This is the investing principles checklist from Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition (Book Summary | Amazon):
Quick Housekeeping:
- All content is from the original author unless otherwise stated. It’s my understanding that this checklist is written in Peter Kaufman’s words (paraphrasing Charlie Munger).
- I’ve added emphasis in bold for readability/skimmability.
Post Contents: Click a link here to jump to a section below
- About the Investing Principles Checklist
- Risk
- Independence
- Preparation
- Intellectual Humility
- Analytic Rigor
- Allocation
- Patience
- Decisiveness
- Change
- Focus
10 Guiding Principles from the “Investing Principles Checklist” of Charlie Munger
About the Investing Principles Checklist
“The following principles are most certainly not employed by Charlie in a one-by-one or one-time fashion as the checklist format might seem to imply. Nor can they necessarily be prioritized in terms of any apparent or relative importance. Rather, each must be considered as part of the complex whole or gestalt of the investment analysis process, in much the same way that an individual tile is integral to the larger mosaic in which it appears.”
- “Since human beings began investing, they have been searching for a magic formula or easy recipe for instant wealth. As you can see, Charlie’s superior performance doesn’t come from a magic formula or some business-school-inspired system. It comes from what he calls his ‘constant search for better methods of thought,’ a willingness to ‘prepay’ through rigorous preparation, and from the extraordinary outcomes of his multidisciplinary research model. In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness. Each attribute is in turn lost without the other, but together they form the dynamic critical mass for a cascading of positive effects for which Munger is famous (the ‘lollapalooza’).”
In Charlie Munger’s own words:
- “Some people do not have a good temperament for investing. They’re too fretful; they worry too much. But if you’ve got a good temperament, which basically means being very patient, yet combine that with a vast aggression when you know enough to do something, then you just gradually learn the game, partly by doing, partly by studying. Obviously, the more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be. I don’t know anyone who did it with great rapidity … The game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”
- “We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But, if you can buy a few great companies, then you can sit on your ass. That’s a good thing.”
Risk
All investment evaluations should begin by measuring risk, especially reputational.
- Incorporate an appropriate margin of safety.
- Avoid dealing with people of questionable character.
- Insist upon proper compensation for risk assumed.
- Always beware of inflation and interest rate exposures.
- Avoid big mistakes; shun permanent capital loss.
Independence
“Only in fairy tales are emperors told they are naked.”
- Objectivity and rationality require independence of thought.
- Remember that just because other people agree or disagree with you doesn’t make you right or wrong—the only thing that matters is the correctness of your analysis and judgment.
- Mimicking the herd invites regression to the mean (merely average performance).
Preparation
“The only way to win is to work, work, work, and hope to have a few insights.”
- Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.
- More important than the will to win is the will to prepare.
- Develop fluency in mental models from the major academic disciplines.
- If you want to get smart, the question you have to keep asking is “why, why, why?”
Intellectual Humility
Acknowledging what you don’t know is the dawning of wisdom.
- Stay within a well-defined circle of competence.
- Identify and reconcile disconfirming evidence.
- Resist the craving for false precision, false certainties, etc.
- Above all, never fool yourself, and remember that you are the easiest person to fool.
Analytic Rigor
Use of the scientific method and effective checklists minimizes errors and omissions.
- Determine value apart from price; progress apart from activity; wealth apart from size.
- It is better to remember the obvious than to grasp the esoteric.
- Be a business analyst, not a market, macroeconomic, or security analyst.
- Consider totality of risk and effect; look always at potential second order and higher level impacts.
- Think forwards and backwards—Invert, always invert.
Allocation
Proper allocation of capital is an investor’s number one job.
- Remember that highest and best use is always measured by the next best use (opportunity cost).
- Good ideas are rare—when the odds are greatly in your favor, bet (allocate) heavily.
- Don’t “fall in love” with an investment—be situation-dependent and opportunity-driven.
Patience
Resist the natural human bias to act.
- “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily.
- Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake.
- Be alert for the arrival of luck.
- Enjoy the process along with the proceeds, because the process is where you live.
Decisiveness
When proper circumstances present themselves, act with decisiveness and conviction.
- Be fearful when others are greedy, and greedy when others are fearful.
- Opportunity doesn’t come often, so seize it when it does.
- Opportunity meeting the prepared mind: that’s the game.
Change
Live with change and accept unremovable complexity.
- Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you.
- Continually challenge and willingly amend your “best-loved ideas.”
- Recognize reality even when you don’t like it—especially when you don’t like it.
Focus
Keep things simple and remember what you set out to do.
- Remember that reputation and integrity are your most valuable assets—and can be lost in a heartbeat.
- Guard against the effects of hubris and boredom.
- Don’t overlook the obvious by drowning in minutiae.
- Be careful to exclude unneeded information or slop: “A small leak can sink a great ship.”
- Face your big troubles; don’t sweep them under the rug.
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