Charlie Munger: The power of not making stupid decisions

Constant Renewal
Charlie Munger, vice chair of Berkshire Hathaway Inc.
Lacy O'Toole | CNBC

By all appearances, Charlie Munger doesn't seem like an interesting man.

He served in the U.S. Army Air Corps during WWII, went to the University of Michigan, Cal Tech, and then to Harvard Law School. He received an elite education which undoubtedly contributed to his success as Vice-Chairman of Berkshire Hathaway.

Yet, nothing about him screams special here. Munger doesn't fit the popular narrative of the college drop-out billionaire. Neither has he attempted any moon shots which promise to radically change the world. Besides being extraordinarily wealthy, there doesn't seem to be anything unique about him.

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It is ironic that this is what makes him so different today. He doesn't have any secret ingredient of success that you might expect. In fact, this is what he says:

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Let's dive into what he means here.

Know your competencies

One of the ways Munger has tried to avoid making stupid decisions is by sticking to what he calls his "circle of competence." It's the same rule that his friend, Warren Buffett, lives by.

The circle of competence is simple — each of us, through experience or study, has built up useful knowledge on certain areas of the world. Some areas are understood by most of us, while some areas require a lot more technical knowledge to evaluate. The economics of running a restaurant might be easy to understand but it takes a lot more to understand a biotech company at the same level.

This is the reason why Berkshire Hathaway has largely avoided investing in the technology sector despite the huge upside it promises. Munger and Buffett both missed the technology boom, but have also avoided the Dotcom Bubbles that subsequently crashed.

Charlie Munger, Bill Gates, and Warren Buffett
Lacy O'Toole | CNBC 

It takes a lot of courage to admit and acknowledge one's limitations, especially when one holds such a high office. Hence the folk saying: it's the strong swimmers who drown.

A loser's game

The scientist and statistician Simon Ramo believed that the game of tennis could be subdivided into two games: the professionals and the rest of us. He observed that while the rules of tennis remain the same, the way points are scored are radically different.

Professionals win points whereas amateurs lose them. Wimbledon matches are the perfect picture of the former. Each player, nearly equal in skill, plays a nearly perfect game rallying back and forth until one player hits the ball just beyond the reach of his opponent.

Amateur tennis is an entirely different game. Not in how it is played but in how it's won. Long and powerful rallies are generally a thing of the past. Mistakes are frequent. Balls are constantly hit into nets or out of bounds. Double faults are nearly as common as faults.

The "Loser's Game" can be observed in the field of chess as well. It's the amateur player who blunders himself to defeat and not exquisite strategy employed by his opponent that causes him to lose.

If you're an amateur, your main focus should be on avoiding stupidity. One can get ahead in such circumstances by just playing conservatively and outlasting his competition.

The problem? Most of us are amateurs but refuse to believe and play like one. It is here where Munger truly excels.

Utilizing mental models

Munger may have gone to top schools for his education, but most of his wisdom wasn't derived from textbooks. He never took a course in business, economics or accounting, yet thrived in his role as vice chairman of Berkshire Hathaway.

Harvard Law School
Brooks Kraft | Getty Images

The way he has accumulated such knowledge and wisdom is by building a "latticework" of mental models. Here's what he says:

"Well, the first rule is that you can't really know anything if you just remember isolated facts and try and bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form."

By accumulating knowledge and stringing them together in a pattern, Munger has built models that have allowed him to navigate through any obstacle through rational thinking. To him, there are big ideas you can pick up that can be applied to every facet of life.

It's evident in how far Munger has applied his system: his thinking has been documented in Poor Charlie's Almanack and The Tao of Charlie Munger. Indeed, the sharp zingers and wit so characteristic of him has even been endearingly referred to as Mungerisms. But perhaps the biggest wisdom here is Munger understanding that there are still limits to his established models.

"You can get in way more trouble with a good idea than a bad idea, because you forget that the good idea has limits." — Benjamin Graham

His solution? Keep learning.

Constant renewal

Munger realizes that the only way to overcome the problem of false knowledge is to keep adding new ideas and models to one's repository. It is only when there is disconfirming evidence — evidence that runs contrary to what one knows — that the best model emerge. The best model is the model that works.

He does this by reading a lot. As a young lawyer, he decided that he would invest an hour each day in improving himself. At $20 an hour, he decided he was his most important client. These days, most of his time is spent reading.

Quinn Perkins hires a lawyer in an episode of Scandal
Danny Feld | Getty Images

But it's not just reading that matters, it's what you take away. Munger offers this nugget:

"We read a lot. I don't know anyone who's wise who doesn't read a lot. But that's not enough: You have to have a temperament to grab ideas and do sensible things. Most people don't grab the right ideas or don't know what to do with them."

Continuous learning is how Munger has avoided making stupid decisions. He has always stayed a student. It probably also helps that he has Buffett by his side most of the time.

The long game

Munger is undoubtedly a smart man. But the reason he's been extremely successful is that he has learned to play the long game. Each stupid decision he hasn't made adds up, and that's taken him to places most will never reach.

All it requires is patience and the ability to play the long game.

Master that, and you can do it too.

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This article originally appeared on Constant Renewal.

These are the money decisions you could regret forever
These are the money decisions you could regret forever