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Investing Principles – A 10-Point Checklist By Charlie Munger

Charlie Munger

Many well-known and successful investors use checklists. For example, Mohnish Pabrai — also known as the “Checklist Investor” — is one of them. Most of these checklists – including those that I have already presented here – sometimes contain very detailed catalogs of questions on the known topics ( profitability or profitability, financial stability, quality of management, competitive advantages, Etc.). In contrast, the checklist that I would like to present to you in this article is almost philosophical in nature (and that, in my opinion, is what makes this checklist so appealing… I rarely say things like that, but you should really print out this checklist and turn it on staple the fridge).

The checklist is taken from the well-known book Poor Charlie’s Almanack and was written by none other than Berkshire Hathaway Vice Chairman Charlie Munger.

Incidentally, I freely translated the checklist into German and added a few comments here and there. I have also highlighted the points that are most relevant to me personally in color… so let’s get started.

1: Risk

Any evaluation of an investment should start with an assessment of the risk (including and especially the possible reputational risk).

We should always consider an appropriate margin of safety.

We should avoid doing business with people of dubious character (this includes investing in public companies whose management has an impeccable reputation).

For every risk taken, we must be compensated accordingly.

We should always be aware of (and analyze in detail) the potential exposure of investment to inflation and interest on borrowing.

We should avoid big mistakes (and thus possible permanent loss of capital) at all costs.

2: Independence

Only in fairy tales are emperors told they are naked.

Objectivity and rationality require independent thinking.

We should not forget that just because other people agree (or disagree) with us doesn’t necessarily mean we’re right or wrong – the only thing that matters, in the end, is the correctness of our analysis and judgment.

Basically, following the crowd implies that we will achieve average performance at best (“reversion to the mean”).

3: Preparation

The only way to win is to work, work, work, and hope to have a few insights.

We should devote ourselves to lifelong learning and try to become a little wiser every day. We can achieve this by reading (a lot) a lot and cultivating a general curiosity.

The will to prepare is more important than the will to win.

We should be familiar with and internalize mental models from various scientific disciplines.

If we want to make smart decisions, we have to keep asking “why”.

4: Intellectual humility

Acknowledging what you don’t know is the beginning of wisdom.

We should move within our circle of competence.

We should proactively identify (for our investment thesis) uncomfortable facts and evidence and compare them with our view (or take them into account in our view).

We should resist the urge for “false precision” (apparent precision) (which also and especially refers to the use of detailed Excel tools, I would imagine).

Most importantly, we should not fool ourselves… and remember that we ourselves are the most easily fooled person of all.

Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.

5: Analytical Thoroughness

The use of scientific methods and effective checklists minimizes errors (and omissions).

We must distinguish between the price and value of an investment, progress, and activity, and between wealth and absolute size.

In many cases, we should try to remember the obvious rather than grasp the esoteric (that is, we’re often right about the simple answer).

We should see ourselves as “Business Analysts”… and not as “Market Analysts” or “Security Analysts” (this probably means the holistic approach… we don’t invest in stocks, but in companies and businesses or businesses models ).

We should always deal with possible secondary effects (“second-order effects”), ie think through the possible risks of an investment to the end.

We should think both forward and backward…inverting, always inverting.

6: Capital Allocation

Efficient allocation of available capital is the most important job for every investor (and also for every manager or CEO).

The best use of the available capital always depends on the next best alternative (keyword: opportunity costs ).

Good ideas are rare – if the opportunity very clearly outweighs the risk, then we should put a large proportion of our capital on this opportunity.

We should never “fall in love” with an investment – we should always act depending on the situation and on the basis of the opportunities available to us.

7: Patience

Resist the natural human bias to act.

“Compound interest is the eighth wonder of the world. Anyone who understands it earns it, everyone else pays for it.” (Albert Einstein) – We should never interrupt this effect unnecessarily (ie not sell our shares prematurely just because we have, for example, reached a certain return threshold).

We should avoid unnecessary transaction costs (and other related costs) – no activity for activity’s sake.

We should always be open to a happy coincidence.

We should also love the process (and not just the “proceeds”, i.e. the results or proceeds) because that’s where we spend most of our time as investors.

8: Decisiveness

When proper circumstances present themselves, act with decisiveness and conviction.

Really good investment opportunities don’t come around very often – so we should take advantage of such rare situations.

Opportunity meets the prepared mind – here’s how it works.

Be fearful when others are greedy and be greedy when others are fearful.

9: Change

Live with change and accept unremovable complexity.

We should recognize and accept the real world around us as it is… and not expect it to adapt to us.

We should regularly put our “favorite and best ideas” to the test and even consciously change or adapt them.
We should accept reality even when we don’t like it (especially when we don’t).

10: Focus

Keep things simple and remember what you set out to do.

We should always remember that our reputation and integrity are our most valuable assets – and that we can easily ruin them if we’re not careful.

We should protect ourselves from the effects of hubris (arrogance) and also boredom.

We shouldn’t overlook the obvious by obsessing over the small details.

We should pay attention to seemingly superfluous information – small leaks can sink a large ship.

We should face our big problems and not sweep them under the rug.

Bottom line

Ultimately, it all boils down to the following “guiding principles”… Charlie Munger’s fundamental philosophy of life: preparation, discipline, patience, and decisiveness! For more by Charlie Munger, be sure to get Poor Charlie’s Almanack from Amazon … or have a look on the web… somewhere there was the whole book as a .pdf download.

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