Want to Learn Charlie Munger’s Way of Thinking?

According to Colby, men will confess to treason, murder, arson, false teeth, or a wig, but not to a lack of humour.

This, I believe also happens with creative thinking.

So people, in general, like to think that they are creative thinkers, don’t even consider otherwise and, you know what, they may be right!

Most of us can become creative thinkers. It’s just that we need a catalyst to bring forth our innate thinking powers.

One such amazing catalyst I found out two years back, through a recommendation from Prof. Sanjay Bakshi, is Roger von Oech’s Creative Whack Pack.

This is a great tool to practice thinking like Charlie Munger does – combining various ideas from different spheres of life and joining them to create a process of thinking creatively – the latticework of mental models, as he calls it.

The pack consists of a deck of 64 cards divided in four suits. Each card gives a bite-sized story or situation and a strategy that may be adapted to the problem or concept the user is working on.

The idea is that drawing cards singly or in combination and considering the strategy can shift the user’s mind to previously unexplored, creative directions.

While this entire pack of cards has helped my thought process immensely over these past two years, here are four cards that have helped me as far as my investment thinking is concerned.

The text in quotes below is from the respective card.

Reverse (Card #27)

Reversing how you look at a situation can open up new possibilities and dislodge assumptions. Example: When everyone else is gazing at a glorious sunset, why not turn around to see the blues and violets behind you? What do you notice when you look at a coffee cup? Its design or color? Reverse your focus and look at the space inside – that’s what gives it its functional value.

What Oech mentions in this card, is same as what Charlie Munger talks about on the ‘rule of inversion’.

As Munger says, “A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage etc.”

So, as an investor, it’s important for you focus…

• Less of how to earn great returns, and more on how to avoid permanent capital loss;
• Less on how to pick the great stocks, and more on how to avoid the dangerous ones;
• Less on things to do for investing success, and more on things to avoid for investing failure.

Of course, you also need to develop the insights to do the right things, cutting back on your ‘potential’ mistakes is surely a very important task at hand.

Don’t Fall in Love with Ideas (Card #45)

If you fall in love with an idea, you won’t see the merits of alternative approaches – and will probably miss an opportunity and two. One of life’s great pleasures is letting go off a previously cherished idea. Then you are free to look for new ones.

Now, this is what Munger talks about when he asks us to be aware of the Commitment and Consistency Bias.

When we fall in love with our ideas, and don’t change them even when we must change them, that is what brings our downfall.

As Warren Buffett says, “Chains of habit are too light to be felt until they are too strong to be broken.”

Avoid Arrogance (Card #46)

On the morning of the battle of Waterloo, Napoleon Bonaparte smugly assured his generals, “I tell you Wellington is a bad general, the English are bad soldiers; we will settle this matter by lunch time.” Don’t be blinded by arrogance. A little humility can help you steer clear of disaster.

Just before the Titanic was about to embark on its maiden journey in 1912, one passenger asked a ship’s agent for extra insurance on some valuables in her luggage. The agent replied, “Ridiculous. This boat’s unsinkable.”

Captain Smith himself was asked about the safety of the Titanic. He answered – “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern shipbuilding has gone beyond that.”

Then, after the ship had struck the iceberg, a passenger asked her employer if they should do something about it. He replied, “Go back to bed. This ship is unsinkable.”

Cut to 2008. Fund managers and stock investors who were betting big on infrastructure and realty stocks, when asked about the valuations at which they were buying such stocks, said, “Real estate and infra are the new gold and prices will continue to head north.”

If we’re repeatedly successful – like Napoleon, or fund managers and analysts prior to 2008 – we’re tempted to believe that we’ve found the formula for success and are no longer subject to human fallibility.

This is devastating, especially in a world that is continually changing, and where every right idea is eventually the wrong one.

Here is something Seth Klarman said in an interview with Charlie Rose in 2012…

You need to balance arrogance and humility…when you buy anything, it’s an arrogant act. You are saying the markets are gyrating and somebody wants to sell this to me and I know more than everybody else so I am going to stand here and buy it. I am going to pay 1/8th more than the next guy wants to pay and buy it. That’s arrogant. And you need the humility to say ‘but I might be wrong.’ And you have to do that on everything.

Staying humble with your analysis and forecasting powers will keep you from risking too much in a view of the future that may well turn out to be wrong.

Learn from Mistakes (Card #63)

On his way to creating the light bulb, Edison discovered 1,800 ways not to build one. One of Madam Curie’s failures was radium. Columbus was looking for China. Errors are of life’s primary learning vehicles. That’s because success reinforces the way you do things. When you fail, however, you learn what’s not working, and you get the opportunity to try new approaches.

The only way to avoid mistakes in investing is not to invest – which is the biggest mistake of all.

So forgive yourself for your mistakes and certainly do not try to recoup your losses by taking bigger risks.

Instead, turn each mistake into a learning experience.

As Munger says, “There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.”

Overall, Creative Whack Pack has benefited me tremendously ever since I started using these cards. I’m sure you will enjoy the benefits too.

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