Poor Charlie's Almanack. We've previously covered "The Snowball," which talks about Warren Buffett. This book, on the other hand, is about Warren Buffett's partner of a thousand years, the "Crocodile of the Salt Lake," Charlie Munger. And from now on, we will call him Charlie. It's not a success book; it's a book that compiles the experiences and wisdom of an old man over 90 years old, who is an investor and the right-hand man of billionaire Warren Buffett, Charlie Munger. Some people say that Charlie was Warren Buffett's teacher. And Warren Buffett himself has confessed that in the field of investment, the two people who had the strongest influence on me were, first, the father of Wall Street, Benjamin Graham, and second, the Crocodile of the Salt Lake, Charlie Munger himself.
His company, Berkshire Hathaway, is a company that invests in a multitude of sectors, from banking, aviation, transportation, insurance, food, and so on. It's the company with the highest stock price, which in 2022 was worth over $530,000 per share. On January 1, 1924, Charlie was born in the city of Omaha, in the state of Nebraska. From a young age, Charlie was a very unfortunate person. He didn't have a better life than others. Before he was 30, he faced war, economic crisis, and a poor family. But he was a fighter, overcame these obstacles, and polished himself into a great person, eventually becoming a successful investor and receiving respect from everyone like this. He was a person dedicated to his work, honest, kind, and very careful with his spending. This made many people trust him and willing to cooperate and invest in his company. After he made his first million dollars in real estate, he partnered with Warren Buffett to create the company Berkshire Hathaway, which has grown to this day. How is his way of thinking and analysis different from ordinary people? In this book, we will introduce the famous model of thinking from many angles by Charlie Munger.
Charlie understood that this world has a very complex system. All the knowledge in the world comes from studying different fields, and those fields are related to each other in a messy way, influencing each other back and forth. If we look at one thing from only one angle, we don't get enough information. People only understand what they can think of. For things beyond their frame of thinking, they will fill in with their own assumptions and then make a conclusion. It's like a saying from Charlie: "To the man with only a hammer, everything he sees is a nail." They also have a saying that is similar to this, which says that if a beggar could make a wish, he would take a golden bowl to beg with. Although this is just a metaphor, its meaning wants to convey the perspective that people can only listen and understand things that are within their level of understanding. In society, the number of smart and understanding people is very small. Those smart people generally don't have many opinions or make automatic judgments about something. What is the automatic factor?
It is a value shown through emotions, behavior, and beliefs that a person has encountered or experienced. In it, subjectivity is also a theory that values an individual's thoughts. For example, when someone says, "Doing this is wrong," or "This person is not good," "The government should do this or that," etc. This is a personal opinion and a subjective view from only a small angle. Smart people absolutely do not say these things. They look at an issue or a person from many angles. For example, they see a mother hitting her own child. An ordinary person would probably think that this mother is crazy. Hitting her child in a public place like this, doing this is wrong. But a person with a high level of thinking will think about the reasons behind these things. Why is she hitting her own child? Did the child do something bad or improper? Did this mother have a bad day and is now releasing her anger on the child like this? They always look at something, analyze it from all angles, and do not judge based on that automatic, subjective factor. In this world, many things happen that cannot be explained. For example, when you learn to drive, you have to learn the driving laws first, don't you?
This is an objective fact that everyone must know. You learn the principles and many customary rules, such as signaling at least 15 meters before turning left or right, frequently checking the rearview mirror, and maintaining a reasonable safety distance, etc. But when you actually hold the steering wheel, you realize that the knowledge you've learned is not very applicable. When turning right on a curve, how many meters in advance must you signal? At what degree should you turn? How much safety distance should you maintain? All of this, we ourselves estimate to a reasonable extent, not too much, not too little, which is the subjective factor. Suddenly, we don't think about the principles we learned. In practical application, whatever it is, writing, playing ball, or doing business, those theories and principles are just recorded things to illuminate the path. But in reality, it is we ourselves who determine when it's appropriate, what level is reasonable, and which way is best. Therefore, what we need to consider is, at what level should this reasonableness be applied to be good?
It can be said that through education and a lot of experience in life, a mature adult has already received a lot of knowledge and information. But in real life, the subjective factor and the objective factor, these two, are still in conflict. We don't know who is right, who is wrong, which one is reasonable, and which one is not reasonable. And what we have to find is the middle point of a reasonable balance of these two factors. They teach us to be honest, don't they? This is the general moral code that is accepted. So why is it that sometimes in daily life, there are still people who lie? Aren't we told that the law is what protects people? So why is it that sometimes there are still people who cry out, "It's so unjust, it's so unjust"? Weren't we told that if you work hard, you will get good results? So why are there some people who have worked for almost their whole lives and still haven't seen any results? Understanding so many reasons like this, why do we still live without any happiness? It's as if what they tell us cannot be used at all in this society. This deep pit between the objective factor and the subjective factor, we can fall into it at any time. If we have the ability to climb out of this pit, we understand that each person has their own subjective factors. Understand the small, know the big.
Learn to listen, learn to understand everyone. That means you are mature. This is why people who are old or mature are very composed. They can accept many things, no matter how complicated and difficult to accept they may be. That's why Charlie raised this theory of thinking from all angles, which can help us see things more comprehensively than before. It can be said that this theory is the bridge that spans the gap between theory and practical application. Listening up to this point, you all probably understand a little by now why we say that thinking from all angles is a very basic foundation in understanding this world. This is why smart people and mature people do not show too many subjective opinions. And if someone speaks without reason, looking completely wrong, they can still understand, because they have stood in that person's angle to look at the problem as well. When we, as outsiders, stand in one angle and judge someone as good or bad, it's very easy. It has no value at all, because we are not them, we don't know for sure. We can't see what they see. All people see things from different angles. If you think about it, what do they see? Of course, each person sees things differently. Most of the time, it's just taking something we've encountered, our level of understanding, our narrow-mindedness, and putting it on display for them to see.
It doesn't make you grow. Even though thinking about them, evaluating them, and criticizing them is easy and makes us feel relieved, all of this does not bring growth to you. You just see them from a distance and try to talk, even though they can't hear you. Therefore, we must learn to train ourselves to see things from all angles, to see what the story behind them is like. If this happened to me, how would I solve it? All of this is what can make us grow. By this point, you all have probably understood the importance of thinking from all angles. But let's remember that just raising a theory and principle is useless. You have to roll up your sleeves and apply it in practice to know what might happen. Of course, in daily life, application has many different forms. We only take what is relevant to us to talk about, which is the creation of our knowledge. At this point, we have to introduce a very important model of thinking, which is inverted thinking. Charlie has a very unique way of thinking. Before you are hesitant about where to go, you have to think back first about whether you should go or not. In fact, this way of thinking comes from mathematics. When a problem asks us to prove that A is less than 0, we can find any assumption that can prove that A is greater than or equal to 0 is not true first. But in daily life, it's rare for anyone to have this kind of inverted thinking.
That's why Charlie Munger always raises this model of inverted thinking for us to often use in practice. He understood that when our very complex brain system encounters very complex stories in society, knowing how to use inverted thinking is actually easier to find a solution. First, he always asks himself, "What shouldn't I do the most?" Then he considers what to do next. Similarly, if we want to create a good knowledge system, we must first know what a bad knowledge system is, and we try to avoid it. A bad knowledge system generally has three special characteristics. Second, knowledge from only one angle, and third, scattered knowledge without any connection. Let's look at the first point, which is shallow knowledge. This point is very simple. A person, no matter how broad their knowledge is, must have one area that is deeper than others. If you know a little of this, a little of that, and don't know anything deeply, it will be very difficult to win in competition, difficult to have an advantage in the market. For example, you are a person with broad knowledge.
You know about marketing, you know some video editing, you can write articles reasonably well, you know a bit about agriculture. But if we score you, you only get 5 out of 10 points. This broad but shallow knowledge is very difficult to generate a stable income for you. But if you compare with a pig farmer, he probably doesn't know how to edit videos like you do. But if we talk about the technology in raising his pigs, he has 9 points. You could say he is an expert in this field and can earn a lot of money from what he knows. But unfortunately, your video editing skills are also not deep. You have only 5 points compared to someone else. Your knowledge cannot be used. You cannot use it to compete and win against others. Second point, knowledge from only one angle. Knowing things from only one angle is also a very dangerous kind of knowledge. Let's take the example of a company that you all have probably heard of, which is Muji, a company that sells daily use items from Japan. Miniso, which we summarized last time, also copied its business model from Muji.
In this company, they saw a problem: the sales staff, after working for a long time, came to understand that the company's products sell well because of good salespeople doing a good job. The production staff, however, thought that the products sell well because of good production and design. The sales department is not that important. Later, the manager had the sales staff try working in production, and the production staff try selling for a while. By doing this, they will understand the importance of each department and will not look at things from only one angle anymore. Third, scattered knowledge, knowing a little of this, knowing a little of that, but not being able to find a knowledge system that connects to each other. It's like having clothes that you have piled on top of each other, not having folded them and put them away properly. It not only takes up a lot of memory, but it also easily causes you to have an incomplete and messy knowledge system.
The above are the three special characteristics of a bad knowledge system. Next, let's look at what a good knowledge system is. What are its special characteristics? In fact, a complete knowledge system should look like the letter T from a distance, and like the letter Y up close. What does it mean to look like the letter T from a distance? Let's observe the letter T. The horizontal line at the top represents a certain field in the market. The vertical line going down is your deep knowledge in that field. Let's use Charlie as a real-life example. This investment king, along with the "Oracle of Omaha" Warren Buffett, broke records, leading Berkshire Hathaway to achieve an average annual return of over 20% in one year. Why were they able to do this? Because Charlie had set up this system from the very beginning. Charlie understood very well that if you want to become a top investment company in any multidisciplinary field, you must have broad knowledge and be able to make decisions from all angles. This means you have to know about everything. But what's important is not just knowing, but you have to know how, and know it deeply. And you must frequently use that knowledge.
Most people's thinking is limited to the level of their understanding or what they have learned. For example, a person who studied accounting. When they analyze something, they only look at the numbers. It is difficult to get them to stand from a marketing perspective and understand customer needs. It's like the saying: "To a man with only a hammer, every problem he sees is a nail." If you go for advice from a human resources consultant, 80% of your business problems will be related to human resources. Because the person giving advice, day in and day out, only researches this. They won't be able to see your business from other angles. Maybe it's a financial problem that you need to solve first. We know that Berkshire Hathaway is a company that invests across all sectors. Therefore, before they decide to invest in a company, they don't just look at a single financial report. They have to look meticulously and from all angles, requiring experts, support programs, and many methods to analyze. From business operations, market needs, favorable factors, and various risk factors. This analysis requires knowledge in many areas, such as history, psychology, mathematics, engineering, biology, geography, economics, finance, etc. Why do you need to know so many things?
Charlie stated that it's not just about knowing, but you have to know how and know it well to be able to analyze correctly. This is why they say a knowledge system should be like the letter T, meaning you have to understand it deeply. So why do they say good knowledge, when looked at up close, should be like the letter Y? For example, you are a designer. Your primary expertise is probably related to design work. But knowledge that is shaped like a Y means that you should not just have knowledge in the field of design alone. You need to know many other things so that your design looks right to most people. For example, you are designing a banner. Before you come up with a design idea, you have to think first. When people see this piece of paper, what information will catch their attention first? What kind of reaction will the customer have? What does the color red mean? What about the color green? In which corner should I put the price to be good? A designer who has knowledge and broad experience around their specialty will certainly do better than one who does not have this knowledge. Therefore, knowing how to set up your own knowledge system is very important. And how do you set up a good knowledge system? First, we introduced you to the bad system so you can avoid it.
Then we raised the special characteristics and the method of organizing a good knowledge system, which is divided into three steps. Step one: find a starting point and research it to understand it deeply. Step two: expand your knowledge around what you are an expert in. And step three: connect that knowledge together and use it often. You are probably wondering, Charlie is over 90 years old and has been in the investment industry for so long. What techniques does he have, and what can he share? Of course, he does. The last point is... In this last point, we will talk about Charlie Munger's investment strategies and techniques. In Charlie's dictionary, he divides companies into only three types. First, companies that are investable. Second, companies that are not investable. And third, companies that are too hard to understand. He only invests in the first type of company. We know his company does not invest in technology companies because he does not understand them, and the risk is beyond his control. So, what kind of companies does he consider investable? Charlie Munger has four criteria for selection. First criterion: The business model is easy to understand, has a future, and can grow no matter the market conditions, no matter how unpredictable or unstable it may be.
Charlie tells his top internal team that if you don't understand a business, whatever they say, you will think it's amazing. When you think they are amazing, you are already acting outside your circle of competence. Don't overestimate your own abilities. And especially don't do things that you don't understand. Second criterion: Don't just look at a few financial reports and make a decision. You also need to understand the problems in the company's operations clearly, because what is written on paper showing the company has investment value now doesn't guarantee it will still have a market in the future. Investors must also look far into the future. Therefore, even if the financial report looks good, you should not rush to a decision. You must analyze and consider all angles, such as: what is the character of the company's founder? Are they dependable? Is the supply chain stable? How is the market situation changing, etc. Third criterion: Is the protective moat high or not? What is a protective moat? It is what prevents competitors from coming in to take the company's market share.
The most important thing in investing in a company is not how much profit it can make. The important thing is: how long can the company continue to generate stable profits? If the protective moat is too low, it means that competitors can easily jump over that moat to take our market share and break down your fortress. Fourth criterion: Only invest in mature companies with low price volatility. Never invest in small, fast-growing companies that lack a solid foundation. The companies he invests in include The Washington Post, American Express, Bank of America, Coca-Cola, etc. They are all large companies that were established hundreds of years ago and have tens of thousands of employees. Charlie believes that all investing is investing in value. First, you have to value the company, and then you value the shares later. Before I let you all understand what "investing in value" means, let's use a very short example. One of Charlie Munger's investment partners is named Lucy. When Lucy first met Charlie, he was an old man over 80 years old. The two of them agreed to meet at 7:30 in the morning.
The first time they met, Lucy couldn't be late. She arrived right on time at 7:30. When she arrived, Charlie had already finished his breakfast and was just finishing reading the newspaper. Lucy felt very embarrassed. Even though she was not late, to let Charlie, who was an old man, sit and wait, was really not comfortable. The second time they met, Lucy came and waited 15 minutes early. She still saw Charlie arrive first and sit reading the newspaper. The third time, Lucy decided to come an hour early. This time, just as she walked in, she saw the old man carrying a briefcase and a few newspapers, walking in. He sat down, ate breakfast, read the newspaper, acting as if nothing was wrong, not even glancing at Lucy. Not until exactly 7:30 did he start to get up and talk about the day's work with her. If you had a partner like this in your daily life, how would you feel?
He lived like this his whole life. This is his life. He is a man of discipline. He is curious, wants to learn, wants to understand, is honest, and respects others. After understanding him, we can understand a little about what he and his partner, Warren Buffett, are doing. The value of an investment is not just seen from the outside. It requires observing the intrinsic value inside it, and especially its long-term stability. And the value of a company must be consistent with the value it has. Charlie said: "The best way to get something you want is to deserve what you want." In fact, in this one book, they have raised a lot about the experiences, tactics, and real-life practices of Charlie Munger. But to summarize, there are only two or three words. That is: Make yourself grow. You must learn to see this world from different angles to be able to grow and keep up with the times. Having this piece of paper in your hand, in the future, whether it's investing, starting your own business, working for others, or doing anything else, it will be useful for you.