August 24, 2015

Here are five important pieces of advice that Charlie Munger has given over the years. These five statements are surprisingly simple, but they are important fundamental factors of long-term wealth creation.

“Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilize a very conservative patterns of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.”

“Checklist routines avoid a lot of errors. You should have all this elementary [worldly] wisdom and then you should go through a mental checklist in order to use it. There is no other procedure in the world that will work as well.”

“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… the wisdom of the world is not to be found in one little academic department. That’s why poetry professors, by and large, are so unwise in a worldly sense. They don’t have enough models in their heads…”

“Obviously, you’ve got to be able to handle numbers  – basic arithmetic. And the great useful model, after compound interest, is the elementary math of permutations and combinations. And that was taught in my day in the sophomore year in high school…Your brain isn’t designed to figure it out spontaneously. It’s not that hard to learn. What is hard is to get so you use it routinely almost everyday of your life…So you simply have to have the technique. Many educational institutions – although not nearly enough – have realized this. At Harvard Business School, the great quantitative thing that bonds the first-year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real life problems. And the students love it. They’re amazed to find that high school algebra works in life…. people can’t naturally and automatically do this…”

“Acknowledging what you don’t know is the dawning of wisdom. Stay within a well-defined circle of competence. Identify and reconcile disconfirming evidence. Resist the craving for false precision, false certainties, etc. Above all, never fool yourself, and remember that you are the easiest person to fool.”

Trying to navigate the financial markets can be tough and expensive. However, if you play to your strengths, invest for the long-term and buy quality at a reasonable price, you stand a good chance of outperforming over the long-term.

About the author 

Erik Conley

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.

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