Poor Charlies Almanack is a must read for long term investors (value, growth or otherwise) and also would be a great resource for any decision makers to consider and learn from.
The book is available online (and perhaps in physical stores in some places) and has a lot to offer for those looking for a read that can make you a more savvy decision maker based on the wisdom from an extremely successful investor and business who is best known as the right-hand man to Warren Buffett. As an added bonus, Charlie is also an extremely funny (albeit, dry at times) character and his speeches and lessons are a pleasure to read because of this feature.
I won’t go into detail here on Charlie’s life and accomplishments, but needless to say, he has an interesting past and even at the age of 97, he claims to be continually learning. Below, I’ll describe some of the key learnings and take-aways from the book that have impacted me the most and hopefully will be interesting or helpful to you.
Here are some of the insights that I have tried to take away and apply them to how I invest and how I do all kinds of things in life.
Avoid being dumb
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
This one seems simple and of course obvious but in reality, most people are not wired to think this way. Our entire upbringing and education tends to reward complexity, fancy solutions. Of course, the first goal of investing and many things in life SHOULD be to simply survive and to get better over time. Therefore, the primary concern should be to NOT blow up! Secondary to this will be to grow/get better. When it comes to investing and other things, time is an advantage to those who survive as there are many tailwinds that are there to ensure you do well, assuming you are able to avoid demise.
The “lollapalooza” effect
“Really big effects, lollapalooza effects, will often come only from large combinations of factors”
This one is misunderstood by some but is obvious once you see the importance of understanding incentives and multidisciplinary mental models to understand the world. The only way to get incredible results/outcomes are when multiple individual driving forces combine to multiply their impact. Often these are known phenomenon but underestimated because the combination of the drivers are what is misunderstood. An example might be a business that employs network effects combined with a new business model that is capital light and is in a growing industry. Individually, these three drivers for the business success are understood reasonably well, but on their own, people initially will undervalue them.
How to approach complex/difficult problems using inversion
“Invert, always invert”
The importance of inversion when approaching a difficult problem is a simple one but is something that humans are not instinctually wired to do. We tend to take the problem as it is initially presented as opposed to manipulating it to be one that is perhaps more easily solvable. The quote that is associated with Charlie “invert, always invert” is actually attributed to the famous mathematician Jacobi.
One easy example is when evaluating a potential investment, instead of asking “how do I make money?”, ask instead “how do I not lose money?”. It may seem overly simplistic at first glance, but the simple reframing of the important questions can often make your mind think in different terms regarding the same problem. You may find that you weren’t asking the right question in the first place, which is more important than answering the difficult initial question correctly!
The importance of long term thinking
“The big money is not in the buying and selling , but in the waiting.”
Great businesses are few and far between but when you find a few, hold on for the long term. Identifying moats that are durable is not easy but also does not need to be impossible to find a few. Keep tabs on the business and try to keep it simple. Reasonable growth that is consistent over a very long time period will reward those who are patient enough to sit and do nothing. Again, there is the theme of this is obvious but humans are not wired to think this way. We always want to be doing something.
Investing is one of the few fields in which inaction is rewarded. Making decisions to buy and sell is likely to result in poorer quality decisions, tax losses and the interruption of compounding. “No one ever wants to get rich slowly” is strikingly true for the vast majority of ambitious people. The trouble is that in almost every other field, being busy and doing things constantly is often rewarded with success (or what appears to be success).
Understanding incentives
“Show me the incentives and I’ll show you the outcome”
This one is maybe less obvious, but it gets down the nature of human psychology. People tend to do things based on how they are incentivized.
In the investment world, this lends itself to thinking about how a management team is compensated and if they have skin in the game. If they have something to lose (and something to gain), they will tend to act to the benefit these outcomes and perhaps at the detriment to other outcomes. You can then try to find situations where you can align your incentives to your benefit. Examples of positive outcomes could include founder lead organizations that have a large portion of their personal wealth in the stock (common stock that you can also own!). Compare this with situations where professional managers are hired. In these situations, it is possible that they have short term risks that are based on quarterly earnings performance or top line revenue growth, potentially at the expense of the long term shareholder’s capital.
The incredible value in a multidisciplinary approach to problems
“To a man with a hammer, everything is a nail”
This quote is attributable to Maslow’s Law of the Instrument. A good part of the book focuses on Charlie’s belief in a multidisciplinary approach to problems. The observation of Charlie’s that the formal education system falls down in its teachings because it overly focuses on whatever field the individual has expertise in. The classic examples given is the failure of the psychology field to incorporate a wider spectrum of mental models that have been proven by other fields such as science and engineering.
There are plenty of examples in the real world both in business and other areas where difficult challenges exist. The modern world tends to value skill and knowledge. People have focused on going deeper and deeper into specialized narrow fields to be rewarded more and more. That being said, the most important problems in the world are often more complex and multidisciplinary in nature than what most specialists would like to believe.
When asked to solve problems, people tend to turn to what they know best in order to solve the problem, no matter if that is the best approach to solve the problem in the first place. The answer, of course is to be open to other mental models. Spending time on learning the basics of other fields and principles will be rewarding in the end for those who need to solve problems.
If you enjoyed this, you might also enjoy my key take-aways from "100 Baggers".
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This was great! Will you be going more of these?