Book of the Week: Poor Charlie's Almanack
22 Dec 2015
This week I read Poor Charlie’s Almanack, which details the wit and wisdom of Charles T. Munger, who is anything but poor. Most people know who Warren Buffett is, but I doubt most people know who is second-in-command is. The poor in the book title is a reference to Poor Richard’s Almanack from Benjamin Franklin of the $100 bill. The book is divided into several sections. Not a book that you read in bed, but more like a coffee table book for people who like Berkshire Hathaway (BRK-A).
I have nothing to add —Charlie Munger
Philosophy
In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation, Discipline, Patience. Decisiveness.
Charlie finds companies that have moats around giving them a competitive advantage that will grow over time. He is patient waiting for the price to be right. Once the price is right, he’ll make a big bet. The amount of effort spent on examining companies deeply gives him enough information to feel confident in betting big. Mungerisms
Beta and modern portfolio theory and the like-none of it makes any sense to me. We’re trying to buy businesses with sustainable competitive advantage at a low, or even a fair, price.
Munger and Buffett often try to buy things below a fair price. This is how they make so much money. They will pay less than something is worth to acquire it. The hard part is investing the effort to properly gauge the value of something. Usually you discount future cash flows. In a truly efficient market, Munger and Buffett should not be able to make a lot of money, because everything should be priced correctly. Academics are not aligned with what is happening in the real world. The market is not efficient with perfect information and equal opportunity. Charlie take advantage of that.
I think that, every time you see the word EBITA [earnings before interest, taxes, depreciation, and amortization], you should substitute the words “bullshit earnings”.
Since incentives are not aligned, the output of accountants and financial statements are mainly crap. You need to dig through piles of crap to get at the truth. It is hard to slip things by Charlie since he is a patient man who has passed up on many billion dollar opportunities like Walmart.
I’d rather make my money playing piano in a whorehouse than account for options as recommended by John Doerr.
I remember a book I read mentioned some of the controversies on how options are accounted for on a balance sheet. I don’t remember which book, so I’ll point to The Controversy Over Option Expensing. Munger wants to treat options as an expense.
It is ridiculous the way a lot of people cling to failed ideas. Keynes said, “It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones.”
This is a very hard thing to do, because people cling on to what they know. To learn new things, you must unlearn what you have learned. On Happiness
If all you succeed in doing in life is getting rich by buying little pieces of paper, it’s a failed life. Life is more than being shrewd in wealth accumulation. A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc. Just avoid things like AIDS situation, racing trains to the crossing, and doing cocaine. Develop good mental habits. Avoid evil, particular if they’re attractive members of the opposite sex. If your new behavior earns you little temporary unpopularity with your peer group, then the hell with them.
Who knew the secret to happiness was by avoiding the AIDS. Ten Talks The bulk of the book are transcripts from 10 talks given by Charlie. I only read the first two.
- Harvard School Commencement Speech
- A Lesson on Elementary, Worldly Wisdom
- A Lesson on Elementary, Worldly Wisdom, Revisited
- Practical Thought About Practical Thought?
- Harvard Law School Fiftieth Reunion Address
- Investment Practices of Leading Charitable Foundations
- Philanthropy Roundtable
- The Great Financial Scandal of 2003
- Academic Economics
- The Psychology of Human Misjudgment
Purchase Poor Charlie’s Almanack on Amazon.com or check it out from your local library.