Charlie Munger: Control Primitive Irrational Emotions

1. Thinking in reverse makes problems easier to solve

Adapting to the working methods of complex systems involves "thinking in reverse," and often problems become easier as a result.

The problem-solving approach adopted by Charlie Munger is in stark contrast to the methods most people use in life.

Reverse deduction and backward thinking are two descriptions of this method.

For example, a good way to maintain happiness is to avoid things that cause you pain.

Munger once gave a speech mentioning Johnny Carson, where Munger said: Carson said he couldn't tell graduates how to be happy, but he could share personal experiences on how to become miserable.

Carson identified three things that lead to suffering:

Drugs that alter emotions or perceptions;
Jealousy;
Resentment.

Carson's idea is to think about a problem in reverse, exploring how to create happiness by considering what not to do that causes you pain.

Another example of Munger's backward thinking is that a good way to stay smart is to avoid being foolish.

Avoiding foolishness is clearly easier than trying to be smart, as you can rely on a few simple principles to avoid certain stupid decisions.

Munger also mentioned: “In life and business, much of the success comes from avoiding certain things, such as early death, bad marriages, etc.”

2. Thinking in reverse helps understand the essence of things

Thinking in reverse aids in understanding the essence of things, thereby helping you solve many difficult problems.

Munger once joked that he wanted to know where he would die so that he would avoid going there.

He also told a story:

I often give my family little puzzles, and not long ago I posed this question: There is a sport in the U.S. that is a one-on-one competition and has a national championship. A person won the championship in two competitions 65 years apart. Now, please name the sport.

I have a son who is a physicist, and his way of thinking is greatly influenced by me. He immediately provided the answer, reasoning as follows: This sport cannot require hand-eye coordination, as no one can win a national billiards league at the age of 85; nor can it be chess, as this sport has complex rules and requires considerable endurance.

At this point, he thought of checkers, realizing that even at 85, as long as you have rich experience, you can perform well in this sport.

Undoubtedly, this is the correct answer.

If what is obvious and known to everyone is usually wrong, then what is right?

Those that overturn conventions.

In fact, most things that most people do not understand or believe are often the best. For example, some investment concepts and methods, because they have not yet been widely accepted, can be seized by those with sufficient insight.

3. In the long run, avoiding foolishness allows us to excel

Charlie Munger once said: “I think part of the reason Berkshire is popular is that we seem to have found the 'investment trick.' In fact, it’s not because we are exceptionally talented; we just avoid foolishness. You might not believe it, but simply avoiding foolishness allows us to perform so well. **”

This is also why Warren Buffett says the first and second rules of investing are "Don't lose money."

The hardest part of value investing is the emotions and psychology, not understanding the system itself.

The long-term advantage of "staying not foolish" is severely underestimated.

Note that we are talking about "long-term," which is an important term because long-term means you are not just relying on luck to avoid foolishness. This state requires you to be humble, especially when it is beyond your capabilities.

Just as a person using a tool should know its limitations, an investor relying on their own cognition must know the limitations of their cognition.

Throughout your life, you have the opportunity to learn from your own inevitable mistakes and the mistakes of others. This process is unlikely to yield positive results, but it can still be beneficial for investing.

Humility helps reduce mistakes made out of arrogance.

Four, be greedy when others are fearful, and fearful when others are greedy

The contrarian thinking advocated by Munger is applied in many places.

He once said, "If I were to answer a question: What is the true failure in life? What do you most wish to avoid? I would think in reverse and consider what qualities I most wish to possess.

And my answer is: Control the primitive irrational emotions. When you are subjected to a huge stimulus, you will exhibit many strange behaviors. If you can remain wise at such times, you will benefit."

Christopher Davis, Chairman of Davis Advisors, said: Munger not only uses contrarian thinking intellectually but also emotionally. He seems to be able to reverse emotions; when others are ecstatic, he becomes disinterested; when others are uncertain or fearful, he becomes engaged."

This is why Munger and Buffett give such advice: be greedy when others are fearful, and be fearful when others are greedy.

Easier said than done. This is why it is said that successful investing is simple, but not easy.

Five, don't be deceived by high IQ

Investors often have high IQs, so they may think that difficult investment decisions are beneficial. In fact, even if you try to do something difficult, you won't get much reward.

High IQ may lead investors to prioritize seeking and solving difficult problems because they believe their intelligence will bring some benefits, but this is incorrect.

In this regard, Munger's view is: "I categorize things into three types: good, bad, and too difficult. For something, unless I am sure I have special insight, I will place it in the 'too difficult' category."

A better strategy is to use high IQ to solve "simple but high-return" problems. Munger enjoys working with those who think their IQ is low but are actually very intelligent.

Six, avoid doing things that others can do better

Identify your strengths

You must figure out what your own talents are. If someone else is more gifted at a certain game and you are not, you will lose. You need to identify your strengths and work within your own capabilities Working Within Your Circle of Competence

If you truly have a certain ability, you also need to understand the boundaries of that ability. In fact, everyone should know their strengths better than others, but not everyone can achieve this.

This is actually related to the concept of "circle of competence." Risks often arise from not knowing what you are doing, so a wise approach is to ensure that you operate within your area of competence.

"Margin of safety" also applies to this topic. If you are unclear about the limits of your abilities, you should leave enough margin of safety. Don't be incompetent and foolish like your competitors; this will be a significant advantage.

Learn to Self-Evaluate Properly

It is very difficult to expand the boundaries of your circle of competence, and it is important to learn to self-evaluate properly in this regard.

We all have certain talents and skills, and we should strive to improve these skills.

However, it is wise to understand the limits of your current skill development.

Especially when the risks are high, it is necessary to be conservative in self-evaluation. One of the main issues arising from human misjudgment is overconfidence.

People tend to be overly optimistic; for example, a study in Sweden found that 90% of drivers believe their driving skills are above average. And for investors, almost no one publicly claims that their performance is below average.

Avoid Doing Things That Others Can Do Better

Munger said, "Buffett and I will avoid doing things that others at Berkshire can do better."

If you let those who can do better than you take on tasks, life will be easier and better.

For example, for Munger, he focuses on acquiring moats rather than building them. Munger leaves the construction of moats to entrepreneurs and venture capitalists, positioning these tasks as "too difficult."

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