The fifth most important takeaway from Charlie Munger’s Poor Charlie’s Almanack is to “Start with the don’t”
When amateurs play tennis, the winner usually don’t win by shooting the fastest or the most skilled shots, instead , when amateurs play tennis, it’s usually the person who shoots the fewest shots in the net, and misses the court the least amount of times that wins.
Simply put, you win by playing safe. The loser is usually the person who tries to hit hard and too advanced shots.
Acoording to Charlie, this also holds for life in general, and more importantly for investing, Trying to be consistently not stupid and staying within your circle of competence is better than trying to be very intelligent.
Charlie Munger and his partner Warren Buffett stayed out of technology companies for a very long time.
They’ve missed out of a lot of opportunities because of this, but more importantly they avoided making a lot of mistakes.
“All I want to know is where I am going to die so I will never go there”
4. Lollapalooza effect
He means an outcome that is extraordinary where 1 + 1 = 3 and more.
Lollapalooza effect is created when an outcome is much bigger than the sum of its parts
One positive effect enhances the power of the next one, and on and on and on
You want to invest where there’s a possibility for such self-reinforcing loops
One of the greatest brands in the history was created through a lot of Lollapalooza effect by combining the factors of a great product
Great Product + Powerful Stimulants + Clever marketing + availability + social proofing = Coco Cola
However, Charlie points out that identifying where and when these Lollapalooza effects can happen is difficult.
Because it requires a multidisciplinary approach, you will need, not only to have a good understanding of economics, business and the industry you are interest in, you will also need a good understanding of basics in subject like psychology, statistics and business law.
This is the secret sauce that can help you find stocks that will skyrocket.
Number 3: Learn from other people’s mistakes
In poor charlie’s almanack, charlie munger presents a rcipe for misery
One of the ingredients for great misery is to learn everything you possibly can from your own mistakes, instead of learning from other people’s experiences, both living and dead people
Fatal mistake for an investor, is the tendency for people and companies to fall into bankruptcy due to financial leverage, by ignoring the lessons that other people already have learnt, you will for sure become miserable and you’re guaranteed of reaching a second-rate achievement.
If you instead start with learning from others, preferably from the masters within the field you wish to accelerate in, you will find yourself make headway much faster than walking on every mine by yourself.
Study history: What make great people great
Look around you: what is it that slows people down?
When within a certain field, climb the shoulders of giants
Charlie Munger and Warren Buffett climbed the shoulders of Benjamin Graham and Philip Fisher, and then proceeded from there
Their company Berkshire Hathaway is now the sixth most valuable stock market company in the entire world.
“If I have seen a little further than other men it’s because I stood on the shoulders of giants
Number 2: Become a swiss army knife
Investing and anticipating a company’s future cash flow is in a way, just a form of problem solving – one that require a multidisciplinary approach.
Rule #1: Charlie Munger’s Investing Checklist
Charlie Munger has a very structure mind, and so is his method when it comes to investing.
He says that no wise pilot, no matter how great his talent and experience fails to use his checklist,
Risk: All investments should begin by measuring risk
Use a margin of safety
More risk require additional compensation
Avoid big mistakes and permanent capital loss
Independence: Only in fairly tales are emperors told they are naked
You can not stay objective and rational while listening to wall street hogwash
That people are agreeing with you doesn’t make your analysis correct, nor does people disagreeing with you make it wrong
Intellectual humility: Acknowledging what you don’t know is where you should begin
Stay within your circle of competence
Identify and think through evidence that goes against your own view
Never fool yourself
Allocation: Proper allocation of capital is an investor’s number-one job
When the odds are great in your favour – bet heavily
Don’t fall in love with an investment. Stay sceptic
Patience: Resist the human bias to act
Compound interest is the eighth wonder of the world, never interrupt it unnecessarily.
The process is where you live, so remember to enjoy it along with results.
Decidiveness: When proper circumstances present themselves, act with decisiveness and conviction.
Be fearfully when others are greedy, be greedy when other are fearful
Opportunities does not come often, seize it when it arrives.
Stay prepared, opportunities can only be identified by those who are prepared.
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