Big Winner

Charlie Munger, Warren Buffett’s business partner, has tons of quotes and advice featured in a book called Poor Charlie’s Almanack. I found a blog post by the incredible Matt Mazur with some notes from the book. Here is a framework outlining Munger’s investment strategies:

An Investing Principles Checklist

Risk - All investment evaluations should begin by measuring risk, especially reputational
* Incorporate an appropriate margin of safety
* Avoid dealing with people of questionable character
* Insist upon proper compensation for risk assumed
* Always beware of inflation and interest rate exposures
* Avoid big mistakes; shun permanent capital loss

Independence - “Only in fairy tales are emperors told they are naked”
* Objectivity and rationality require independence of thought
* Remember that just because other people agree or disagree with you doesn’t make you right or wrong - the only thing that matters is the correctness of your analysis and judgment
* Mimicking the herd invites regression to the mean (merely average performance)

Preparation - “The only way to win is to work, work, work, work, and hope to have a few insights”
* Develop into a lifelong self-learner through voracious readings; cultivate curiosity and strive to become a little wiser every day
* More important than the will to win is the will to prepare
* Develop fluency in mental models from the major academic disciplines
* If you want ot get smart, the question you have to keep asking is “why, why, why?”

Intellectual humility - 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

Analytic rigor - Use of the scientific method and effective checklists minimizes errors and omissions
* Determine value apart from price; progress apart from activity; wealth apart from size
* It is better to remember the obvious than to grasp the esoteric
* Be a business analyst, not a market, macroeconomic, or security analyst
* Consider totality of risk and effect; look always at potential second order and higher level impacts
* Think forward and backwards - Invert, always invert

Allocation - Proper allocation of capital is an investor’s number one job
* Remember that highest and best use is always measured by the next best use (opportunity cost)
* Good ideas are rare - when the odds are greatly in your favor, bet (allocate) heavily
* Don’t “fall in love” with an investment - be situation-dependent an opportunity-driven

Patience - Resist the natural human bias to act
* “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
* Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
* Be alert for the arrival of luck
* Enjoy the process along with the proceeds, because the process is where you live

Decisiveness - When proper circumstances present themselves, act with decisiveness and conviction
* Be fearful when others are greedy, and greedy when others are fearful
* Opportunity doesn’t come often, so seize it when it does
* Opportunity meeting the prepared mind: that’s the game

Change - Live with change and accept unremovable complexity
* Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
* Continually challenge and willingly amend your “best-loved ideas”
* Recognize reality even when you don’t like it - especially when you don’t like it

Focus - Keep things simple and remember what you set out to do
* Remember that reputation and integrity are your most valuable assets - and can be lost in a heartbeat
* Guard against the effects of hubris and boredom
* Don’t overlook the obvious by drowning in the minutiae
* Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
* Face your big troubles; don’t sweep them under the rug

Sources:
http://www.mattmazur.com/2008/08/an-investing-principles-checklist/
http://www.poorcharliesalmanack.com/index_pca.html