Charlie Munger’s Investing Principles Checklist

This checklist is from Poor Charlie’s Almanac, and if of course incomplete. I’m adding to this list all the time, and updating my thinking. Disclaimer: I’m not a professional investor, or an investment advisor, nor do I play one on the internet. The information below does not constitute investment or financial advice.

I retyped this this checklist by hand to help switch my brain from ‘busy mode’ to ‘rational investor mode.’ I therefore won’t make an investment decision without first grounding my perspective in this series of principles. From there, I run a few additional filters including if I use the product or service, if I think it’ll grow with time, and if I understand the company. Only then and after consideration will I place my long term money in an investment.

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 permenent capital loss.

Independence — “Only in fairly tales are emperoros told they have no clothes”

  • 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 judgement.
  • Mimicking the herd invites regression to the mean.

Preparation — “The only way to win is to work, work, work, work, and hope to have a few insights”

  • Develop into a lifeling self-learner through voracious reading; cultivate curiousity 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 to get smart, the question you have to keep asking is “why, why, why?”

Intellectual Humility — Acknowledging what you don’t knwo 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; profress 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 macroeconomic, market, or securities analyst.
  • Consider the totality of risk and effect; look always at potential second order and higher level impacts.
  • Think forwards and backwards
  • Invert, always invert

Allocation — Proper allocation of capital is an investor’s number one job

  • Remember that the highest and best use is always measured by the next best use (opportunity cost)
  • Good ideas are rare — when the odds are in your favor, bet (allocate) heavily
  • Don’t “fall in love” with an investment — be situation-dependent and opportunity-driven

Patience – Resist the natural human bias to act

  • “Compound interest is the eighth wonder of the world” (Einstein); don’t interrupt it unnescessarily
  • Avoid unnescessary transactional taxes and frictional costs; never take action for its own sake
  • Be alert to the arrival of luck
  • Enjoy the process along with the proceeds, because the process is where you live

Deciciveness — When proper circmstances present themselves, act with deciciveness 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 youl don’t expect it to adapt to you
  • Contunually challenge and willingly amend your “best-loved ideas”
  • Recognize rality 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
  • Gurad against the effects of hubris and boredom
  • Don’t overlook the obvious by drowning in minutiae
  • Be careful to exclude unneeded unformation or slop: “A small leak can sink a great ship”
  • Face your big troubles; don’t sweep them under the rug

Preparation, Discipline, Patience, Decisiveness

“We’re partial to putting out large amounts of money where we don’t have to make another decision. If you buy something because its undervalued, then you have to think about selling it when it approaches your calculation of intrinsic value. That’s hard. But, if you can buy a few great companies, then you can sit on your ass. That’s a good thing.” -Charlie Munger

 

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