Charlie Munger's Checklist

High Level

  • Can you understand the business? Is it in your circle of competence? Avoid industries where you know little.
  • Does the business have a moat? Does it have a durable competitive advantage? Avoid perfectly competitive and high fixed cost industries.
  • Does it have managers that behave as owners and are wise capital allocators?
  • Do insiders own their own stock and are they buying back shares?
  • Does the company have a lot of debt? Any long list of numbers multiplied by zero is always zero.

Details

  • 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 permanent capital loss
  • Independence: "Only in fairy tales are emperors told they are naked"
    • 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 judgment
    • Mimicking the herd invites regression to the mean (merely average performance)
  • Preparation: "The only way to win is to work, work, work, work, and hope to have a few insights"
    • Develop into a lifelong self-learner through voracious readings cultivate curiosity 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 know 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; progress 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 market, macroeconomic, or security analyst
    • Consider 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 highest and best use is always measured by the next best use (opportunity cost)
    • Good ideas are rare-when the odds are greatly 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); never interrupt it unnecessarily
    • Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
    • Be alert for the arrival of luck
    • Enjoy the process along with the proceeds, because the process is where you live
  • Decisiveness: When proper circumstances present themselves, act with decisiveness 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 you; don't expect it to adapt to you
    • Continually challenge and willingly amend your "best-loved ideas"
    • Recognize reality 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
    • Guard against the effects of hubris and boredom
    • Don't overlook the obvious by drowning in minutiae
    • Be careful to exclude unneeded information or slop: "A small leak can sink a great ship"
    • Face your big troubles; don't sweep them under the rug

Other

  • The Two-Track Analysis
    • What are the factors that really govern the interests involved, rationally considered? (for example, macro and micro-level economic factors).
    • What are the subconscious influences, where the brain at a subconscious level is automatically forming conclusions? (influences from instincts, emotions, cravings, and so on).
  • Investing and Decision Making Checklist
    • Charlie's informal, but extensive, list of factors worthy of consideration.
  • Ultra-Simple, General Problem-Solving Notions:
    • Decide the big "no-brainer" questions first.
    • Apply numerical fluency.
    • Invert (think the problem through in reverse).
    • Apply elementary multidisciplinary wisdom, never relying entirely upon others.
    • Watch for combinations of factors-the Lollapalooza effect.
  • Psychology-Based Tendencies
    • His famous Twenty-Five Standard Causes of Human Misjudgment