Thursday, November 14, 2019

Poor Charlie’s Almanack

Most people have heard of the great investor Warren Buffett, but fewer have heard of his long-time business partner Charlie Munger. Charlie’s approach to understanding the world is laid out in Poor Charlie’s Almanack, a long, but interesting, book edited by Peter D. Kaufman.

This book covers such a wide array of topics that it resists summary. To this reader, Munger’s biggest ideas are 1) that we should understand the biggest and most useful ideas from a broad range of fields, and 2) that we should understand the many ways that our psychology gets in the way of drawing sensible conclusions.

Whether we agree or disagree with Munger’s ideas, I found a great many worth thinking about. I’ll list a few here as an enticement to reading the book.

Munger is known for challenging and often abandoning his best-loved ideas: “a thing not worth doing is not worth doing well.” It may not be a good idea to change your mind too often, but we have to be open to the possibility that our ideas are wrong or no longer useful.

“Our investment style has been given a name—focus investing—which implies ten holdings, not one hundred or four hundred.” Other investors should be wary of following this path; few others have the stock-picking skill of Buffett and Munger.

“Black-Scholes [option-pricing model] works for short-term options, ... but the minute you get into longer periods of time, it’s crazy to get into Black-Scholes.”

“The efficient market theory is obviously roughly right—meaning that markets are quite efficient and it’s quite hard for anybody to beat the market by significant margins.” However, Munger is very critical of the strong form of Efficient Market Theory. He laughs at those who claim that Berkshire-Hathaway’s investment record is just luck.

“Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it.” “In fact, anytime anybody offers you anything with a big commission and a 200-page prospectus, don’t buy it.”

“If I were running the civilization, compensation for stress in worker’s comp would be zero—not because there’s no work-caused stress, but because I think the net social damage of allowing stress to be compensated at all is worse than what would happen if a few people that had real work-caused stress injuries were uncompensated.” Allowing fraudulent claims for hard-to-diagnose ailments invites otherwise honest people to game the system.

In a discussion of Coca-Cola, Munger describes Coke as giving “harmless pleasure.” I can see where he’d like to believe Coke is harmless given the massive returns he has received from Coke stock, but the evidence says that soda is a large part of the blame for obesity and type 2 diabetes.

We have a tendency to overweight things that can be measured and underweight the things that can’t be measured accurately. I saw this in the justifications for open office plans for software developers. The money saved on floor area and walls is easy to measure. Harder to measure is the lost productivity due to programmers constantly being interrupted by noise and their unwillingness to work collaboratively lest they disrupt others’ work.

Munger likes to ask people for examples of cases where raising prices allows you to sell more of something, which violates the simple price-quantity curve we learn in introductory economics. His favourite answer is mutual funds when you raise commissions “to bribe the customer’s purchasing agent.”

When you shout ideology, “you’re ruining your mind, sometimes with startling speed. So you want to be very careful with intense ideology.” This is a good warning from those who get drawn into either conservative or liberal Facebook nonsense. If you can’t come up with both good and bad things to say about some politician, you’re ideas aren’t worth listening to.

“You do not want to drift into self-pity. I had a friend who carried a thick stack of linen-based cards. And when somebody would make a comment that reflected self-pity, he would slowly and portentously pull out his huge stack of cards, take the top one and hand it to the person. The card said ‘Your story has touched my heart. Never have I heard of anyone with as many misfortunes as you.’”

A large section of the book is devoted to Munger’s list of 25 psychological tendencies we have that steer us to poor decisions. In many ways, this list resembles much of the work in behavioural economics.

To illustrate our tendency to misreact to contrasts, we have a “reprehensible” real estate broker trick: “The salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high. And, boom, the broker often makes an easy sale.”

“Light stress can slightly improve performance—say, in examinations—whereas heavy stress causes dysfunction.” I recall the feeling of reaching a higher mental level during stressful exams. However, I definitely saw many other students who fell to dysfunction. I guess we differed in how much stress we felt.

Anyone interested in a serious study of how to make better decisions about investing or anything else would do well to read this book.


  1. "where raising prices allows you to sell more of something, which violates the simple price-quantity curve we learn in introductory economics."
    I'll give you one.
    A sawmill near me used to give away the outside cutting as it was of no use to them. You could go there with a trailer and they would load it up for you. Just small household trailers.
    They could not get rid of it fast enough.
    Someone came up with charging $10 per a loader grapple which is a significant amount. They soon ran out of supplies and each week could not meet demand as they only cut so many logs per week. Now why is this??
    Quite simple really. It was worthless when free. It was really inexpensive when you paid "only" $10 for it.
    So something more expensive ($10) sold better than something that was less expensive (free)
    Maybe this has more to do with perception though.


    1. @Ricardo: Good example. I've seen situations before when people won't take something for free, but they're interested when there's a small charge.