Charlie Munger: The 5 Investing Tricks That Made Him a Billionaire

But what caused the financial success was not extreme ability. You know, I have a good mind, but I’m way short of prodigy. And I’ve had results in life that are prodigious, and that came from tricks I just learned a few basic tricks from people like my grandfather.

What kind of? Now everybody's leaning in, wanting to know. Charlie Munger has often said that the vast majority of his financial success has come not from superior intelligence or insight but from a framework of mental tricks and models that have helped him avoid just making bad mistakes. By applying those mental tricks in the realm of stock market investing, he's been able to accumulate a net worth of 2.4 billion dollars and will go down as one of the best investors and best thinkers to have ever lived.

So in this video, I'm going to explain five mental tricks that Charlie described in his 2020 interview that have helped his decision making and his investing throughout his lifetime. It starts with the very powerful trick of inverting. Inverting the problems you have to solve. There are all kinds of tricks that I just got into by accident in life.

One, I invert all the time. I was a weather forecaster when I was in the Air Corps. How did I handle my new assignment being a weather forecaster in the Air Force? A lot like being a doctor that reads X-rays. It's pretty solitary. You're in the hangar in the middle of the night, drawing weather maps and you're going pilots, but you're not interfacing with a bunch of your fellow men very much.

So I figured out the minute I was actually making weather forecasts for real pilots, I said, how can I kill these pilots? Now that's not the question that most people would ask, but I want to know what the easiest way to kill them would be so I could avoid it. So I thought it through and reversed that way, and I finally figured out I said, there are only two ways I'm ever going to — I was in the Ferry Command — the only two ways I'm going to kill a pilot.

So, I'm going to get him to icing his plane can't handle and that will kill him, or I'm going to get him someplace who's going to run out of gas before he can land because all the airports are sucked in. I just was fanatic about avoiding those two hazards. My grandfather would say to him when I'm swimming, he'd say swim as long as you want but stay near the shore.

But you can laugh, but you know he was a very wise man. But what I'm hearing you say is that you as a discipline look at what the risk is on the other side of the situation and you avoid that. That's one of the rules, right? Well, it's just — it's like a lot of practical problems in algebra. If you invert, you can solve it easily. If you don't, you can't solve it exactly right.

And so, of course, I had that trick very early. Most people would say how can you please tell us what you'd do to save India? And of course, I would approach it differently. I'd say, what could I do which would most easily hurt India? Approaching it in reverse that way, I got better results. You look at the vulnerabilities.

Yes, and I have a whole bag of tricks like that. So while Charlie describes how he applied this to his work as a meteorologist, inversion is also a very powerful concept in the stock market. People are very good at finding stocks they think could be a winner, but of course, that's only half the story.

The other half of the investing equation is to ensure the company you're looking at won't be a loser. You know Buffett's first rule of investing, after all, is don’t lose money. So while it's necessary to ask why will this stock do well in the future, remember it's equally as important to ask why might this stock do poorly. Oftentimes, asking the latter will do much more for your long-term returns than anything else.

So, you know next time you hear someone talking negatively about a stock that you own, don't argue with them. Instead, thank them for bringing the inverted perspective to your attention. So inversion is key, but another mental model Charlie talks about is the concept of humility or knowing what you don't know.

But if humility means that you know the edge of your own competency, yes, and you aren't arrogantly stepping over the boundary? I'm very good at that. Yeah, well, I'd redefine humility as knowing what you don't know. Yes, well, both Lauren and I are very good at that.

One of these guys at the Berkshire meeting from one of the foreign publications said, why do a couple of guys in a little place in Omaha do so much better than all these powerful minds and great institutions? And I said, well, I think Warren and I know the edge of our competency better than other people do. Warren frequently says, I'd rather deal with a guy with an IQ of 130 who thinks it's 125 than a guy with an IQ of 180 that thinks it's 200. That second guy will kill you.

So this discussion revolves around a core philosophy of investing which is the circle of competence. In investing, you don't need to know about a lot of things; you just need to know a few things very well. This is another mental trick to avoiding bad investments: know the limit of your competency to be able to understand when you're drifting into areas that you don't know.

And once you can understand what's inside your circle and what's outside your circle, don't be afraid to double down and go deep on learning about the areas of business that do fall firmly within your circle of competence. Specialization is the safest way up for most people, and for that reason, surgeons know more and more about less and less.

And that’s what gets rewarded. If you have a nasty fistula in your colon, you do not want a surgeon who's good at proofs or political science. You know, it's understandable how the world rewards this specialization. I never liked it, and I loved picking up new ideas, being a great passionate reader, and so I decided I'd make whatever living I could make doing what I like to do, which is sort of romping over a whole field.

I do not recommend it to other people because the safe way up is to know a hell of a lot about something. So while Charlie Munger doesn't himself like to specialize, he acknowledges that it's the smart thing to do. Now here he was talking about specializing in, you know, a certain career, but of course, this applies to investing as well.

You know, Warren Buffett understands insurance very well; Ray Dalio understands macroeconomics very well; Charlie Munger understands China very well; Benjamin Graham understood distressed businesses very well; Jack Bogle understood long-term market patterns very well. All of these guys knew a lot about a little, not a little about a lot.

For example, the people on CNBC are people that understand a little about a lot, but when they do want to go deep on a particular issue, then they bring in a big investor that specializes in that area. So definitely make sure you know your circle of competence and don't be afraid to go deep on things you already understand reasonably well.

So that's trick two. Then from here, the third trick Charlie talks about in this interview is to be rational enough to be unaffected by wild swings in the stock market. Well, I am continuously invested in American equity, but I've had my Berkshire stock decline by 50 percent three times, and it doesn't bother me that much.

Weird? That is just the natural consequence of life properly lived. So if you have my attitude, it doesn't really matter. I always like Kipling's stressing expression in that poem called "If." He said, success and failure, he says, treat those two impostors just the same. You just roll with it.

Sometimes it's going for you and some against. It's all part of the same game. This might be one of the most powerful philosophies that Charlie has: the ability to stay focused on the long term and not have a knee-jerk reaction when the market starts swinging wildly. This is something he's always been very passionate about.

Let's rewind the clock to this old interview he did with the BBC. How worried are you by the declines in the share price of Berkshire Hathaway?

The difficulty is this is the third time that Warren and I have seen our holdings in Berkshire go down top tick to bottom tick by 50. I think it's the nature of long-term shareholding with the normal vicissitudes and worldly outcomes and in markets that the long-term holder has his quoted value of his stock go down, and then by say 50 percent.

In fact, you can argue that if you're not willing to react with equanimity to a market price decline of 50 percent two or three times a century, you're not fit to be a common shareholder, and you deserve the mediocre result you're going to get there. You go.

If you're not prepared to tough it out through periods where your portfolio is down 50, just do yourself a favor and never buy into the market because it will happen to you at some point, and you won't be able to see it coming. And when it does hit, you need to be able to stay focused on the long term and not panic.

You panic, you lose. So always stay rational and just ignore those sudden market swings. Then moving on to Charlie's fourth trick is to always keep things simple and moreover ensure the companies you look into are solid, straightforward businesses that anyone could run.

We have a very peculiar way of looking at things. We want to buy something that's intrinsically a very good business, meaning that an idiot could run and it would do all right. And then we want that business, which an idiot could run successfully, to have a wonderful person in it running it.

If we have a wonderful business with a wonderful person running it, that really turns us on, and it works very well. And now we do make exceptions, but not many, and it's a pretty simple philosophy. Warren sometimes says you have to choose a good person or a good business.

You know what he says? This is not politically correct. He says good business. He wants something that has such tremendous strength that I had a friend when we practiced law, and he said if it won't stand a little mismanagement, it's not much of a business. We like businesses that stand a lot of mismanagement, but don't get it.

So that's our formula, and we can't make it work perfectly, but it certainly worked better than most people's. So ideally, you want a wonderful business and a wonderful person running it, but the most important thing is that the business is solid and straightforward and it's got a big competitive advantage.

You know, as Charlie said, if it won't stand a bit of mismanagement, then it isn't much of a business. So even though we like businesses that are well managed, above all else, finding a straightforward strong business that anyone could run is definitely the top priority.

And then finally Charlie's fifth trick that helped him do very well in investing is a simple one: it’s to read a lot. Take a listen. Oh, by the way, don't you read a book a day, something like that, like you do? Well, maybe not. I read and I skim a lot.

Yeah, I do the accidents of life. You give me books; I haven’t torn the books. Perfect strangers give me books, lots of them, and I almost never buy a book anymore. When I was young, I used to order them from the book review columns of the New York Times, and now it's torn books that come, and I just select what I want.

I'm amazed at how well some of these people are reading me. I don't think you can take every bookish little boy and turn him into a billionaire by petting him on the head and say read all you want, Johnny. But if it were that easy, there'd be more billionaires. But it enormously helped me.

And I think reading, once you've learned it, reading and arithmetic, you can take in so much, and you can take it on your own time schedule. If somebody's talking to you, he may be telling you something you don't want to know; you already know it's too hard or he's going too fast or too slow.

Yeah, but when you're reading, you can just take it as you want it. So it's just God's gift. If you're into self-education, there's nothing like reading. And of course, people who do a lot of it have an enormous advantage.

So Charlie is a big fan of reading, as is Warren Buffett. But beyond the general tip of reading, I think self-education is really the trick that Charlie is getting at. You know, it’s a shame, but most people finish their uni degree, and they think that their learning is done.

They'll just go out and work their job for the rest of their lives. You know, school's out, hooray, we've done it! But all the most successful people in the world are the ones that make self-education and self-improvement a focus throughout their whole life.

You know, and it doesn't necessarily have to be books. It could be courses, or podcasts, audiobooks, or interviews, or whatever really. But if you do take the time to improve your own abilities and your own earning power, as Charlie says, that will serve you tremendously well in life.

Having an innate interest in self-improvement, that's Charlie's last trick, and he practices what he preaches. He's 98 years old and he's still putting in the effort to read a lot and gain perspective.

So overall, they are five of Charlie's mental tricks that helped him become not only one of the best investors in the world but also one of the best minds, full stop.

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