Charlie Munger, the “Model” Investor

Super investor Charlie Munger spent a lot of time developing mental models to help him think better and make better decisions. In fact, the idea for building a “latticework” of mental models comes from Charlie Munger, Vice Chairman of Berkshire Hathaway and one of the finest thinkers in the world.

The Munger Model

Munger's system is akin to “cross-training for the mind.” Instead of allowing ourselves to be immersed in our work domain and limit our acquisition of knowledge to “internet bubbles” or cable news echo chambers, great investors deliberately expose themselves to a range of sources, opinions and experts. This process puts them in control of the mental models they use for investing.

In a famous speech in the 1990s (excerpt from Farnam Street blog), Munger explained his novel approach to gaining practical 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 remember and pound back what is remembered. Well, they fail in school and in life. You've got to hang experience on a latticework of models in your head.

What are the models? Well, the first rule is that you've got to have multiple models because if you just have one or two that you're using, the nature of human psychology is such that you'll torture reality so that it fits your models, or at least you'll think it does. …

And the models have to come from multiple disciplines because all 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. So you've got to have models across a fair array of disciplines.

You may say, “My God, this is already getting way too tough.” But, fortunately, it isn't that tough because 80 or 90 important models will carry about 90% of the freight in making you a worldly wise person. And, of those, only a mere handful really carry very heavy freight."

You can't not model

Your brain is full of models that you use every day: about people, the economy, the layout of your house, the behavior of physical objects, your company and industry. They all exist as a bunch of overlapping ontologies that include words, images, numbers and other sensory inputs, all of which are related and combine to form contextual understanding you use to move about, converse, decide, play and interact with the world. If your models are incomplete relative to the decision you make, you risk making a poor decision.

Munger and other great investors, first and foremost, have well developed models of the people, markets, companies, industries and economies in which they invest. Since the foundation of our approach is built on models, Charlie’s philosophy resonates with us. First, some background to help you build your mental model of Charlie Munger.

A quick bio

Born in Omaha Nebraska, Charlie Munger was a New Year’s baby, born January 1st, 1924. His father Alfred was a lawyer and his mother Florence raised Charlie and his two sisters, Mary and Carol. As a teenager Charlie worked for Buffet & Son, a grocery store owned by Warren Buffett’s grandfather. Charlie left Omaha to study mathematics at the University of Michigan. After his 19th birthday, he felt the sense of duty to serve his country in WWII. He dropped out of school and signed up to serve in the US Army Air Corps where he achieved the rank of second lieutenant. He studied Meteorology at Caltech and became a meteorologist for the US Army Air Corps. Taking full advantage of the GI bill, he took advanced classes at several universities, eventually attending Harvard Law School, where he graduated Magna Cum Laude in 1948. In 1949, he was hired by the law firm Wright & Garret for $3,300 a year, or about $30,000 in today’s dollars. He managed to save $1,500 and began dabbling in real estate development partnering with Jack Wheeler to form Wheeler, Munger and Co. From 1962 to 1975 Munger’s investments generated 19.8% annual returns, despite a loss of 32% in 1973 and 31% in 1974. (according to "The Superinvestors of Graham-and-Doddsville" published in 1984).

Munger’s philosophy for long term superior returns is to hold a concentrated number of stocks he knows extremely well. So it’s no surprise that when Munger and Warren Buffett first met at a dinner in 1959, they hit it off immediately. They remained in touch for years before loosely investing together in the 1970’s. Munger became Vice Chairman of Berkshire Hathaway in 1978 and went on to become one of the richest 400 people in the world. It wasn’t all roses for Charlie along the way. In 1953, Charlie was 29 and after eight years, he and his wife divorced. Charlie lost everything in the divorce. Then shortly after he learned his son had leukemia. One year later, Teddy Munger died. There is a great lesson here. He didn’t start rich and worked through setbacks, a world war, multiple careers and personal tragedy. Through it all he developed strong mental discipline honed by a lot of reading across many domains. In addition to intellect, honesty and integrity are the pillars of the Munger philosophy.

"Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail."

It wasn’t all reading. Like many of the best investors and Wall Street legends, he honed "an important skill" playing cards.

“What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don't get a big edge often. Opportunity comes, but it doesn't come often, so seize it when it does come.”

Our BEA models

To recognize opportunity your mental models need to be complete, free of bias and current. We would add that the tools you use should be built on the same principals. Note that Munger's principles did not include memorizing facts or algorithms. While powerful, they have narrow utility.

Boulder’s technology uses models as the foundation for it’s analytics. When our agents are trained to understand concepts (themes), they have built a model of that concept. When we analyze a paragraph in a document, our core builds and extracts a model that can be compared to thousands of agent models which in different combinations reflect the “mental models” Munger refers to.

What are the advantages? This is not search and it’s not math. You already have those tools. Our agents are free of bias and read at machine scale and speed. The combinations can be reconfigured as you work to reflect the “mental models” relevant to each decision so you can cover a broader range and go deeper when you need to, augmenting your intelligence, not replacing it.

Frank

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