“My father is the second smartest person I know. Charlie Munger is the first.” — Howard Buffett

Book Summary

This is my book summary of The Tao of Charlie Munger by David Clark. My notes are informal and often contain quotes from the book as well as my own thoughts. This summary also includes key lessons and important passages from the book.

• Overview
• The Book in Three Sentences
• An Introduction to Charlie Munger
• Quotes and Wisdom from Charlie Munger
• More Books Like This
• Buy the Book

Overview

The Tao of Charlie Munger is a compendium of pithy quotes culled from interviews, speeches, writing, and Charlie’s answers to questions at the Berkshire Hathaway, Wesco, and Daily Journal annual meetings.

Charlie’s wisdom is often Mungerisms. Here are just a few from this incredible collection.

• On knowledge: “Knowing what you don’t know is more useful than being brilliant.”
• On the importance of reading: “In my whole life, I have known no wise people who didn’t read all the time — none, zero.”
• On a successful career: “Don’t sell anything you wouldn’t buy yourself. Don’t work for anyone you don’t respect and admire. Work only with people you enjoy.”

Charlie Munger’s investment and business philosophies, as well as his rules for living, are profound for those who seek to invest well and live well.

The Book in Three Sentences

Charlie Mungernis truly the broadest thinker I have ever encountered.” — Bill Gates

“Charlie Munger is the architect of today’s Berkshire. Berskshire has been built to Charlie’s blueprint. My role has been that of general contractor.” — Warren Buffett

“My father is the second smartest person I know. Charlie Munger is the first.” — Howard Buffett

An Introduction to Charlie Munger

In The Tao of Charlie Munger, David Clark sums up Charlie's background, early career, and incredible impact on Warren Buffett and Berkshire Hathaway. David outlines why Charlie Munger is an enigma wrapped in a paradox:

In the chronicles of American financial history Charlie Munger will be seen as the proverbial enigma wrapped in a paradox—he is both a mystery and a contradiction at the same time. Warren Buffett said, “Charlie’s most important architectural feat was the design of today’s Berkshire. The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices. Consequently, Berkshire has been built to Charlie’s blueprint. My role has been that of general contractor, with the CEOs of Berkshire’s subsidiaries doing the real work as subcontractors.”

How is it that Charlie—who trained as a meteorologist and a lawyer and never took a single college course in economics, marketing, finance, or accounting—became one of the greatest business and investing geniuses of the twentieth and twenty-first centuries? Therein lies the mystery.

Charlie was born in Omaha, Nebraska, on January 1, 1924, in the midst of the Roaring Twenties. The radio and airplane were the cutting-edge technologies of the day. The financier Bernard Baruch was the king of Wall Street. And everyone was getting rich investing in stocks. Charlie’s father was one of Omaha’s leading business attorneys, and his roster of clients included many of the state’s business elite. Charlie spent much of his youth reading—the television and video games of his day—and that is where he discovered a larger world than the idyllic, but very parochial, neighborhood of Dundee, where Warren Buffett’s family also lived. The two boys attended the same grade school and high school, though seven years apart in age. In fact, one of Charlie’s first jobs was working for Warren’s grandfather at the Buffett neighborhood grocery store—which is still standing in the heart of old Dundee.

Charlie was introduced to the world of business at the Buffett grocery store. He learned about taking inventory, stocking shelves, pleasing customers, the importance of showing up on time for work, how to get along with others while accomplishing a joint task, and, of course, running the cash register, where money, the lifeblood of the business, flowed.

Omaha in the 1930s had distinct ethnic immigrant neighborhoods: Italian, Greek, African American, Irish, French, Czech, Russian, and even Chinese. Many immigrants worked for the Union Pacific Railroad and meatpacking plants whose operations were centered in Omaha. Charlie went to public school with the children of those immigrants and as a result developed an appreciation not only of their cultures but also of their commercial aptitude and willingness to work unbelievably hard to give their children a better life.

Charlie often brings up the horrors of the Great Depression at Berkshire Hathaway annual meetings as a reminder of just how bad things can get. But Omaha didn’t suffer like other parts of the United States during the Great Depression, in part because it was the crossroads of two major railroads, the Union Pacific and the Burlington, and also because it was home to the Union Stock Yards, the second largest in the world. With this convergence of livestock and transportation, Omaha attracted the big meatpacking companies, which established processing plants in South Omaha. America may have been in a great depression, but it still had to eat, and as many as twenty thousand pigs, sheep, and cattle arrived in Omaha every day. Those animals needed to be slaughtered, butchered, packed, and shipped to other parts of the country. The stockyard generated lots of economic activity even during hard times.

The Kiewit construction company, today one of North America’s largest building companies, was founded in Omaha. The company’s first big job was constructing the Livestock Exchange building for the Union Stock Yards. (Peter Kiewit had a huge influence on both Charlie and Warren, and today Berkshire’s home office is in Kiewit Plaza.) Charlie learned about the business dealings of some of Omaha’s most prominent businessmen from his father, who represented both the Hitchcock family, who owned the town’s leading newspaper, and the Kountze family, who owned the largest bank.

After high school, seventeen-year-old Charlie enrolled in the University of Michigan to study mathematics. He turned nineteen a year after Pearl Harbor, dropped out of college, and joined the US Army Air Corps. The army sent him to Caltech, in Pasadena, California, to study meteorology. There he learned the difference between cumulus and cirrus clouds and fell in love with the sunny Southern California weather. While the teenage Warren Buffett was busy learning about odds and probability at the Ak-Sar-Ben horse-racing track—a short bike ride from his Omaha home—Charlie Munger was learning this important investment skill while playing poker with his army buddies. That’s where he learned to fold his hand when the odds were against him and bet heavy when the odds were with him, a strategy he later adapted to investing.

After the war Charlie, who did not have an undergrad degree, applied to Harvard Law School, his father’s alma mater. He was rejected. After a phone call from Harvard Law’s retired dean, who was a Nebraskan and family friend, he was admitted. Charlie excelled in his law studies and graduated magna cum laude in 1948. He has never forgotten the importance of having friends in high places.

After law school Charlie moved back to Los Angeles, where he joined a prestigious corporate law firm. He learned a lot about business from handling the affairs of Twentieth Century–Fox, a mining operation in the Mojave Desert, and many real estate deals. During that time he was also the director of an International Harvester dealership, where he first learned how hard it is to fix a struggling business. The dealership was a volume business that required a lot of capital to pay for its costly inventory, most of it financed with a bank loan. A couple of bad seasons, and the carrying costs on the inventory start to destroy the business. But if the company cut its inventory to lower the carrying costs, it wouldn’t have had anything to sell, which meant that customers would seek out a competing dealership that did have inventory. It was a tough business with lots of problems and no easy solutions.

Charlie thought a lot about business during that time. He made a habit of asking people what was the best business they knew of. He longed to join the rich elite clientele his silk-stocking law firm served. He decided that each day he would devote one hour of his time at the office to work on his own real estate projects, and by doing so he completed five. He has said that the first million dollars he put together was the hardest money he ever earned. It was also during that period that he realized he would never become really rich practicing law; he’d have to find something else. In the summer of 1959, while in Omaha to settle his father’s estate, he met two old friends for lunch at the Omaha Club, a wood-paneled, private downtown club where businessmen lunched in the afternoon and drank and smoked cigars in the evening. The two men had decided to bring along a friend of theirs who was running a partnership they had invested in and whom they thought Charlie would enjoy meeting, a young man by the name of Warren Buffett.

By all accounts it was a case of instant mutual attraction. Warren started by launching into his standard diatribe about the investment genius of Benjamin Graham. Charlie knew about Graham, and immediately the two began to talk about businesses and stocks. The conversation became so intense that Charlie and Warren barely noticed when their two friends got up to leave. That was the beginning of a long and very profitable relationship—a bromance in the making—and over the next couple of days they couldn’t see enough of each other. One night over dinner Charlie asked if Warren thought it would be possible for Charlie to open an investment partnership like Warren’s in California. Warren said he couldn’t see any reason why not.

After Charlie returned to California, he and Warren talked several times a week on the phone over the next couple of years. And in 1962 Charlie finally started an investment partnership with an old poker buddy who was also a trader on the Pacific Coast Stock Exchange. He also started a new law firm, Munger, Tolles, Hills and Woods. Within three years he stopped practicing law to focus on investing full-time.

Charlie’s investment partnership was different from Warren’s, in that he was willing to take on a lot of debt to do some of his trades. He was particularly fond of stock arbitrage. One arbitrage deal involved British Columbia Power, a company that was being taken over by the Canadian government. The takeover price was $22 a share. BCP was selling for $19 a share. Thinking that the deal would eventually go through at $22 a share, Charlie bought all the shares of BCP he could get his hands on and ended up putting all of the partnership’s money, all of his own money, and all that he could borrow into BCP. The trade worked out—BCP was taken over at $22 a share—and Charlie made out like a bandit.

In the mid-1960s Charlie and Warren were busy scouring over the Pink Sheets (a pre-Internet daily publication of the prices of OTC stocks printed on pink paper) looking for a bargain price on a good company. One of the companies they found was Blue Chip Stamp. Blue Chip was a trading stamp company; other businesses would buy trading stamps from Blue Chip to give them to their customers, who would then redeem them for prizes that Blue Chip was offering. Think of it as an early form of a rewards program. What made the company interesting to Charlie was that Blue Chip had a pool of money called a “float” that was created by the lag time between its selling the stamps and the customer’s redeeming them. What made Blue Chip’s stock attractively priced was the fact that the US government had filed an antitrust action against the company. Charlie, as a lawyer, thought the lawsuit would be resolved in favor of Blue Chip—which it was. Charlie—through his partnership—and Warren—through Berkshire—eventually took control of the company, and Charlie became its chairman. By the late 1970s the float at Blue Chip had grown to approximately $100 million, money that Charlie and Warren could invest.

Blue Chip’s business model eventually became obsolete, and its sales slowly declined over the years, from $126 million in sales in 1970 to $1.5 million in 1990. But in its heyday, under Charlie’s direction, Blue Chip used its surplus capital to purchase 100% of See’s Candies and 80% of a finance company called Wesco, which owned a savings and loan. Just as Warren had taken capital out of Berkshire’s failing textile operation to buy a thriving insurance company, National Indemnity, Charlie took the excess capital out of Blue Chip Stamp and invested it in profitable businesses. Eventually Blue Chip Stamp was merged into Berkshire Hathaway.

In 1968 Charlie teamed up with Warren and David “Sandy” Gottesman, who ran the investment firm First Manhattan, to form Diversified Retailing Company. DRC acquired the Baltimore-based department store Hochschild Kohn for $12 million. Half of the acquisition was financed with a bank loan. Hochschild Kohn was bought at a bargain price, but it had no competitive advantage and was constantly having to spend precious capital keeping up with the competition. Charlie and the others quickly learned how hard the retail clothing business really is. Unlike the jewelry or carpet business, where the inventory never depreciates, in retail clothing the entire inventory becomes obsolete with the changing of every season. After three years of dismal results they sold Hochschild Kohn.

During that time Charlie started seeing the advantages of investing in better businesses that didn’t have big capital requirements and did have lots of free cash that could be reinvested in expanding operations or buying new businesses.

From 1961 to 1969 Charlie’s investment partnership showed an amazing average annual return of 37.1%. But the crash in 1973–74 hurt him, and when he closed the fund in 1975 it had $10 million in assets and showed an average annual rate of return of 24.3% for the fourteen years it was in operation. What is interesting is that in the final years of the fund Charlie was running a highly concentrated portfolio, the holding in Blue Chip Stamp alone accounting for 61% of the fund’s investments. He has never been a fan of diversification as an investment strategy.

One of the investment decisions that Charlie’s partnership made in 1972 was to team up with the investor Rick Guerin and take a controlling interest in a closed-end investment fund called Fund of Letters, which they quickly renamed the New America Fund. When the partnership liquidated the partners received shares in the New America Fund, which Guerin ran and for which Charlie picked the investments. In 1977 New America Fund bought the Daily Journal Corporation for $2.5 million, and Charlie became its chairman. The Daily Journal Corporation is a California publishing company that publishes newspapers and magazines, including the Los Angeles Daily Journal and the San Francisco Daily Journal. When Guerin and Charlie dissolved the New America Fund, its shareholders received shares in the Daily Journal Corporation and the company became a publicly traded OTC stock. Many of today’s Daily Journal shareholders have literally been with Charlie since the days of his original investment partnership, more than forty years ago.

In 1979 Charlie became Berkshire Hathaway’s first vice chairman. In 1983 Blue Chip Stamp merged with Berkshire Hathaway and Charlie took over as chairman of Wesco. It was from those two positions that Charlie would help Warren make the investment and management decisions that would take Berkshire Hathaway from a net income of $148 million and a stock price of $1,272 a share in 1984 to a net income of approximately $24 billion and a stock price of $210,000 a share in 2016.

Today, at ninety-two, Charlie is vice chairman of Berkshire Hathaway, a company with a market capitalization of $362 billion, as well as the chairman of the Daily Journal Corporation, and his personal fortune now exceeds $2 billion.

Warren, in summing up Charlie’s impact on his investment style over the last fifty-seven years, said, “Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me. This was the real impact that he had on me. It took a powerful force to move me on from Graham’s limiting view. It was the power of Charlie’s mind.”

Quotes and Wisdom from Charlie Munger

What's remarkable about Charlie Munger is that he's not just full of wisdom — but biting wit. Here are a few of my favorite quotes from the book:

The desire to get rich fast is pretty dangerous.

Knowing what you don’t know is more useful than being brilliant.

People are trying to be smart. All I am trying to do is not to be idiotic, but it’s harder than most people think.

Life, in last, is like a poker game wherein you have to learn to quit sometimes when holding a much-loved hand. You must learn to handle mistakes and new facts that change the odds.

My idea of shooting a fish in a barrel is draining the barrel first.

Once we’d gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.

Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by the Great Crash and the Depression almost destroyed him. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.

Sit on your ass investing. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax  system gives you an extra one, two, or three percentages points per annum.

Acknowledging what you don’t know is the dawning of wisdom.

You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.

You should remember that good ideas are rare. When the odds are greatly in your favour, bet heavily.

Mimicking the herd invites regression to the mean.

I’ve never been able to predict accurately. I don’t make money predicting accurately. We just tend to get into good businesses and stay there.

If you, like me, lived through 1973-74 it even the early 1990s, there was a waiting list to get OUT of the country club. That’s when you know things are tough. If you live long enough, you’ll see it.

The way to get rich is to keep $10 million in your checking account in case a good deal comes along.

I succeeded because I have a long attention span.

It is an unfortunate fact that great and foolish excess can come into prices of common stocks in the aggregate. They are valued partly like bonds, based on roughly rational projections of use value in producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up, so far.

I think that, every time you see the word EBITDA, you should substitute the word ‘bullshit earnings.’

Where you have complexity, by nature you can have fraud and mistakes. This will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world.

Smart people aren’t exempt from professional disasters from overconfidence.

It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.

In terms of business mistakes that I’ve seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. Anytime somebody offers you a tax shelter from here in life, my advice would be don’t buy it.

An isolated example that’s very rare is much easier to endure than a perfect sea of misery that never ceases.

Move only when you have the advantage. You have to understand the odds and have the discipline to bet only when the odds are in your favor.

View a stock as an ownership of the business and judge the staying quality of the business in terms of its competitive advantage.

I think that one should recognize reality even when one doesn’t like it. Indeed, especially when one doesn’t like it.

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. There must be some wisdom in the folk saying: ‘It’s the strong swimmers who drown.’

There is more dementia about finance than there is about sex.

If people weren’t wrong so often, we wouldn’t be so rich.

You have to be very patient, you have to wait until something comes along, which, at the price you’re paying, is easy. That’s contrary to human nature, just to sit there all day long doing nothing, waiting. It’s easy for us, we have a lot of other things to do. But for an ordinary person, can you imagine just sitting for five years doing nothing? You don’t feel active, you don’t feel useful, so you do something stupid.

We have a history when things are really horrible of wading in when no one else will.

By and large I don’t think much of finance professors. It is a field with witchcraft.

There isn’t a single formula. You need to know a lot about business and human nature and the numbers… It is unreasonable to expect that there is a magic system that will do it for you.

Successful investing requires this crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long.

We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.‍

In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables — like the discount warehouses of Costco.‍

There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.

Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.

The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.

If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.

Averaged out, betting on the quality of a business is better than betting on the quality of management. But, very rarely, you find a mange who’s so good that you’re wise to follow him into what looks like a mediocre business.‍

From all business, my favorite case on incentives is Federal Express. The heart and soul of their system — which created the integrity of the product — is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on-time. They tried everything — moral suasion, threats, you name it. And nothing worked. Finally, somebody got the idea to pay all these people not by the hour, but by the shift — when it’s done, they can go home. Well, their problems cleared up overnight.‍

As you can tell in Berkshire’s operations, we are much more conservative. We borrow less, on more favorable terms. We’re happier with less leverage. You could argue that we’ve been wrong, and that it’s cost us a fortune, but that doesn’t bother us. Missing out on some opportunity never bothers us. What’s wrong with someone getting a little richer than you? It’s crazy to worry about this.

We didn’t know when we were young which things to stretch for, but by the time we reached Iscar, which we never would have bought when we were young, we knew to stretch for the right people. It’s a hell of a business. Everything is right there. Isn’t it good that we keep learning? Better late than never.

Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day — if you live long enough — most people get what they deserve.

Know the big ideas in the big disciplines and use them routinely — all of them, not just a few.‍

I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.‍

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.‍

Extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world.‍

Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.‍

Being rational is a moral imperative. You should never be stupider than you need to be.

Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind.‍

We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.‍

‘One solution fits all’ is not the way to go. The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You can’t run all these places with a cookie-cutter solution.

Warren is one of the best learning machines on this earth. Warren’s investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is.

I’m getting more experienced at aging. I’m like the man who jumped off the skyscraper and at the 5th floor on the way down says, ‘So far this is not a bad ride.’‍

You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. But there are also cases where you have to recognize that you have no wisdom to add — and that your best course is to trust some expert.

Most people are trained in one model — economics, for example — and try to solve all problems in one way. You know the saying: ‘To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.

The best armor of old age is a well-spent life preceding it.

In my whole life, I have known no wise people who didn’t read all the time — none, zero. You’d be amazed at how much Warren reads and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.

Life is always going to hurt some people in some ways and help others. There should be more willingness to take the blows of life as they fall. That’s what manhood is, taking life as it falls. Not whining all the time and trying to fix it by whining.

I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up. And boy does that help, particularly when you have a long run ahead of you.

The highest form that civilization can reach is a seamless web of deserved trust — not much procedure, just totally reliable people correctly trusting one another. In your own life, what you want is a seamless web of deserved trust. And if your proposed marriage contract had forty seven pages, I suggest you not enter.‍

I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well, every missed chance in life was an opportunity to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion. That is a very good idea.‍

Dean Kendall of the University of Michigan music school once told me a story: ‘When I was a little boy, I was put in charge of a little retail operation that included candy. My father saw me take a piece of candy and eat it. I said, “Don’t worry. I intend to replace it.” My father said, “That sort of thinking will ruin your mind. It will be much better for you if you take all you want and call yourself a thief every time you do it.”’

It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.

For more, I highly encourage you to order Tao of Charlie Munger and read the entire book yourself.

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