“Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines—psychology, history, mathematics, physics, philosophy, biology, and so on—a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts.” -Tren Griffin
In chapter three of “Charlie Munger (Trades, Portfolio): The Complete Investor”, author Tren Griffin introduces readers to what is called the “lattice of mental models” that lead to worldly wisdom. While investors admire Munger’s investing success, their fascination with the man really rests on his polymath mind.
And why would an investor be interested in Munger’s lattice of mental models? Griffin wrote, “If you do this work [intensive learning] and adopt a worldly wisdom mindset, Munger believes you will create an investing edge over other investors.”
Munger used the example of a business that raises its prices and, as a result, sells more of its product. One mental model—the economic law of supply and demand—would appear to have been violated. But other mental models, from psychology, would see it as quite logical. Perhaps making a product too expensive for almost everyone makes it a status symbol, or perhaps consumers thought the original price signalled a lack of quality.
In Munger’s mind, people who have a wide range of knowledge and understand diverse models from diverse disciplines make better decisions and, thus, better investors. He explained this way:
“You’ve got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there’s no precise numbering you can put to these factors. You know they’re important, but you don’t have the numbers. Well, practically (1) everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and (2) doesn’t mix in the hard- to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that.”
Griffin observed that in Munger’s world “it is better to be worldly wise than to spend lots of time working with a single model that is precisely wrong.”
Where does that worldly wisdom come from? Munger believes in reading the great books and, perhaps, for a wide-ranging liberal arts education. As we recall from chapter one, Munger did have a diverse background: While first at the University of Michigan, he studied mathematics, he joined the military to serve in World War II and in it served as a meteorologist. After the war, he studied law and became a lawyer before ultimately becoming an investment manager.
Importantly, Munger advocates for thinking broadly because everything is “literally related.” As he wrote in "Poor Charlie’s Almanack" in 2005: “You have to realize the truth of biologist Julian Huxley’s idea that 'Life is just one damn relatedness after another.' So you must have the models, and you must see the relatedness and the effects from the relatedness.”
Griffin noted this breadth of knowledge is a natural part of Munger’s character, and something he consciously cultivates, because knowing nothing about an important issue leads to problems. So he sets aside time each day, as does Warren Buffett, to just think. And, of course, he also sets aside time for reading as well. Buffett has claimed, “You could hardly find a partnership in which two people settle on reading more hours of the day than in ours.”
As a result of reading broadly and thinking, Munger likes to take a multi-disciplinary approach to problems. More specifically, he has referred to 80 or 90 important models that “carry about 90 percent of the freight in making you a worldly wise person. And, of those, only a mere handful really carry very heavy freight.”
Although he has been asked many times for a full list of those models, Munger has yet to produce one. He has also said he could never simply say “here are three things” because each person will need to determine their own important models.
In a related vein, he also believes that by recognizing, and avoiding, some dysfunctional decision-making processes, an investor could learn to make fewer mistakes. Nevertheless, he does not believe mistakes can be eliminated completely.
One of his tools for reducing the number of mistakes he makes involves asking questions. Another is using an algebraic model of inverting problems to make it easier to find solutions. And the lattice effect is what Griffin calls a double-check on the investing process, in which you check the results over and over using perspectives from many disciplines. Or as Munger put it in his characteristically blunt way, “you can more consistently not be stupid.”
Another important tool for avoiding mistakes is checklists. And then there is the classic Munger/Buffett idea of investing only in businesses that are simple to understand, given your education and experience. Buffett gave the latter idea his own spin when he said that if you cannot explain why your investment failed, then the business was too complex for you.
Behind the latter statement is their belief that if you cannot understand the business, then you won’t be able to understand what you did wrong. If you can’t understand why you were wrong, you will not be able to learn from the mistake. All of which means you won’t know what you are doing—and that is the real source of risk.
The two also divide their errors into mistakes of omission and mistakes of commission. Mistakes of omission refers to not taking an action or, as Munger described it, “buying with an eyedropper things we should be buying a lot of.” That included not buying shares of Walmart (WMT, Financial) when the company was still young, a mistake they say cost them $10 billion. Griffin does not provide any examples of errors of commission, which consist of doing something wrong (versus not doing some right thing in errors of omission).
Finally, remember this incisive Munger quotation, “People calculate too much and think too little.”
(This article is one in a series of chapter-by-chapter digests. To read more, and digests of other important investing books, go to this page.)
Disclosure: I do not own shares in any company mentioned, and do not expect to buy any in the next 72 hours.
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