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How thinking like Charlie Munger may have saved my life

  This is a continuation of my previous blog posts on “the Psychology of Human Misjudgment,” which is Charlie Munger’s description of dysfunctional decision making heuristics.  Munger writes: “…tendencies are probably much more good than bad. Otherwise, they wouldn’t be there, working pretty well for man, given his condition and his limited brain capacity. So the tendencies can’t be simply washed out automatically, and shouldn’t be. Nevertheless, the psychological thought […]

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Charlie Munger on The Psychology of Human Misjudgment

“…the brain should be using the simple probability mathematics of Fermat and Pascal applied to all reasonably obtainable and correctly weighted items of information that are of value in predicting outcomes…”  Charlie Munger  http://www.rbcpa.com/Mungerspeech_june_95.pdf To cope with information and computation overload, humans have developed simple “rules of thumb” called “heuristics” which  allow them to make decisions.  It would be great if people could do what Charlie describes above, but it […]

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Charlie Munger on the Importance of Worldly Wisdom and Consistently not being Stupid

“I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick.  It’s not brilliance.  It’s just avoiding stupidity.” http://www.scribd.com/fullscreen/110302239?access_key=key-28dmiqkoda00xd7b7mae  A Lattice of Mental Models Understanding how humans make decisions is critical for any investor.  Unless careful attention is devoted to decision making processes the brain can be a mistake-making machine. “It is remarkable how much long-term advantage people like  [Warren Buffett and […]

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Charlie Munger on Investment Concentration versus Diversification

Active versus Passive Investing Charlie’s advice to other people on investing is very different depending on the nature of the investor. “Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund.” http://www.myinvestmentforum.com/category/sgfunds-forum/interview-with-charlie-munger-t1655.html What is a “know nothing” investor? The answer is simple for Charlie:  a no-nothing investor is someone who does not understand the economics of the specific business in question. As was pointed […]

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Charlie Munger on Margin of Safety (the Fourth Essential Filter)

“No matter how wonderful [a business] is, it’s not worth an infinite price. We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life.”  Charlie Munger http://www.psyfitec.com/2009/10/buffett-and-munger-on-bbc.html Are you an Investor or a Speculator? Anyone who wants to understand Charlie Munger must understand this:  If you are buying a share of stock, the investing process is the same as if […]

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Charlie Munger on Management with Talent and Integrity (The Third Essential Filter)

Delegate, but not Everything With only a little over 20 people working at Berkshire, Buffett and Munger must leave it to the managers to run the businesses in the portfolio since they don’t have the staff to do otherwise.   This is, of course, by choice since what the two men love most is investing. Munger has said: “We have extreme centralization at headquarters where a single person makes all the […]

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Charlie Munger on “Circle of Competence” (The Second Essential Filter)

 “We have to deal in things that we are capable of understanding.” Charlie Munger  http://www.youtube.com/watch?v=3XlBrohrIUc   “An Investor’s got to know His or Her Limitations” (Apologies to Clint Eastwood in Dirty Harry) Charlie believes that investors who get outside of what he calls their “Circle of Competence” can easily find themselves in big trouble.  Within a Circle of Competence a given investor has expertise and knowledge that gives him or […]

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