Charlie Munger (Trades, Portfolio) is considered to be one of the world's best investors. He is also one of the investment world's most celebrated thinkers.
However, the vast majority of articles out there concentrate on Munger's investment prowess, so I wanted to do something that focuses on Munger's generalized way of thinking about the world and learning, rather than just his advice on investing.
“How do some people get wiser than other people? Partly it is inborn temperament. 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. Warren Buffett (Trades, Portfolio) has become one hell of a lot better investor since the day I met him, and so have I. If we had been frozen at any given stage, with the knowledge hand we had, the record would have been much worse than it is. So the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”
The key takeaway from this quote is the idea that investors should always be continually learning and seeking to improve themselves. No matter how much experience you may have, the only way you are going to grow is to attempt to learn continually. As Charlie said, "The game is to keep learning."
And one of the first topics you should be learning about and exploring is math. Above all else, to be a successful investor, you need to understand the science of probabilities:
“If you don’t get this elementary, but mildly unnatural, the mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest. You’re giving a huge advantage to everybody else.”
The science of probabilities is second only to an understanding of compound interest, which is closely followed by the elementary math of permutations and combinations:
“And the great useful model, after compound interest, is the elementary math of permutations and combinations.”
An understanding of these key principles will give you a far better understanding of the investment universe rather than academic teaching, which focuses on beta and modern portfolio theory:
“Beta and modern portfolio theory and the like – none of it makes any sense to me. We’re trying to buy businesses with sustainable competitive advantages at a low, or even a fair, price.”
“How can professors spread this [nonsense that a stock’s volatility is a measure of risk]? I’ve been waiting for this craziness to end for decades. It’s been dented, but it’s still out there.”
“Warren once said to me, 'I’m probably misjudging academia generally [in thinking so poorly of it] because the people that interact with me have bonkers theories.'”
Academics also fail because they lack experience, in the view of Munger. He believes that to have the best outcome in life, you have to seek to learn continually, but also have experiences, experiences that can help you form mental models to find the best solution to any problem, a solution he's aptly named "elementary worldly wisdom."
"What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.
You’ve got to have models in your head. And you’ve got to array your experience – both vicarious and direct – on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and fail in life. You’ve got to hang experience on a latticework of models in your head.”
Finally, it always pays to have a broad experience of the world. A narrow focus will only hamper your ability to solve problems.
“You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.”
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