out the yin-yang, and he sold his Berkshire [Hathaway] (NYSE:BRK.A) (NYSE:BRK.B) stock to Warren. Warren actually said, I bought Rick’s Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at … $40 apiece because he was levered.”
7. Read Constantly
“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.” — Charlie Munger
Bill Gates, Warren Buffett, Charlie Munger, and Elon Musk all attribute their success to the habit of constantly reading. (As a side note, if you’re looking to improve your own habits, I’ve written a separate behaviour change playbook article that I use when looking to improve some aspect of my life.)
Target Your Reading
“Don’t read annual reports the way Francis Bacon said you do science — which, by the way, is not the way you do science — where you just collect endless data and then only later do you try to make sense of it. You have to start with some ideas about reality. And then you have to look to see whether what you’re seeing fits in with proven basic concepts.” — Charlie Munger
A voracious reading habit works best if you map out in advance what you want to know, and carefully choose books accordingly. A good way to start is to find people you believe are admirable and read biographies of them or books that they have recommended. 2021 saw me read a lot about Buffett and Munger to get a thorough understanding of their values and approach to life, whilst my 2022 reading list has around 15 books that one or both of them has recommended to investors and anyone looking to become wiser.
It’s also worth considering reading textbooks if looking to pick up a better grounding in a certain subject. These can be excellent introductions to a topic and yield a more thorough understanding than reading more popular books about the subject.
Have a Growth Mindset
“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 they were when they got up and boy does that help, particularly when you have a long run ahead of you.” — Warren Buffett
Many adults think that education stops when they finish school or university, but for most people the time they spend in formal education represents less than one quarter of their life. By continuing your education informally after your formal education is complete, you’re going to develop into a much wiser person over time.
8. Have Strong Values
“Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.” — Charlie Munger
With respect to hiring people, Buffett has said that “in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”
Clearly, both men believe that integrity is a cornerstone of what is required to be a high-quality person.
What other qualities do they praise?
When Munger was asked what his secrets for a happy life were, he replied: “You don’t have a lot of envy. You don’t have a lot of resentment. You don’t overspend your income. You stay cheerful in spite of your troubles. You deal with reliable people. And you do what you are supposed to do. All these simple rules work so well to make your life better and they are so trite.”
The Newspaper Test
Buffett has a great mental model for deciding whether we should take certain actions: "I ask the managers to judge every action they take — not just by legal standards, though obviously, that’s the first test — but also by what I call the 'newspaper test.’” He asks them how they "would feel about any given action if they know it was to be written up the next day in their local newspaper… written by a smart but pretty unfriendly reporter" and read by their family, friends and neighbours.
By taking a step back and asking how your actions would be portrayed by an impartial (or somewhat less than fair) reporter, we can gain a better perspective on how our actions may be perceived by those we care about and therefore avoid any obvious blunders.
9. Say No to Almost Everything
“The difference between successful people and really successful people, is that really successful people say no to almost everything.” — Warren Buffett
In this article by James Clear, the author explains a methodology Buffett recommends to people to increase focus.
It boils down to identifying all of the things in life that you consider important, but not quite as important as your top few aims, and then avoiding them at all costs. By focusing exclusively on your top few aims, instead of splitting time across a large number, you increase the likelihood that you’ll achieve the things that matter to you the most. As James Clear says in his article: “Spending time on secondary priorities is the reason you have 20 half-finished projects instead of five completed ones. Eliminate ruthlessly.”
10. Use Mental Models
“You have to learn (The big ideas in all the other disciplines) in such a way that they’re in a mental latticework in your head and you automatically use them for the rest of your life. If you do that I solemnly promise you that one day you’ll be walking down the street and you’ll look to your right and left and you’ll think ‘my heavenly days, I’m now one of the of the few most competent people in my whole age cohort.’ If you don’t do it, many of the brightest of you will live in the middle ranks or in the shallows.” — Charlie Munger
I’ve written separately about Charlie Munger’s mental models approach to life, but the above quote sums it up nicely. Munger believes that by learning the basic ideas in a broad range of fields from mathematics and physics to psychology and economics, you’ll have access to far more appropriate tools to understand and address any real world problems than most other people.
One of the most important mental models (and related to the points above about not fooling yourself) concerns cognitive biases. Munger’s talk on 25 psychological misjudgements shared by Farnam Street (Shane Parrish) is a terrific place to read Munger’s thoughts on the matter.
There are countless useful lessons we could (and should) learn from Buffett and Munger. This list highlights some of the top ones for me, but I strongly recommend reading more materials on them to get a better sense of their characters and hear more of their ideas in their own words. The books listed below are the ones I read about them in 2021 and I’d recommend all of them to anyone interested in learning more about investing, the lives of Buffett and Munger, or just life in general.
Bibliography
- Damn Right! — Janet Lowe
- The Snowball — Alice Schroeder
- Poor Charlie’s Almanack — Charlie Munger
- The Warren Buffett Portfolio — Robert G Hagstrom
- Richer, Wiser, Happier — William Green
- Seeking Wisdom: From Darwin to Munger — Peter Bevelin
Some other terrific sources of investment wisdom are:
- The Berkshire Hathaway Shareholder Letters. There are over 50 years worth of letters, so it’ll take some time to work through them, but many investors cite them as one of the greatest sources of investing wisdom.
- FS Blog by Farnam Street (Shane Parrish). This blog is home to some amazing write-ups of different mental models, speeches from great thinkers, and the author’s analysis on a variety of topics.
- James Clear’s blog. In particular, his article on Buffett’s focus strategy.
