Charlie Munger on Making Mistakes

Munger describes the best way to cope with mistakes

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Mar 22, 2016
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As investors, but most importantly as humans, we are prone to make mistakes in our decisions. So how does a rational man such as Charlie Munger cope with mistakes? What is his recommendation regarding the correct attitude to take when we face them? Luckily for us, at a Wesco Annual Meeting, Munger elaborated on the subject.

Shareholder: When Bell Rich Oil goes up 35 times, I imagine myself having a lot of regret or debilitating. How does one recuperate from something like that? A big missed opportunity?

Munger: Yeah.

Shareholder: How does one recover from that? How do you end up not dwelling on that?

Munger: You know what Kipling said? Treat those two impostors just the same — success and failure. Of course, there’s going to be some failure in making the correct decisions. Nobody bats a thousand. I think it’s important to review your past stupidities so you are less likely to repeat them, but I’m not gnashing my teeth over it or suffering or enduring it. I regard it as perfectly normal to fail and make bad decisions. I think the tragedy in life is to be so timid that you don’t play hard enough so you have some reverses.

While Munger's answer is short, he touches upon key aspects that are worth commenting on:

Treat success and failure just the same. Munger is quoting the famous poem "If" by Rudyard Kipling, in which he suggests that, among other things, to be a man we need to avoid bragging about success or feeling defeated by failure. Investors such as Munger and Warren Buffett have mentioned that their goal was not to make a lot of money but rather to achieve independence. Apart from this, investing for them is fun, provided by the embedded intellectual challenge. So, as a natural outcome of making decisions, some of them will be bad and others will be wrong, but the important aspect is to learn from both to become better and better with the passage of time.

Review your mistakes. They say that nothing teaches like failure. Ray Dalio (Trades, Portfolio) mentioned in "Principles" that Pain + Reflection = Progress. Why are lessons that we learn from failure so important? First, the emotional toll that they leave us is likely to be higher than that of success. Second, if we take the courage to dig and analyze our behavior to identify the sources of error, we will connect the generated pain with lessons and become unlikely to repeat them. Mistakes are similar to seeds; they take awhile to blossom, but they carry important lessons that could prove beneficial for us as investors.

Dare to play hard. Munger mentioned that, when we make decisions, in spite of doing and working hard to stack the odds in our favor, we are likely to encounter losses along the way. Munger suggests taking an understanding approach, since these outcomes are to be expected from time to time, and, most importantly, they shouldn't leave us outside the table for our next big play.