The most famous story about Charlie Munger, a vice-chairman of Berkshire Hathaway since 1978, who died Tuesday at the age of 99, is that many years ago, he convinced Warren Buffett to rethink his entire philosophy of investing.
Buffett had grown up as a disciple of Ben Graham, whose investment approach emphasized buying fair-to-middling companies that were being massively undervalued by the market. Their upside was limited, but their downside was essentially nil. Munger, by contrast, pushed Buffett to buy what he called “great businesses at fair prices”—companies with strong brands and pricing power. Even if, at first, you had to pay more to buy the stocks of these companies, Munger argued, their far greater upside more than made up the difference. Buffett was convinced, and over the years was buying and holding the stocks of “great businesses”—companies including Coca-Cola and Costco and, later, Apple—which was key to Berkshire Hathaway’s extraordinary investing performance.
“Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me,” Buffett told Forbes in 1996. “It took a powerful force to move me on from Graham’s limiting views. It was the power of Charlie’s mind.”
The power of Munger’s mind was evident not just in Berkshire’s decisions, but in the way he talked and wrote about decision-making and problem-solving in general. Munger’s mantra was “keep it simple.” But that phrase obscured the complexity of his approach to thinking—which fused rational, probabilistic calculation with a keen understanding of the limitations of human psychology, and the ways in which our biases and temperamental weaknesses shape the choices we make. Perhaps just as important, Munger was able to talk about the challenges of making good decisions in a way that was not just useful in practice, but also inspiring.
Munger’s key concept was the idea that rather than be locked into a single way of seeing the world, it was essential to have a diverse portfolio of what he called mental models, which in essence were useful tools to help you understand the world (and yourself). These models ranged from such concepts as the importance of confirmation bias in skewing our interpretation of data, and the power of positive and negative feedback loops, to heuristics you can use to try to see a problem in a different light.
One of Munger’s favorite such heuristics was what he called “inversion”—thinking backward from a situation to try to understand how things might have turned out differently, and therefore what might go wrong in the future. In a famous 1996 talk, he used inversion to look at the history of Coca-Cola, and its rise to dominance, in order to try to understand whether Coke’s competitive position was secure, and what the company could do to jeopardize it. (Unsurprisingly, changing the formula, as the company did with the introduction of New Coke in 1985, was high on his list of potential dangers.)
Finding these mental models requires a couple of things. First, you have to be constantly learning, taking in new material from as many different sources as you can. That may sound obvious, but one of Munger’s constant refrains was how important it was to simply read a lot. He once said, “I don’t think you can be a really good investor . . . without doing a massive amount of reading,” and also said that he knew no wise people “who didn’t read all the time.”
And when you read, Munger argued, you should read in many different fields. In a world in which people feel a constant pressure to specialize and narrow their focus, Munger insisted on the value—and the pleasure—of widening it. Learning to think better, he argued, required taking in insights from multiple disciplines and from people with diverse perspectives and then weaving them together into what he called a latticework of mental models. As he put it, “I paid no attention to the territorial boundaries of academic disciplines and I just grabbed all the big ideas that I could.”
The weaving-together part of that process is important—for Munger, the point was not to build a collection of mental models that are siloed from each other. It’s to use insights from one field to help you understand another, to recognize possible patterns you might otherwise have missed.
The challenge, of course, is that it’s easy to make superficial connections, or facile analogies. That’s why Munger placed a lot of emphasis on reading deeply, and on the importance of not rushing. Munger may have been vice-chairman of Berkshire Hathaway, but unlike most corporate executives, he and Buffett were the antitheses of the stereotypical C-level executive: They were not running from meeting to meeting or jetting all over the country. Instead, as Munger said, they both insisted on having “a lot of time almost every day to just sit and think”—something that’s very rare in American business, and, more generally, in American society today.
An important part of what all that thinking should be about, Munger argued, was recognizing your own strengths as well as your limitations. And so, one of his key concepts was the idea of identifying your “circle of competence,” and then trying not to stray from it. All that reading and learning across disciplines could help expand your circle of competence, but for Munger, it was essential to not imagine that you could be the master of all trades. The goal, ultimately, was to be ready to seize opportunities that took advantage of your strengths—and avoid situations that played to your weaknesses. (In Munger’s case, paradoxically, that meant that, for many years, he shied away from investing in tech stocks since he felt they were outside his circle of competence.)
That is, of course, easier said than done because successful investing (or decision-making, in general) isn’t just about IQ or even having a good process. It’s also about temperament and emotion: If you’re impatient or fearful or find it difficult to accept the reality that sometimes you’ll lose, it’s hard to invest well or make good decisions. Munger’s most optimistic take was that you can train yourself out of these temperamental weaknesses. But to do so, you first have to recognize them.
Today, some of Munger’s insights may sound obvious. But that’s in no small part because of how he’s shaped the way generations of investors and business executives think about cognitive biases, judgment, and decision-making. In the end, Munger will be (and should be) remembered less for his specific insights into investing, and more for his thinking about thinking. Warren Buffett once said about Munger: “He expanded my horizons.” He expanded them for the rest of us, too.
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