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Charlie Munger is the right hand man of Warren Buffett. I believe that Charlie is one of the smartest people that has ever lived. I do not mean when it comes to only investing, but in just all areas of life. Charlie even says, “You have a moral duty to make yourself as un-ignorant and un-stupid as you can.” If you didn’t know, Charlie Munger is the 99 year old Billionaire, who is the Vice Chairman of Berkshire Hathaway.
In fact, Warren Buffett has said that “Munger has the best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you even finish the sentence.”
Munger has become famous from putting together ideas from multiple disciplines to form what he calls a latticework of mental models. Mental models are frameworks that help us to understand and simplify the world.
Charlie observes reality/investments and observes it against his mental models.
Charlie Munger believes that people who think very broadly and understand many different models from many different disciplines make better decisions.
These mental models have helped Charlie conquer the stock market. However, these models have allowed Charlie to run a large hospital, a massive non-profit, and many other things. There are 100 mental models that he uses, but we will only discuss a few.
Below we will explain some of the mental models that Charlie Munger uses.
Swiss Army Knife Approach
Let’s say that you were learning to drive a car. Would you only learn how to use the accelerator? Absolutely not. (Unless you are from Atlanta or Florida)
If you only used the accelerator while driving a car, it would end up as a disaster for you and others. Before you become a good driver, you need to learn how to use the wheel, the brakes, the turn signals, and many other things.
If you want to be a successful thinker, you need to learn about multiple ideas. Charlie calls this “worldly wisdom.”
Here is one of my favorite analogies:
To the man with a hammer, every problem looks like a nail.
The man with the hammer will torture himself because the only way that he thinks is to use the hammer to solve his problems.
You rather be the man with a swiss army knife that realizes that different problems need different tools.
In corporations, you see this every single day. The marketing department will only care about Marketing. In academia, the science department will only care about science.
First Principles Thinking
First-principles thinking is one of the best ways to reverse-engineer complicated problems and unleash creative possibility. This mental model was made famous by the philosopher Aristotle and used by Elon Musk, Peter Thiel, and Jeff Bezos.
The idea of first principles thinking is to simplify complex problems into basic elements and then reassemble them from the ground up. In other words, the average person looks at solving problems the same way that previous people or generations have solved them.
He contrasts First Principles Thinking with thinking by analogy:
In 2016, Jeff Bezos wrote to his Amazon employees to be caution of proxies. Proxies are “like something else that was done.” They can take the form of processes that employees mindlessly follow, or of market research that employees unquestioningly accept as fact.
Peter Thiel is the founder of PayPal and an early investor in Facebook. He is one of the best investors ever in terms of finding the next big company. Thiel has used first principles thinking for years.
Theil is a believer in “vertical progress” which essentially means going from 0 to 1 or doing something that no one has ever done. Vertical progress is much harder to do than “horizontal progress:” going from 1 to n, copying things that already work. The quote below is one of my favorite quotes.
In Matt Allen terms: If Henry Ford would have not used first principles thinking, he would have tried to give everyone a faster horse.
The average person is always stuck in how it has “always been” but you have to look at problems with first princples thinking.
When it comes to investing, the next amazon will not be an internet company. The next amazon might be a company where you shop in the Metaverse. Sounds crazy, right? How crazy did Amazon sound in the 1990’s.
Inspired by the German mathematician Carl Gustav Jacob Jacobi, Munger says, “Invert, always invert.” Most of us try to tackle our problems always looking forward. However, Munger believes that it is very beneficial to look at problems from the opposite end.
As a thinking tool it means approaching a situation from the opposite end of the natural starting point.
For example, rather than asking, “How do I have a successful marriage?” it is better to to ask, “How do I ruin a marriage?”
If you were focusing on not doing things that ruin a marriage, you would end up having a good marriage.
Invert thinking can be great in the workplace.
Leaders can ask themselves “What would someone do each day if they were a terrible manager?” Good leaders would likely avoid those things.
Customer service people can ask themselves, “What would make my customer upset?” If you focused on not doing those things, your customer service would go up.
In personal finance, everyone wants to have more money. They focus on making more money, but they should take some time to think about “What would destroy my finances?”
Spending time thinking about the opposite of what you want doesn’t come naturally to most people.
In Matt Allen terms: When a child doesn’t want to do their homework, they think about all the things that they could do instead of their homework.
If a child thought about what would happen, if they they didn’t do their homework, they would end up doing their homework.
I only covered 3 of 100 today, but I am confident that we will keep revisiting these in the future!
I hope everyone has a great rest of the week!
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