Mungerism: A Deep Understanding of Human Nature, the State of the World, and How to Think Rationally

Source: Qilehui

In this article, the author carefully examines excerpts from Charlie Munger's impromptu remarks in Chapter 3 of "Poor Charlie's Almanack," borrowing the chapter's title, "Mungerism," to articulate their own nuanced understanding from three perspectives. The author also recommends several supplementary readings that offer valuable insights and serve as useful references.

At present, there are only two monographs devoted to Charlie Munger's thought: "Poor Charlie's Almanack" and "The Pursuit of Wisdom." However, neither was authored by him personally. His key ideas are either articulated in a handful of public speeches or expressed in his letters to shareholders and in his responses during annual shareholder meetings.

Investors enjoy listening to Charlie Munger's speeches, for by heeding his teachings, they can gain a deeper understanding of human nature, the state of the world, how to think rationally, and, most importantly, how to live a more upright, happy, and virtuous life.

In Chapter 3 of "Poor Charlie's Almanack," Whitney Tilson draws the term "Mungerism" from Warren Buffett and Charlie Munger's remarks at Berkshire Hathaway and Wesco Financial Corporation annual meetings between 2001 and 2006.

However, Tiersen did not specify what exactly constitutes the precise essence of Mungerism. Therefore, we must elaborate on it further.

The so‑called "-ism" is a doctrine or set of principles forcefully advocated. Over the course of his long‑term reflections and practice, Charlie Munger gradually developed his own "Mungerism." In my view, Mungerism is embodied in at least three dimensions: the core theories of key disciplines, a universal investment philosophy, and profound business insights.

One tenet of Mungerism: the essential theories of the most important disciplines.

We must keep in mind Munger's "big ideas"—the essential theories of the most important disciplines. Munger advises that we should regularly employ mental models, and draw on the full range of them, rather than relying on just a few. Most people cultivate a single discipline—say, economics—and try to apply one approach to every problem. But as the saying goes, "To the man with a hammer, the world looks like a nail." That is a clumsy way to tackle issues.

When dealing with different companies, you need to examine distinct factors, apply varied mental models, and distill these insights into a framework that becomes deeply ingrained in your mind over time. If you rely solely on the rote‑learning approach favored by many students, you will never master the "100 ways of thinking" that are truly essential.

Munger admires the spirit of not deceiving oneself. This spirit is the finest of all, profoundly powerful precisely because it is so rare. Yet most people absurdly cling to false beliefs.

John Maynard Keynes said, "It is not so difficult to accept new ideas as it is to rid oneself of old ones."

Having access to systematic common sense is an immensely powerful tool. A widespread problem is that people calculate too much and think too little. In fact, possessing common sense not only means being able to recognize wisdom but also means being able to reject folly.

The more fundamental knowledge you possess, the more new knowledge you will need to absorb. If you eliminate many unnecessary distractions, you'll avoid turning your life into a chaotic mess. Charlie Munger has personally observed that no truly intelligent person fails to read widely. Yet reading alone is not enough; you must also cultivate a mindset that enables you to grasp ideas and act rationally. Most people either fail to master the right principles or do not know how to put them into practice.

Munger coined the term "lollapalooza effect," which we translate as the "supercritical effect."

Lollapalooza is a renowned pop music festival in the West. A key principle of the event is to blend music with non-musical arts. Attendees not only enjoy live performances but also experience dance, comedy, and other artistic acts. This multidisciplinary approach and on‑stage cross‑disciplinary presentations enhance the festival's artistic atmosphere, allowing art to flourish and delivering a powerful dose of contemporary creativity.

Due to the Lollapalooza music festival's distinctive philosophy, it has drawn significant attention from Charlie Munger, who has extended this approach to investment practice, coining the unique concept of the "Lollapalooza Effect."

At Munger's, the "supercritical effect" refers to combining several models to generate multiple forces that converge in the same direction. When a critical mass is reached, it can trigger a "nuclear explosion"; otherwise, nothing will emerge.

In other words, when multifaceted thinking is taken to its extreme, it can swiftly give rise to a "supercritical" state. Because this effect often exceeds the sum of its constituent forces, it can produce a remarkable phenomenon. Once one masters the key to harnessing this effect, whether in investing or in any other endeavor, one can achieve extraordinary results. Accordingly, "lollapalooza" encapsulates the very essence and core tenets of Mungerism.

Most of the speeches and essays in "Poor Charlie's Almanack" are geared toward the investment world. However, it is clear that the wisdom embedded in "Mungerism" extends far beyond the realm of investing.

So, from this perspective, Munger's wisdom has, like that of Benjamin Franklin, risen to the level of universally applicable insight. As Munger himself has said,

I am devoted to wisdom; I am consumed by the pursuit of accuracy and the satisfaction of curiosity… I am willing to dedicate myself to values that transcend my fleeting existence.

Mungerism, Part Two: A Universal Investment Philosophy

1. Personality, patience, and a thirst for knowledge are extremely important.

One of the key factors in successful investing is cultivating a strong character. Success requires immense patience, coupled with the willingness to take decisive action when the time is right.

But having a good character alone is not enough; one must also maintain a strong thirst for knowledge over a long period. In other words, it is essential to have a deep interest in understanding the underlying causes of what is happening. The broader the sources from which one draws lessons—rather than relying solely on one's own painful experiences—the better one can become.

If one can sustain this mindset over the long term, their ability to engage with reality will gradually improve; conversely, without it, even a high IQ is bound to lead to failure.

2. Munger adheres to a concentrated investment strategy.

Concentrated investing means that your portfolio may include only 10 companies, rather than 100 or 400. When promising investment opportunities arise, you must be able to recognize them, because such opportunities do not come along often—only those who are prepared can seize them.

"Because good projects are hard to come by, we should concentrate our capital on a select few," said Munger. "In my view, that's an excellent idea." The rule of investing is to wait for the right opportunity to arise.

3. Forget those crazy theories in academia

In Munger's view, the beta coefficient, modern portfolio theory, the capital asset pricing model, and the like all make little sense—they are misguided investment doctrines. What Munger seeks is to acquire, at a low price or even a reasonable one, companies that possess sustainable competitive advantages.

In this regard, as Buffett put it,

My overall view of the academic world may be mistaken—perhaps I'm too critical—because everyone I've interacted with seems to have some rather outlandish theory.

4. Highly diversified investments do not necessarily yield favorable outcomes.

Almost all good investments have relatively low diversification. If you were to…$Berkshire Hathaway-A (BRK.A.US)$If the 15 best decisions were eliminated, their performance would be quite mediocre. What they need is not a flurry of activity, but immense patience.

To this end, one must adhere to principles and seize opportunities with determination when they arise. Over the past many years, they have made their profits by placing their bets on ventures they knew were sure to succeed.

5. The "sit-and-wait investment strategy" involves buying and holding for the long term.

This is an important investment principle. It holds that the best investment strategy is to buy shares of a company with strong economic fundamentals and hold them for many years. By contrast, attempting to time the market and engaging in frequent buying and selling is far less effective than adopting a "sit-and-wait" approach.

For companies with outstanding economic performance, time is an investor's friend; for ordinary companies, however, time may well be a curse.

6. Buy when the stock price declines.

Truly good investment opportunities do not come often, nor do they last very long, so one must be ready to act. Over the past few decades, Munger and Buffett have often done just that: if the stock of a company they favor falls, they buy more.

But sometimes, in certain exceptional circumstances, once you realize you may have made a mistake this time, you choose to step back.

7. Investing requires a sustained learning process.

If someone intends to become an investor, there will always be certain areas of investment that they do not fully understand. However, by diligently studying and continuously improving, they can ensure that their investments yield positive results.

The key is self-discipline, diligence, and practice—just like playing golf: you have to practice hard. Without continuous learning, others will quickly catch up and surpass you.

8. Defining one's circle of competence and its boundaries is critically important.

Regarding the circle of competence, Munger offers three options: "Yes," "No," or "Too difficult." Unless he is exceptionally bullish on a particular opportunity, he typically classifies it as "too difficult." He says,

All we need to do is identify a specific domain of expertise and focus our efforts there. If we truly possess the requisite capabilities, we will clearly understand where the boundaries of our competence lie.

An ability without boundaries cannot truly be called an ability.

9. Long-term holding will inevitably involve significant stock price declines during certain periods.

Munger has witnessed Berkshire Hathaway's stock price plunge by 50% on three separate occasions. Had he sold his shares during any of those declines, the company's net worth would now amount to only a fraction of its current value.

For an investor who cannot remain calm in the face of all this, being a common shareholder is simply not the right path. Compared with those who are more composed and better able to weather market volatility, such an investor is likely to achieve only mediocre results.

10. One of the most successful strategies is to be a contrarian investor—buy when others are selling.

Some people consistently buy stocks at prices above their long-term intrinsic value—this stems from human nature. If investors simply wait, they can acquire more for less.

Therefore, one must be exceedingly patient and wait until the right opportunity arises—only then will one realize that the price one has paid was well worth it.

……

Charlie Munger's profound investment insights extend far beyond what has been discussed here. David Clark devotes an entire chapter to this topic in his book, "Charlie Munger's Investment Philosophy," which readers may consult.

Mungerism, Part Three: Great Business Ideas

Tilson specifically devotes a section to Munger's analysis of Berkshire Hathaway, aiming to elucidate the company's superior business model and thereby lay the groundwork for deriving Mungerism.

An excellent company

There is no doubt that Munger considers Berkshire Hathaway an "excellent" company. It understands a fundamental principle: leveraging 3%‑interest‑rate‑costly float to invest in businesses that can generate 13% returns is a superb proposition.

Berkshire Hathaway is indeed the case: the companies it acquires deliver pre-tax returns of 13%, and even a bit more. Over many years, Berkshire has added numerous outstanding businesses. As reflected in its compound annual growth rate, from Buffett's takeover of Berkshire Hathaway in 1965 to 2021—a span of 57 years—the company's average CAGR reached 20.1%, far outpacing the S&P 500's 10.5% over the same period.

The culture is very old-fashioned.

Berkshire Hathaway's corporate culture is very old-fashioned, much like that of Benjamin Franklin or Andrew Carnegie. And many of the companies it acquires are just as quirky and old-school as Berkshire Hathaway itself.

Munger believes Berkshire Hathaway is an exceptionally reliable company, better able to withstand adversity than most others, and avoids the kind of reckless expansion seen elsewhere. While steering clear of unreasonable risks and liabilities, Berkshire strives to maintain a steady, sustainable growth rate.

In the business world, two-thirds of acquisitions end in failure, but Berkshire Hathaway's acquisitions have been highly successful—because it never pursues deals for the sake of acquiring. Instead, it waits for opportunities that are so obvious they hardly require any second thought to recognize their potential for success.

Berkshire Hathaway has acquired one company after another because it admires the founders and the accomplishments they have achieved in life. In most cases, these founders have stayed on and have never let the company down. Berkshire Hathaway is filled with people who are deeply passionate about their work—passion is even more important than intellectual ability.

The managers of Berkshire Hathaway's operating companies attend the annual shareholder meeting each year—not to learn management techniques, but because it's an engaging event they're eager to be a part of.

Berkshire Hathaway selects individuals whom Buffett and Munger deeply admire to manage its subsidiaries. They are easy to work with. They have full autonomy in determining the corporate culture their companies should embody, without interference from Buffett or Munger. They consistently demonstrate a proactive spirit and promptly correct past mistakes. Certain virtues are shared across Berkshire Hathaway's portfolio companies; Buffett and Munger do not create these virtues—they simply choose companies that already possess them.

Bamang places no obstacles in the way of the companies he manages. This pleases them, as they no longer have to waste 25 percent of their time on various activities they dislike. Over the past few decades, Berkshire Hathaway has laid off employees at a remarkably low rate—far lower than that of other firms. Munger commends Berkshire Hathaway for its strong performance; in fact, 90 percent of his own net worth is invested in Berkshire Hathaway stock.

Why has no one ever imitated it?

It is worth noting that Berkshire Hathaway does things differently, yet no one has ever followed its example.

In the appendix "The Five Essential Elements of a Moat" to *The Charlie Munger Principle*, Tran Griffin discusses the key components that underpin Berkshire Hathaway's competitive moat. These elements, in essence, encapsulate Munger's profound business insights: Berkshire is a tax‑efficient company; it keeps its operating expenses low; it is the preferred choice for private buyers; it possesses enduring capital; and it can outperform the market even during downturns.

Donald Keough wrote in "Ten Commandments of Management" that why do we find it so satisfying to read Warren Buffett's legendary annual reports? Because if a company's performance in a given year fails to surpass the previous year or falls short of expectations, Buffett promptly and candidly admits, "This year's results were poor—my fault." Although Buffett's outstanding track record in investing is virtually unmatched, he has never considered himself invincible or infallible.

The key to success lies in common sense and morality.

Berkshire Hathaway's enduring stellar performance is directly linked to the "key to success" of Buffett and Munger. As Munger put it,

(a) They make their money by memorizing the simple, not by mastering the complex. They never strive to become exceptionally smart; instead, they consistently aim to avoid becoming fools. Over time, this approach gives them a significant advantage.

(b) They do not claim to be paragons of virtue, but they refrain even from many actions that are perfectly legal. They see a wide chasm between what ought to be done and what can be done without incurring legal penalties. Their guiding principle is to stay well clear of that line. This approach helps them earn more money. Even if this way of doing business does not yield huge profits, it at least avoids wrongdoing. More often, however, it leads to greater earnings precisely because they do the right thing.

Editor: jayden