Wisdom and Circles of Competence
“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.”
Identify your circle of competence and use your knowledge, when possible, to stay away from things you don't understand. There are no points for difficulty at work or in life. Avoiding stupidity is easier than seeking brilliance. Of course this principle relates to another of Munger's sayings: “People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”
“Mimicking the herd invites regression to the mean.”
Here's a simple axiom to live by: If you do what everyone else does, you're going to get the same results that everyone else gets. This means that, taking out luck (good or bad), if you act average, you're going to be average. If you want to move away from average, you must diverge. You must be different. And if you want to outperform others, you must be different and correct. As Munger would say, “How could it be otherwise?”
Know When to Fold ’Em
“Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand—you must learn to handle mistakes and new facts that change the odds.”
“Sit on your ass. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum.”
Investing Is a Perimutuel System
“You’re looking for a mispriced gamble,” says Munger. “That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.” At another time, he added: “You should remember that good ideas are rare— when the odds are greatly in your favor, bet heavily.”
When asked about his success, Munger says, “I succeeded because I have a long attention span.” Long attention spans allow for a deep understanding of subjects. When combined with deliberate practice, focus allows you to increase your skills and get out of your rut.
Fake knowledge, which comes from reading headlines and skimming the news, seems harmless, but it's not. It makes us overconfident. It's better to remember a simple trick: anything you're getting easily through Google or Twitter is likely to be widely known and should not be given undue weight.
Echoing Pascal, who said some version of “All of humanity's problems stem from man's inability to sit quietly in a room alone,” Munger adds an investing twist: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
Deal With Reality
“I think that one should recognize reality even when one doesn’t like it; indeed, especially when one doesn’t like it.”
There Is No Free Lunch
“There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you.”
When everything is a priority, nothing is a priority. It's hard to compete with businesses that have correctly identified the right variables to maximize or minimize. When you focus on one variable, you'll increase the odds that you're quick and nimble — and can respond to changes in the terrain.
Map and Terrain
Plans are maps that we become attached to. Once we've told everyone there is a plan and what that plan is, especially multi-year plans, we're psychologically more likely to stick to it because coming out and changing it would be admitting we were wrong. This makes it harder for us to change our strategies when we need to, so we're stacking the odds against ourselves.
One Step At a Time
“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day—if you live long enough—most people get what they deserve.”
“The desire to get rich fast is pretty dangerous.”
Getting rich is a function of being happy with what you have, spending less than you make, and time.
“Know the big ideas in the big disciplines and use them routinely—all of them, not just a few.”
“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”
“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.”