Summary: 13 min
Book reading time: 2h56
Book published in: 2017
- You only need a few successful companies in your portfolio to become rich.
- Winning is about not losing.
- Success is more about one or two great strikes than a lot of mediocre ones.
What The Tao of Charlie Munger Talks About
The Tao of Charlie Munger is a book written by David Clark. It contains the principles, quotes, and maxims of Charlie Munger in an attempt to expose the philosophy of the chairman of Berkshire Hathaway. I learned that the efficient portfolio theory is a stupid theory, and that there will always be market crashes.
This book was a disappointment for two reasons.
First, the author included several times quotes that meant the same thing – and had the balls to say “we already spoke about this…”.
Second, the quotes themselves aren’t really good. They mostly concern the investment period of the 60s-90s, a time when exponential growth due to zero marginal cost wasn’t as spread as it is now (software, crypto).
I decided to only include relevant and smart quotes in this summary.
For example, one of the quotes from Munger was him bragging about the fact that he didn’t exercise and ate what he wanted (mostly sugar).
As you can imagine, I didn’t include these idiocies.
On paper, Charlie Munger is a smart guy.
In practice, he comes across as arrogant and full of himself.
Buffett will gladly say he owns his success to Charlie, but the reality is the opposite.
Charlie merged his company with Berkshire and hopped on Warren’s rocket (and became incredibly wealthy thanks to that).
As a result, I would urge you to avoid getting all of your investment and life advice from Charlie Munger, a man who bought stocks with debt and figured it was a bad idea when his predictions fail (true story).
Overall, this average book written by an average author contains average quotes from an average man.
It gets, as a result, an average note: 5/10.
Summary of The Tao of Charlie Munger by David Clark
Charlie Munger grew up in Omaha and attended the same high school as Warren Buffett (albeit seven years earlier).
His first job was working in Warren’s grandfather’s supermarket.
Charlie’s father was a lawyer who represented important business families in Omaha. He learned most of their dealings from him.
After high school, Charlie enrolled at the University of Michigan to study math, but dropped to enlist after Pearl Harbor.
The army sent him to California to study meteorology where he played poker with his army friends.
That’s how he learned his investment skills: bet the farm when chances to win are high and fold when chances to win are low.
After the war, he applied to Harvard Law School and did not get in – at first. It happened that the retired dean of the faculty was a family friend, so Munger eventually got in…magically!
This event taught him how important it was to have powerful friends.
After Harvard, he went to Los Angeles and worked at a law firm where he learned about business.
That’s when he understood he wanted to be rich.
He invested in real estate and eventually made a million dollars, which was the hardest he ever made.
He also realized he’d never get rich practicing law.
In 1959, Charlie met Warren Buffett.
They instantly became friends.
Charlie went back to California and started his own partnership three years later.
In the mid-1960s, Charlie and Warren bought a stamp trading company that worked like an insurance company – with a pool of money that customers would come to redeem later on.
They grew the business and Charlie invested all of the profits in other companies.
In 1968, they bought a retail clothing business, didn’t find a way to manage it profitably, and sold them at losses.
Charlie learned the importance to buy businesses with low capital requirements and lots of free cash to reinvest in other companies.
Eventually, Charlie became Berkshire’s vice chairman in 1979 and he merged his companies with Berkshire in 1983.
This is when Charlie would help Warren transform Berkshire into the enormous company it is today.
Part I: Charlie’s Thoughts on Successful Investing
#1 Fast Money: The desire to get rich fast is pretty dangerous.
It’s dangerous because Charlie Munger only got rich in the stock market, and the stock market is a long-term game, not a short-term game.
To make a lot of money quickly (in the stock market), you’d need to use leverage and be right. If you’re wrong, you’d lose a lot of money (like Charlie did).
#3 Avoid being an idiot: 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.
Not being idiotic means not making mistakes, like selling what he should hold and not buying what he should buy. It also means walking away when you should.
#6 Revelation: Once we recognized bargains based on quantitative measures that would have horrified Graham, we started thinking about better businesses.
This meant that while Ben Graham saw the math value of a business, Munger and Buffett saw the business potential.
#7 Graham’s Error: Graham was left with fear for the rest of his life after the crash of 1929, and all of his methods were designed to keep that at bay.
Graham’s method was to buy underpriced businesses and sell them when they reached their intrinsic value to avoid being destroyed in a crash again.
The buying was perfect, but the selling was a mistake, as it prevented Graham from enjoying long-term returns.
This method was designed to protect him from a crash, before all else.
#8 Sitting on your a*s: Buy one or two great businesses, not many
You’ll pay fewer taxes and fees. Hold and don’t diversify, not the opposite.
When you see a good opportunity, go all in.
#9 The dawning of wisdom: Acknowledging what you don’t know is the dawning of wisdom
The smarter we get, the more we realize how little we know -> this incites us to learn more.
Don’t invest in businesses you don’t understand.
#11 A mispriced gamble: You’re looking for a mispriced gamble. And you have to know enough to know whether it is mispriced.
A company is mispriced when its stock value doesn’t reflect its actual value. It can be overpriced, or underpriced.
This is how Berkshire made its money. They would buy undervalued companies (usually right after a crash), then wait for the next crash to buy the next company.
#12 Diversification: The worshipping at the altar of diversification is really crazy.
It creates average portfolios.
#14 The herd: Mimicking the herd invites regression to the mean
#19 Patience: I succeeded because I have a long attention span
#20 Stock Prices: It is an unfortunate fact that great and foolish excess can come into prices of common stocks in the aggregate. They are valued partly like bonds, based on roughly rational projections of use value in producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up, so far.
#21: EBITDA: I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit earnings.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. However, all of these must be paid at some point, hence should be taken into account.
#22 Dangers of finance companies: Where you have complexity, by nature you can have fraud and mistakes. . . . This will always be true (…) including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world.
Derivatives make it possible for financial companies to hide risks.
#23 Overconfidence: Smart people aren’t exempt from professional disasters from overconfidence.
This refers to a hedge fund that made money with an enormous volume of leverage, and that always won…until Russia defaulted on its debt, and they lost it all.
#27 Enduring problems: An isolated example that’s very rare is much easier to endure than a perfect sea of misery that never ceases.
It’s much better to solve one difficult problem rarely, than easy problems all the time.
#29 Understanding the odds: Move only when you have the advantage—you have to understand the odds and have the discipline to bet only when the odds are in your favor.
At the end of the 60s, Warren and Charlie each had their own hedge-funds. Everything was overpriced, so Warren closed the fund, gave back the money to his partners, and bought bonds.
Charlie didn’t. When the crash hit in 73, he lost half of his customers’ money, while Warren had a pile of cash to invest.
#32 Recognizing reality: I think that one should recognize reality even when one doesn’t like it; indeed, especially when one doesn’t like it.
This concerns the insurance business. When prices go down, Berkshire stops selling insurance because they don’t like the prices. They wait until they go back up.
#36 Financial dementia: There is more dementia about finance than there is about sex.
This means that bankers forget pretty fast about crises because finance is oriented towards the future – not the past.
This also means they are doomed to repeat the errors of the past.
#40 Academic sorcery: By and large I don’t think too much of finance professors. It is a field with witchcraft.
For two reasons:
- They believe in the efficient portfolio theory (where the idea is to diversify)
- They believe in the efficiency of the market: meaning that markets always gave the right price for a stock
#43 No winning formula: 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.
Getting rich is complex and takes time.
#44 On technology: The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you.
Some technologies built businesses (Microsoft, Google) while some tech destroys businesses (Blockbuster).
#47 Commissions: Everywhere there is a large commission, there is a high probability of a rip-off.
People that make their money off commission don’t have incentives to give you good stocks to buy and hold, but to make you change stocks often.
Part II: Charlie On Business, Banking, And The Economy
#49 Regulating banks: Banks will not rein themselves in voluntarily. They need adult supervision.
#56 Printing money: I think democracies are prone to inflation because politicians will naturally spend—they have the power to print money and will use money to get votes.
#59 Korea: Koreans came up from nothing in the auto business. They worked 84 hours a week with no overtime for more than a decade. At the same time every Korean child came home from grade school, and worked with a tutor for four full hours in the afternoon and the evening, driven by these Tiger Moms. Are you surprised when you lose to people like that? Only if you’re a total idiot.
As the US got richer, people got lazier.
#60 Carrots and sticks: If we’re going to prosper, we have to work. We have to have people subject to carrots and sticks. If you take away the stick the whole system won’t work. You can’t vote yourself rich. It’s an idiotic idea.
Sticks work better than carrots, which is why America is losing today.
#64 Corruption in Asia: You cannot just go invest in China, however. The first movers can get killed. There’s a saying in Indonesia: ‘What you’re calling corrupt is Asian family values.’
Berkshire finally invested in China in 2002 when they bought $500 million of shares in Petrochina. They did so because the Communist party controlled most of Petrochina. As a result, they knew the company would behave.
While the US bails its CEOs, China throws them in prison.
Part III: Charlie’s Philosophy Applied To Business And Investing
#72 Going to extreme: In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables—like the discount warehouses of Costco.
#74 Two kinds of businesses: There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested—there’s never any cash. We hate that kind of business.
#75 Few Companies Survive: Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.
#80 Incentives: From all businesses, my favorite case on incentives is Federal Express. (…) They could never get it done on time (…) Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift—and when it’s all done, they can go home. Well, their problems cleared up overnight.
Don’t pay people for how long they work, pay them for what they do.
#83 Master Plans: At Berkshire there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.
You can’t predict the future, no master plans are useless.
#84 Decentralization: Nothing in the history of the world of the size of Berkshire has been organized in a such decentralized manner
Berkshire does not intervene in the businesses it owns. They let them run by themselves, even if they compete against another Berkshire business.
#89 McDonald’s: (…) the really great educator is McDonald’s…I think a lot of what goes on there is better than at Harvard.
McDonald’s hires bad people with bad work habit and teach them good work habits, which levels up the whole US culture in general.
#91 Singapore: In a democracy, everyone takes turns. But if you really want a lot of wisdom, it’s better to concentrate decisions and processes in one person. It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in an enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.
Lee Kuan Yew said: “With few exceptions, democracy has not brought good government to new developing countries…What Asians value may not necessarily be what Americans or Europeans value. Westerners value the freedoms and liberties of the individual. As an Asian of Chinese cultural background, my values are for a government which is honest, effective, and efficient.”
Part IV: Charlie’s Advice On Life, Education, And The Pursuit Of Happiness
#92 One step at a time: Spend each day trying to be a little wiser than you were when you woke up. (…) At the end of the day—if you live long enough—most people get what they deserve.
#94 Using big ideas: Know the big ideas in the big disciplines and use them routinely—all of them, not just a few.
Generalists understand the world better than specialists.
#95 Career advice: Three rules for a career: (1) Don’t sell anything you wouldn’t buy yourself; (2) Don’t work for anyone you don’t respect and admire; and (3) Work only with people you enjoy.
#99 Making mistakes: There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.
#100 Specialization: Extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world.
This comment is why I am always careful about taking advice from people that have a vested interest in you respecting the advice or not.
Billionaires’ purpose isn’t to make you rich. It’s to get you to work for them so they can get richer.
Notice how this quote contradicts #94 and #136, where Charlie advises people to become generalists.
#103: Out with the old: Any year that passes in which you don’t destroy one of your best-loved ideas is a wasted year.
You need to keep your thoughts and certainties in tune with the evolution of the world.
#105: Secret of success: “I have never succeeded very much in anything in which I was not very interested. If you can’t somehow find yourself very interested in something, I don’t think you’ll succeed very much, even if you’re fairly smart.
#106 Ideology: Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind.
Charlie helped Warren break his chains of ideology and see past Ben Graham.
#109 Catechism: Oh, it’s just so useful dealing with people you can trust and getting all the others the hell out of your life. It ought to be taught as a catechism…But wise people want to avoid other people who are just total rat poison, and there are a lot of them.
#110 Cookie-cutter solutions: One solution fits all is not the way to go…The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You can’t run all these places with a cookie-cutter solution.
#111 Learning machine: Warren is one of the best learning machines on this earth…Warren’s investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is.
#115 Positive reinforcement: All human beings work better when they get what psychologists call reinforcement. If you get constant rewards, even if you’re Warren Buffett, you’ll respond… Learn from this and find out how to prosper by reinforcing the people who are close to you.”
#119 Marriage advice: In marriage, you shouldn’t look for someone with good looks and character. You look for someone with low expectations.
Someone with high expectations is never pleased.
#122 Envy: Well, envy and jealousy made, what, two out of the Ten Commandments? (…) I’ve heard Warren say a half a dozen times, ‘It’s not greed that drives the world, but envy’.
#123 Reading: In my whole life, I have known no wise people who didn’t read all the time—none, zero. You’d be amazed at how much Warren reads—and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.
#124 Taking the blows: Life is always going to hurt some people in some ways and help others. There should be more willingness to take the blows of life as they fall. That’s what manhood is, taking life as it falls. Not whining all the time and trying to fix it by whining.
#125 Useless worry: I don’t think it’s terribly constructive to spend your time worrying about things you can’t fix. As long as when you are managing your money you recognize that a terrible thing is going to happen, in the rest of your life you can be a foolish optimist.
#127 Tragedy: You should never, when faced with one unbelievable tragedy, let one tragedy increase into two or three because of a failure of will.
#131 A seamless web: In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has forty-seven pages, I suggest you not enter.
#132 Missed chances: I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well,(…) to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion. That is a very good idea.
#134 Truth: Remember Louis Vincenti’s rule: ‘Tell the truth, and you won’t have to remember your lies.’
#135 Perspective: 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.
#136 Multidiscipline: If you have enough sense to become a mental adult yourself, you can run rings around people smarter than you. Just pick up key ideas from all the disciplines, not just a few, and you’re immensely wiser than they are.
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