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MyTeacher:CharlieMunger

AuthorLouisLi
May21,2010
Source:ChineseEntrepreneurs

"ChinaEntrepreneur"MagazineTwentyyearsago,asayoungstudentcomingtotheUnitedStates,I
couldnthaveimaginedhavingacareerininvestmentsandwouldneverhavethoughtthatIdbefortunate
enoughtomeetwiththecontemporaryinvestmentguru,Mr.CharlieMunger.In2004,Mr.Mungerbecamemy
investmentpartnerandhassincebecomemylifelongmentorandfriendanopportunityIwouldhavenever
daredtodreamabout.
IgraduatedfromColumbiaUniversityin1996andfoundedmyinvestmentcompanyin1997,thusstarngmy
professionalinvestmentcareer.Tillthisday,thevastmajorityofindividualinvestorsandinstuonalinvestors
sllfollowinvestmentphilosophiesthatarebasedon"badtheories."Forexample,theybelieveintheecient
markethypothesis,andthereforebelievethatthevolalityofstockpricesisequivalenttorealrisk,andthey
placeastrongemphasisonvolalitywhentheyjudgeyourperformance.Inmyview,thebiggestinvestment
riskisnotthevolalityofprices,butwhetheryouwillsuerapermanentlossofcapital.Notonlyisthemere
dropinstockpricesnotrisk,butitisanopportunity.Whereelsedoyoulookforcheapstocks?ButIfoundthat
while,onthesurface,famousfundmanagersappeartoacceptthetheoriesofBueandMungerandshow
greatrespectfortheirperformance,theyareinactualpraccetheexactoppositebecausetheirclientsarealso
theexactoppositetoBueandMunger.Theysllacceptthetheoriesthatsay"volalityisrisk"and"the
marketisalwaysright."
Aserendipitousopportunityledmetomeetmylifelongmentorandfriend,Mr.CharlieMunger.
CharlieandIrstmetatamutualfriendshousewhileIwasworkingoninvestmentsinLAa ergraduang
fromcollege.Therstimpressionhegavemewasdistantheo enappearedtobeabsentmindedtothe
presenceofhisconversaonpartnersandwas,instead,veryfocusedonhisowntopics.Butthisoldmanspoke
succinctly;hiswordsfullofwisdomforyoutomullover.

Sevenyearsa erweveknowneachother,ataThanksgivinggatheringin2003,wehadalonghearttoheart
conversaon.IintroducedeverysinglecompanyIhaveinvestedin,orresearched,oraminterestedinto
Charlieandhecommentedoneachoneofthem.IalsoaskedforhisadviceontheproblemsIveencountered.
Towardstheend,hetoldmethattheproblemsIveencounteredwerepraccallyalltheproblemsofWall
Street.TheproblemiswiththewaytheWallStreetthinks.EventhoughBerkshireHathawayhasbeensucha
success,thereisntanycompanyonWallStreetthattrulyimitatesit.IfIconnueonthispath,myworrieswill
neverbeeliminated.ButifIwaswillingtogiveupthispathrightthen,totakeapathdierentfromWallStreet,
hewaswillingtoinvest.Thisreallyaeredme.
WithCharlieshelp,IcompletelyreorganizedthecompanyIfounded.Thestructurewaschangedintothatof
theearlyinvestmentpartnershipsofBueandMunger(note:BueandMungereachhadpartnershipsto
managetheirowninvestmentporolios)andalltheshortcomingsofthetypicalhedgefundswereeliminated.
Investorswhostayedmadelongterminvestmentguaranteesandwenolongeracceptednewinvestors.
ThusIenteredanothergoldenperiodinmyinvestmentcareer.Iwasnolongerrestrictedbythevarious
limitaonsofWallStreet.Thenumbersslluctuateasbefore,buteventualresultissubstanalgrowth.From
thefourthquarterof2004totheendof2009,thenewfundreturnedanannualcompoundgrowthrateof36%
a erdeducngoperangcosts.FromtheinceponofthefundinJanuary1998,thefundreturnedanannual
compoundgrowthrateinexcessof29%.In12years,thecapitalgrewmorethan20folds.
Buesaidthat,despitethecountlesspeoplehehasmetinhislife,hehasneverencounteredanyoneelselike
Charlie.AndintheyearsthatIveknownCharlie,andwasfortunatetobeabletoinmatelyunderstandhim,I
amalsodeeplyconvincedthat.Evenfromallthebiographiesofpeoplefromallages,Ihaveyettoseeanyone
similartohim.Charlieissuchauniquemanhisuniquenessisinhisthinkingand,also,inhispersonality.
WhenCharliethinksaboutthings,hestartsbyinverng.Tounderstandhowtobehappyinlife,Charliewill
studyhowtomakelifemiserable;toexaminehowbusinessbecomebigandstrong,Charlierststudieshow
businessesdeclineanddie;mostpeoplecaremoreabouthowtosucceedinthestockmarket,Charlieismost
concernedaboutwhymosthavefailedinthestockmarket.Hiswayofthinkingcomesfromthesayinginthe
farmersphilosophy:IwanttoknowiswhereImgoingtodie,soIwillnevergothere.
Charlieconstantlycollectsandresearchesthenotablefailuresineachandeverytypeofpeople,business,
government,andacademia,andarrangesthecausesoffailuresintoadecisionmakingchecklistformakingthe
rightdecisions.Becauseofthis,hehasavoidedmajormistakesinhisdecisionmakinginhislifeandinhis
career.TheimportanceofthisontheperformanceofBueandBerkshireHathawayoverthepast50years
cannotbeemphasizedenough.
Charlie'smindisoriginalandcreave,neversubjecttoanyrestricons,shackles,ordogmas.Hehasthe
curiosityofchildrenandpossessesthequaliesofatopnotchscienstsandtheirsciencresearchmethods.
Hehasastrongthirstforknowledgethroughouthislifeandisinterestedinpraccallyallareas.Tohim,with
therightapproach,anyproblemcanbeunderstoodthroughselfstudy,buildinginnovaonsonthefoundaon
laidbythosewhocameearlier.Histhinkingradiatesouttoeverycornerofbusiness,life,and[areasof]
knowledge.Inhisview,everythingintheuniverseisaninteracvewhole,andallofhumanknowledgearejust
piecestothestudyofthecomprehensivewhole.Onlybycombiningoftheseknowledgethroughalacework
ofmentalmodelscantheybecomeusefulindecisionmakingandindevelopingtheproperunderstandingof
things.Soheadvocatesstudyingallthetrulyimportanttheoriesinalldisciplines,andbuildingonthis
foundaonthesocalledworldlywisdomasatoolforstudyingtheimportantissuesinbusinessand
investments.
Charlieswayofthinkingisbasedonbeinghonestaboutknowledge.Hebelievesthatinthiscomplexand
changingworld,therewillalwaysbelimitaonstohumancognionandunderstanding,soyoumustuseallthe

toolsatyourdisposal.And,atthesameme,youmustconstantlycollectnewveriableevidences,correcng
andupdangyourknowledge,andknowingwhatyouknowandwhatyoudontknow.
Butevenso,thetrueinsightsapersoncangetinlifeissllverylimited,socorrectdecisionmakingmust
necessarilybeconnedtoyour"circleofcompetence".Acompetencethathasnodenedborderscannotbe
calledatruecompetence.Howdoyoudeneyourowncircleofcompetence?Charliesaid,ifIwanttoholda
view,ifIcannotrefuteordisprovethisviewbeerthanthesmartest,mostcapable,mostqualiedpersonon
Earth,thenImnotworthyofholdingthatview.SowhenCharlietrulyholdsacertainpointofview,histhinking
isnotonlyoriginalandunique,butalsoalmostneverwrong.
AbeaufulladyonceinsistedthatCharlieuseonewordtosumupthesourceofhissuccess,Charliesaiditwas
beingraonal.However,hehasamorestringentdenionofraonality.Itisthiskindofraonalitythat
grantshimthesensiveanduniquevisionandinsight.Eveninacompletelyunfamiliarterritory,withjustone
lookhecouldseethroughtotheessenceofthings.BuecallsthischaracteriscofCharliethetwominute
eecthesaidCharliecan,intheshortestmepossible,unravelthenatureofacomplexbusinessand
understanditbeerthananyoneelsecan.TheprocessofBerkshiresinvestmentinBYDAutoisanexample.I
rememberin2003,whenIrstdiscussedaboutBYDwithCharlie,despitehavingnevermetWangChuanfu
(ChairmanofBYDAuto),visitedBYDsfactory,andbeingrelavelyunfamiliarwiththeChinesemarketand
culture,hisquesonsandcommentsaboutBYDremains,llthisday,themostpernentquesonsaBYD
investorneedtoask.
Everyonehasblindspots,andeventhebrightestpeoplearenoexcepons.Buesaid:BenjaminGraham
taughtmetoonlybuycheapstocks,Charlieallowedmetochangemythinking.ThatstherealimpactCharlie
hadonme.IneededapowerfulforcetowalkoutofthelimitaonsimposedbyGrahamstheories.Charlies
ideaswerethatsourceofpowerheexpandedmyhorizons.Ivealsohadthisprofoundexperience.Charlie
pointedouttheblindspotsinmythinking;ifitwerentforhishelp,Illsllbesllinprocessofevoluon,
slowlycrawlingalong.
Charliespentalifemestudyingdisastroushumanmistakesandisparcularlyfondofcatastrophicerrors
causedbyhumanpsychologicaltendencies.Themostvaluablecontribuonisthathepredictedthedisastrous
consequenceofthespreadofnancialderivavesandtheloopholesintheaccounngandaudingsystem.
Backinthelate1990s,heandMr.Buealreadyraisedthedisastrouspotenalsofnancialderivave
products.Theyescalatedtheirwarningswiththeproliferaonofnancialderivaveproducts,callingnancial
derivaveproductsnancebasedweaponsofmassdestrucon;iftheywerenotstoppedinamelyand
eecvemanner,theywouldhaveadevastangimpactonthemodernsociety.Thenancialtsunamiand
globaleconomicrecessionin2008and2009unfortunatelyvalidatedCharliesfarreachingvisionandinsights.
ComparedwithBue,Charliehasafarwiderrangeofinterests.Forinstance,hehasstronginterestsandhas
doneextensivestudiesinalmostalleldsofsciencesandsocialsciences,integrangthemtoformtheoriginal
anduniqueMungerideology.Comparedtoanythingcomingfromwithintheivorytowerssystemofthinking,
Mungersdoctrinesarebuilttosolvepraccalproblems.Forexample,asfarasIknow,Charliewastherstto
proposeandsystemacallystudyhumanpsychologicaltendenciesanditshugeimpactondecisionmaking
processesininvestmentsandbusiness.Now,tensofyearslater,behavioralnancehasbecomeapopulararea
ofresearchineconomics,withbehavioraleconomicswinningtherecognionoftheNobelPrize.The
theorecalframeworkCharliedescribesinthenalchapterofthisbook,thePsychologyofHuman
Misjudgment,"maybecomemorewidelyunderstoodandappliedbypeopleinthefuture.
Charlieisnaturallyfullofenergy.Charliewas72yearsoldwhenIrstmethimin1996.Heis86yearsoldthis
year.InthetensofyearsIveknownCharlie,hislevelofenergyhasneverchanged.Heisalwaysenergecand
isanearlyriser.Breakfastmeengsalwaysbeginat7:30am.Atthesameme,becauseofdinnerevents,his
spendslessmesleepingthantheaveragepeople,butthatdoesnotaecthisexuberantenergy.Hismemory

isalsoamazing.HesllremembersBYD'soperangguresIdiscussedwithhimmanyyearsagowhilemy
memorieshavealreadyblurred.
The86yearoldmanhasabeermemorythanthisyoungman.Thesearehisinnateadvantages,buthe
acquiredthroughhardworktheunusualqualiesthatcontributedtohissuccess.OnceCharliefoundonething
hewantstodo,hecandoitforalifeme.
Tome,Charlieisnotjustapartner,heisalsoanelder,ateacher,afriend,arolemodelforsuccessandarole
modelinlife.NotonlydidIlearnfromhimtheprinciplesofvalueinvesng,Ialsolearnedfromhimhowtolive
life.Hemademeunderstandthataperson'ssuccessisnotaccidental.Timingandopportuniesare,ofcourse,
important,buttheinherentqualiesofpeopleareevenmoreimportant.
Charlielikestomeetpeopleforbreakfasts,usuallystarngat7:30am.IremembertherstmeIhad
breakfastwithCharlie,Iarrivedonme,onlytondCharliesingthere,nishedwiththedaysnewspapers.
Whileitwasonlyafewshortminutesawayfromthe7:30,butIfeltbadlenganelderlymanIrespectedwait
forme.Forourseconddate,Iarrivedabout eenminutesearlierandsllfoundCharliesingthere,reading
thenewspaper.Forourthirdmeeng,IarrivedhalfanhourearlierandCharliewassllreadingthenewspaper,
asifhehadbeenwaingthereallyearroundandhadneverle theseat.Forthefourthmeeng,whenI
arrivedanhourearlyatsattheretobeginwaingat6:30am,andat6:45am,Charlieleisurelywalkedinwitha
pileofnewspapersandsatdown,notevenlookingup,completelyunawareofmyexistence.A erwards,I
cametounderstandthatCharliewillalwaysbearriveearlyformeengs.Buthedoesntwastemeeither,he
willtakeoutthenewspaperhepreparedtoread.
InmyinteraconswithCharlie,therewasanotherthingthatmadeabigimpactonme.Oneyear,CharlieandI
wereaendinganoutofstatemeeng.A ertheevent,IwashurryingtogetbacktoNewYorkand
unexpectedlymetCharlieattheairportterminal.Whenhishugebodypassedthroughthesecuritydetector,
forsomeunknownreasonthedetectorkeptbeingseto.Charliereturnedtoagainandagainforthesecurity
check.Henallypassedthroughthesecuritycheckpointa eralongandlaboriouseort,but,bythen,his
planehadalreadydeparted.
ButCharliewasnotinahurry.Hetookoutabookhecarriedwithhimandsatdowntoreadwhilehewaitedfor
thenextplane.Incidentally,myightwasalsodelayedsowewaitedforourightstogether.
IaskedCharlie:YouhaveyourownprivatejetandsodoesBerkshire,whydoyoubothergoingthroughthe
troubleofyingcommercial?
Charliereplied:Firstly,itisawasteoffuelformetoyinmyprivatejet.Secondly,Ifeelsaferyingina
commercialaircra .However,therealreasonisCharliesthirdreason,Iwanttoliveanengagedlife.Idont
wanttobeisolated.
WhatCharliecanttolerateistolosecontactwiththeworldbecauseofmoneyandwealth.Toisolateyourself
inasingleroombehindalabyrinthofoces,torequirelayersa erlayersofapprovalstosetupmeengs,and
tohidebehindacomplicatedbureaucracysoyoubecomehardtoreachforanyonethatishowyoulosetouch
withtherealiesoflife.
"AslongasIhaveabookinmyhand,IdontfeellikeImwasngme."Charliealwayscarriesabookonhim.
Evenifhessinginthemiddleseatineconomyclass,aslongashehasabook,hellhavenocomplaint.Once
hewenttoSealetoaendaboardmeeng,takingtheeconomyclassasusual,hesatbesideaChinesegirl
whowasdoinghercalculushomeworkthroughouttheight.HewasimpressedwiththisChinesegirlbecause
hehasdicultyimaginingAmericangirlsofthesameagehavingsuchpowerofconcentraontoignorenoise
ontheaircra andconcentrateonstudying.Ifhewasaboardaprivatejet,hewouldhaveneverhadthe

opportunitytocomeintoclosecontactwiththesestoriesofordinarypeople.
ThoughCharliehasverystrictselfdiscipline,heisverygenerouswithothersandtreatpeoplehecaresandlove
reallywell.Heisnotsngywithmoney,alwayshopingotherswillbenetmore.Forhisowntravels,whether
forbusinesstripsorforpersonaltrips,healwaysieseconomyclass,butwhentravelingwithhiswifeand
family,hewouldtakehisownprivatejet.Heexplained:mywifebroughtupsomanychildreninherlifeme
andhasgivenmesomuch.Nowthatherhealthisntasgoodasitusedtobe,Imusttakegoodcareofher.
Charliespenthislifemestudyingthecausesofhumanfailures,sohehasaprofoundunderstandingofthe
weaknessesofhumannature.Becauseofthis,hebelievespeoplemustbestrictanddemandingon
themselves,connuouslyimprovingtheirdisciplineinlifeinordertoovercometheinnateweaknessesof
humannature.Thiswayoflifeis,toCharlie,amoralrequirement.Toanoutsider,Charliemightseemlikea
monk;buttoCharlie,thisprocessisbothraonalandpleasantanditallowspeopletohavingasuccessfuland
happylife.
Charlieissuchauniqueperson.Butifyouthinkaboutit,ifMungerandBuewerentsosounique,how
couldtheyhavebuiltBerkshiresperformanceover50yearsintoonethatisunprecedentedinthehistoryof
investmentsandonethathasyettobereplicated.
OvertheyearsIveknownCharlie,Io enforgetthatheisanAmerican.Heisclosertobeingthetradional
Litera(scholarocials)ofImperialChinathatIknew.
A ertheImperialexaminaonsystemended,overthepasthundredsofyears,thespiritoftheLiterahas
beenlosttoreality.Especiallyinthehighlydevelopedcommercialsocietyofthismeandage,theChinese
scholarswhobearthespiritoftheChineseLiteraareo enconfusedaboutthevalueandidealsoftheirown
existence.Inacommercialsocietywheretradionhasbeenlost,isthespiritofLiterasllapplicableor
useful?InthelateMingDynasty,capitalismbegantosproutinChina,themerchantsatthatmeraisedthe
idealsof"abusinesspersonwithaLiterassoul.Today,theforcesofthecommercialmarkethasbecomethe
dominantpower,andIthinktherearemorepossibiliesforthisidealtobecomeareality.
Charliecanbesaidtobethebestexampleof"abusinessmanwithaLiterassoul".Firstofall,Charlieis
extremelysuccessfulinbusiness.However,inthedeepinmateinteraconsIvehadwithCharlie,Ifound
Charlietobeessenallyamoralphilosopherandascholar.Hereadswidely,isknowledgeableoverabroad
rangeoftopics,istrulyconcernedabouthisownmoralculvaon,andisulmatelyconcernedaboutthe
society.Charlie'svaluesystem,fromtheinsideout,promotesselfculvaonandselfdevelopmenttobecome
thesaintswhohelpothers.
A erachievingbusinesssuccessandwealth,Charlieissllcommiedtocharityandtobenengthepeopleof
theworld.Hewascompletedependentonhiswisdominachievinghissuccess,andthisisundoubtedlyan
excingrolemodelforChinesescholars.Hemadefulluseofhisownwisdomandachievedgreatsuccessin
businesswiththeutmostintegrity.Today,inthemarketeconomy,cantheChinesescholarsbelledwiththe
spiritoftheLiteraand,byimprovingthemselvesthroughlearningandselfculvaon,achievethesuccesses
ofthesecularsocietywhilerealizingthevalueoftheirownideals?
CharlieverymuchappreciatesConfucius.IsomemesthinkthatifConfuciuswasreborninAmericatoday,
Charliewillprobablybethebestincarnaon.IfConfuciusreturned2000yearslatertothecommercialized
China,histeachingwillprobablybe:haveyourheartintherightplace,culvateyourmoralcharacter,forfy
yourfamily,acquirewealth,andhelptheworld!
(Thisarclewaswrienfortheforewordto"PoorCharlie'sAlmanackTheWitandWisdomofCharlesT.
MungerpublishedinMay2010,someparagraphswerecut,thetlewasaddedbytheeditor.)

[Translatorsnotes:ThankstoEeLinSimforherassistanceintranslaon.PleasesendfeedbackstoEnochKo:
contact(at)enochko[dot]com]

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