A Lesson on Elementary Worldly Wisdom As It Relates To Investment Management & Business (USC Business School, 1994)

Charlie Munger · c. 1994

Charlie Munger did not write this page.

Every claim below was made in this piece, quoted word for word and numbered in the order the piece makes them, so you can read it there rather than take our word for it. The sentence above each quote is our reading of the claim, not their wording. Each quote was checked against a stored copy of the page at build time; where the two differ, the quote is the fact.

Our reading
Facts that do not hang together on a latticework of theory are not held in a usable form
Mental modelMany models, not one

Their wordsyou can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.
Our reading
With only one or two models in use, a person is liable to torture reality to fit them, or to think they fit
Mental modelMany models, not one

Their wordsyou’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does.
Our reading
Thinking with a single model is a disastrous way to think and to operate in the world, so multiple models are needed
Mental modelMany models, not one

Their wordsIt’s like the old saying, “To the man with only a hammer, every problem looks like a nail.” And of course, that’s the way the chiropractor goes about practicing medicine. But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models.
Our reading
Some 80 or 90 important models carry about 90% of the load in making a person worldly-wise, and only a handful carry the heaviest
Mental modelMany models, not one

Their words80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person. And, of those, only a mere handful really carry very heavy freight.
Our reading
Without the elementary mathematics of probability in one’s repertoire, one gives everybody else a huge advantage
Mental modelProbabilistic thinking

Their wordsIf you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest. You’re giving a huge advantage to everybody else.
Our reading
The psychology of misjudgment is terribly important to learn, and terribly smart people make bonkers mistakes by failing to heed it
Mental modelYour own biases

Their wordsThe elementary part of psychology—the psychology of misjudgment, as I call it—is a terribly important thing to learn. There are about 20 little principles. And they interact, so it gets slightly complicated. But the guts of it is unbelievably important. Terribly smart people make totally bonkers mistakes by failing to pay heed to it.
Our reading
Advantages of scale are very important to which businesses succeed and which fail

Their wordsin terms of which businesses succeed and which businesses fail, advantages of scale are ungodly important.
Our reading
In a lousy business, wonderful new inventions can give owners nothing, because the gains from improvements flow through to the customers

Their wordsthere are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.
Our reading
Everyone has a circle of competence, and it is very hard to advance
Mental modelCircle of competence

Their wordsEvery person is going to have a circle of competence. And it’s going to be very hard to advance that circle.
Our reading
Playing games where others have the aptitudes and one does not is close to certain to lose, so one has to find where one has an edge and stay inside one’s circle of competence
Mental modelCircle of competence

Their wordsIf you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.
Our reading
The wise bet heavily when the world offers them the odds, and not the rest of the time
Mental modelProbabilistic thinking

Their wordsAnd the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t.
Our reading
It makes sense to load up on the very few good insights one has rather than pretend to know everything about everything at all times
Mental modelProbabilistic thinking

Their wordsAnd it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. You’re much more likely to do well if you start out to do something feasible instead of something that isn’t feasible.
Our reading
Over the long term a stock is hard put to earn a much better return than the business underneath it earns

Their wordsOver the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount.

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