The Directed Life

Date read: 1/12/2023

• Avoid man-with-a-hammer tendency; develop a toolkit so that not every problem resembles a nail; this toolkit is a latticework of mental models

• Use checklists for employing the latticework of models

• Look for the mispriced gamble where you know you have the advantage

• Always compare the value you’re getting for the price that you’re paying

Chapter 1: Introduction

Kaufman compares Munger to being this generation’s Ben Franklin.

The Lollapalooza Definition (from Kaufman’s Introduction):

As personified by Charles Munger, the critical mass obtained via a combination of concentration, curiosity, perseverance, and self-criticism, applied through a prism of multidisciplinary mental models.

The values associated with Munger (from Introduction):

• lifelong learning

• intellectual curiosity

• sobriety

• avoidance of envy / resentment

• reliability

• learning from other’s mistakes

• perseverance

• objectivity

• willingness to test one’s own beliefs

Life decisions trump investment decisions.

Independence is wealth’s end, never the other way around.

Munger read a ton of biographies when he was young (page 6).

Munger on reading (page 6):

I have known no wise people … who didn’t read all the time—none, zero.

Physics-like problem solving has been one of Munger’s intellectual passions. The concepts and theories in physics are imperative for demonstrating sound theory / logical analysis (page 10).

Kaufman on the influence Munger’s grandfather had on him (page 12):

He never forgot the sound principles taught by his grandfather: to concentrate on the task immediately in front of him and to control spending.

Munger proclaiming himself as a biography nut, and on learning (page 23):

I am a biography nut myself. And I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among ‘the eminent dead,’ but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education.

It’s a harmful trend for the people who get paid the most to deliver very little real value into the market (page 24).

Praising Old Age

“Munger’s Reflections on Aging, Inspired by Cicero’s Discourse of Old Age” (page 27)

Honoring the past: giving “due credit to ancient models responsible for present felicity” (page 28)

For Munger and Cicero, learning and self-improvement are activities engaged in until death (page 32).

Cicero quote on greed (page 33):

Can anything be more senselessly absurd than that the nearer we are to our journey’s end, we should still lay in more provision for it?

Munger’s reflections on Cicero, death, and a life worth living (page 33):

And fear of death is silly and unacceptable for this Roman. He reasons that either (a) you are going to a perpetual, better afterlife, or (b) you won’t retain any pain if there is no such outcome. To Cicero it is unworthy that an old man would work to improve only what he would live to enjoy. For him the only life worth living is dedicated in substantial part to good outcomes one cannot possibly survive to see.

Cicero on living well (pages 35-36):

The best Armour of Old Age is a well spent life preceding it; a life employed in the Pursuit of useful Knowledge, in honorable Actions and the Practice of Virtue; in which he who labours to improve himself from his Youth, will in age reap the happiest fruits of them.

End of essay

Munger possesses an uncanny ability to focus on a single task (page 48).

Munger on being prepared for the odds to fall in your favor (page 52):

A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.

Chapter 2: The Munger Approach

Munger on niches in business (page 54):

I find it quite useful to think of a free market economy—or partly free market economy—as sort of the equivalent of an ecosystem. Just as animals flourish in niches, people who specialize in some narrow niche can do very well.

Multiple factors shape a system. So you need multiple models to understand the system. Munger’s latticework of mental models (page 55):

What you need is a latticework of mental models in your head. And, with that system, things gradually get to fit together in a way that enhances cognition.

Munger on reading history and Paul Johnson as recommended reading (page 58):

There are answers worth billions of dollars in a $30 history book.

Go at complicated things step-by-step (page 59).

Fundamental guiding principles (page 59):

• preparation

• patience

• discipline

• objectivity

Buffet and Munger use the analogy of Ted Williams’ 77-cell strike zone. Lay off pitches outside of your zone. Wait for a fat pitch, one you know you can drive, and swing hard (page 61).

Cultivate a “lone-wolf” mentality. Be able to go left when others are going right, trust your judgement and continue to develop it to recognize these opportunities to stray from the herd (page 62).

Munger’s two-track analysis (pages 63-64):

First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically forming conclusions in various ways … which often malfunction?

A company’s competitive advantage is its “moat,” i.e. whatever barrier it has in place to prevent replication. The best companies have the largest moats and are able to keep widening the moat (pages 66-67).

Develop the habit of committing more time to learning and thinking than to doing. The best ‘doing’ is going to be a result of a lot of learning and thought. You control how much you prepare, so prepare well (page 70).

Quote from Kaufman in his outline of Munger’s Investing Principles Checklist—golden nugget quote (page 73):

Mimicking the herd invites regression to the mean.

Another golden nugget from Kaufman in the checklist (page 75):

Opportunity meeting the prepared mind: that’s the game.

Munger on mispriced bets (page 75):

It is given to human beings who work hard at it—who look and sift the world for a mispriced bet—that they can occasionally find one.

Munger on the game (page 76):

You just gradually learn the game, partly by doing, partly by studying … the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.

Chapter 3: Mungerisms

Collected and edited by Whitney Tilson

Munger on the tortoise and the hare (page 87):

It is occasionally possible for a tortoise, content to assimilate proven insights of his best predecessors, to outrun hares that seek originality or don’t wish to be left out of some crowd folly that ignores the best work of the past. This happens as the tortoise stumbles on some particularly effective way to apply the best previous work, or simply avoid standard calamities.

Munger cites an ideal business model as owning “lots of monopolistic businesses with unregulated prices.” (page 94)

Outstanding Investor Digest has the transcripts from the Wesco Annual Meetings—use as a future reading resource (page 115).

Know the big ideas from the big disciplines and use them all routinely (page 133).

Munger’s advice to a young shareholder (page 138):

Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts … most people get what they deserve.

Reduce your material needs and wants—life will be much happier this way (page 139):

One of the great defenses if you’re worried about inflation is not to have a lot of silly needs in your life—you don’t need a lot of material goods.

Talk 1: Harvard School Commencement Speech

Munger follows his frequently advised principle of inversion and explains to the graduating class how to become miserable.

A key step to becoming miserable is to avoid learning (page 156):

The other aspect of avoiding vicarious wisdom is the rule for not learning from the best work done before yours. The prescription is to become as non-educated as you reasonable can.

Talk 2: USC Marshall School of Business

Worldly wisdom and developing premier decision-making abilities.

It’s necessary you learn and develop mental models that connect like a latticework and be able to mentally refer to that framework (page 166).

Great quote Kaufman includes in the margin from Anthony Trollope (page 167):

There is no royal road to learning: no short cut to the acquirement of any art.

The importance of thinking in probabilities (page 168):

The great useful model, after compound interest, is the elementary math of permutations and combinations … it was all worked out in the course of about one year in correspondence between Pascal and Fermat … the Fermat/Pascal system is dramatically consonant with the way the world works. And its fundamental truth. So you simply have to have that technique.

Munger lays out his two track analysis of coming at a problem first rationally and then analyzing psychological factors that could be at play and causing irrational outcomes, analyzing both sides of what Pascal observed man’s mind to be as “both the glory and the shame of the universe.” (page 174)

Niches and the ecosystem analogy (page 175):

Just as in an ecosystem, people who narrowly specialize can get terribly good at occupying some little niche. Just as animals flourish in niches, similarly, people who specialize in the business world—and get very good because they specialize—frequently find good economics that they wouldn’t get any other way.

Look for advantages of scale (page 176).

Train yourself out of Pavlonian association and cultivate emotionless reactions to things you might not necessarily enjoy hearing (page 182).

The importance of finding an edge (page 192):

If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge.

Thinking about the pari-mutual system (racetrack betting) like what it is: a market. Everybody bets and the odds change based on the bets. Prices change where it is hard to beat the house. But any market not perfectly efficient will have winners—those will be the ones with some sort of advantage that allows them to beat others and the house (pages 195-197).

Decision maker incentives determine behavior (page 200).

There will always be opportunities to profit from underpricing. Raising prices signals the quality of the good to consumers, as well as a chance for them to trade their money for a status-elevating item or service (page 210).

Munger’s advice on what young people should look for in a career (page 219):

• Don’t sell anything you wouldn’t buy

• Don’t work for anyone you don’t respect / admire

• Work only with whom you enjoy

The best methods for coping with life’s challenges (page 219):

• low expectations

• sense of humor

• love of family and friends

Talk 3: Stanford Law School

Advice for acquiring worldly wisdom.

Develop a latticework of mental models and then hang your experience, personal and vicarious from reading, onto it (page 222).

Be wary of ideology and how it can distort your cognitive ability (page 231).

Beware of lollapalooza effects, when a combination of forces from the models combine and operate in the same direction, that can have tremendous positive or negative consequences (page 236).

Models to checklists to lollapaloozas sequenced framework in Munger’s own words (page 236):

You have to get the main doctrines together and use them as a checklist. And, to repeat for emphasis, you have to pay special attention to combinatorial effects that create lollapalooza consequences.

Regulation, systems, and cheating (page 239):

So it’s much better to let some things go uncompensated—to let life be hard—than to create systems that are easy to cheat.

The passions and what drives Munger’s learning (page 275):

I’m passionate about wisdom. I’m passionate about accuracy and some kinds of curiosity … I believe in the discipline of mastering the best that other people have ever figured out.

It’s desirable to make human systems as cheat-proof as possible even if some misery is left unfixed (page 276).

Talk 4: Informal Talk

How to solves problems through mental models and why academia has failed in producing keen decision makers.

Munger works backwards and outlines the steps to creating a $2 trillion dollar company in 150 years, Coca-Cola.

Notions for solving complex problems:

Simplify problems by first asking and answering the big “no-brainer” questions associated with the problem (page 279).

Develop numerical fluency to be able to work through problems using math and logic (page 280).

Think in reverse and invert problems (page 280).

Employ elementary academic wisdom from the major disciplines—integrate these notions into a multidisciplinary lens (page 280).

Talk 5: Harvard Law School (Class of 1948 50th Reunion)

The need for a greater multidisciplinary approach in education and how to improve the current state of academia.

The two most frequent mental biases (page 304):

• Incentive-caused bias: what is good for me is good for my client or society

• Man-with-a-hammer tendency: having only one tool / lens for the world

The only way to “broadscale worldly wisdom” (pages 307-308):

• Immense multidisciplinary coverage

• Practice-based fluency of all necessary skills

• Synthesis at boundaries between disciplines

• Forward and reverse thinking; inversion

• Checklist routines

Reading and thinking through articles in the best business periodicals could serve as good practice for multidisciplinary analysis (page 312).

The “fundamental organizing ethos” that would help soft science imitate hard science a little more (pages 314-315):

“Rank and use disciplines in order of fundamentalness.”

Master and use the essential parts of the “fundamental four-discipline combination”—math, physics, chemistry, and engineering.

Always attribute the discipline where you’re getting ideas from and use the most fundamental material available whenever possible.

Test new principles by “using methods similar to those that created successful old principles.”

Summed up in Charlie’s words (page 315, 316):

Like pilot training, the ethos of hard science does not say “take what you wish” but “learn it all to fluency, like it or not.” And rational organization of multidisciplinary knowledge is forced by making mandatory (1) full attribution for cross-disciplinary takings and (2) mandatory preference for the most fundamental explanation. What I found, in my extended attempts to complete by informal means my stunted education, was that, plugging along with only ordinary will but with the fundamental organizing ethos as my guide, my ability to serve everything I loved was enhanced far beyond my deserts.

Kaufman’s summation of Charlie’s checklists appear on page 320: two-track analysis, investing / decision making, problem solving notions, and psychological tendencies.

Talk 6: Charity and Investing

Avoid over-optimism—don’t ever fool yourself (think of the Feynman quote).

The importance of work that provides real value (page 334):

This [antisocial effects of “high-cost investment modalities”] would be so because the activity would exacerbate the current, harmful trend in which ever more of the nation’s ethical young brainpower is attracted into lucrative money management and its attendant modern frictions, as distinguished from work providing much more value to others.

Talk 7: Philanthropy Roundtable

Munger references “wealth effects” several times in this talk—the idea that as spending increases stock prices increase, while the increase of stock prices increases spending (pages 341-342).

Confronting reality (page 348:

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

So many models are based on “rational man,” whereas not enough are based on “foolish man,” most present in psychology as well as the real world.

The greater the upside in a boom is also the greater the downside of future stock price decline (page 351).

There are “virtue effects” in economics; if what people are doing is unethical or not sufficiently value generating, there will inevitably be consequences. Munger has a great quote on this (page 352):

I suggest that when the financial scene starts reminding you of Sodom and Gomorrah, you should fear practical consequences even if you like to participate in what is going on.

The moral obligation we have to develop our “thinking tools” (page 352):

If you don’t have the right thinking tools, you, and the people you seek to help, are already suffering from your easily removable ignorance.

Talk 8: Great Financial Scandal

Munger tells a story about a fake company, Quant Tech, that reaches its demise after transition to poor leadership and shady accounting practices. He emphasizes the necessity of integrity when it comes to financial reports and how companies exercise stock options.

You can’t grow exponentially infinitely if you’re growing too quickly (page 366):

All man’s desired geometric progressions, if a high rate of growth is chosen, at last come to grief on a finite earth.

Quote from Plato that Kaufman includes in the margin (page 373):

Pleasure is the greatest incentive to evil.

Talk 9: UCSB Economics Department

Interest is a far more powerful tool for persuasion than reason (page 376).

Munger again recounts the fundamental organizing ethos of hard science: knowing all of the fundamentals from the big disciplines, make explanations as fundamental as possible, and fully attribute the discipline where you’re drawing fundamental ideas from (pages 378-379).

Opportunity cost and incentives are superpowers (page 381).

Munger recounts how awestruck Kant and Voltaire were by Adam Smith’s thinking and writing abilities (page 381).

Having a full toolkit and employing the tools checklist-style (pages 382-383).

The only antidote for being an absolute klutz due to the presence of man-with-a-hammer syndrome is to have a full kit of tools … if you’ve got a full list of tools and go through them in your mind, check-list style, you will find a lot of answers that you won’t find any other way.

Grab information with full attribution and full discipline and reduce ideas to be as simple as possible (page 385).

The factors that extreme success is likely to be caused by (pages 390-391):

• Extreme maximization or minimization of one or two variables.

• Lollapalooza effects: combination of success factors that drive success in a non-linear fashion.

• Good performance over many factors.

• Catching and riding a big wave.

Munger emphasizes using luxury goods in business: raising prices to signal quality / value of the good and a potential transaction of status to the consumer (page 393).

Fairness interventions (pages 410-411):

Tolerating a little unfairness to some to get a greater fairness for all is a model I recommend to all of you.

Complexity and paradox make problems more fun, not unsolvable. Remember Keynes: better roughly right than precisely wrong (page 413).

Talk 10: USC Law School

2007 Commencement Address emphasizing the duty of acquiring wisdom.

Filial piety: you have a duty to pass on the ideas and values that were given to you from your parents and the generations before you. (pages 421-422)

Deserving what comes your way (page 422):

You want to deliver to the world what you would buy if you were on the other end.

Learning to love learning (page 423):

The acquisition of wisdom is a moral duty.

But you need to use the right methods—the multidisciplinary approach (page 424):

Just as civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning.

In a devotion to lifelong learning you actually grow and mature the proper way (pages 427-428):

Cicero is famous for saying that a man who doesn’t know what happened before he’s born goes through life like a child. That is a very correct idea. Cicero is right to ridicule somebody so foolish as not to know history.

The disastrous modes of thought, to be avoided at all costs (page 431):

• envy

• resentment

• revenge

• self-pity

Avoid perverse associations: don’t work under somebody you wouldn’t like to be like (page 433).

Munger on the influence his grandfather had on him (page 438):

All these years after my grandfather is dead, I conceive myself as duty bound to carry the torch for my grandfather’s values. One such value was prudence as the servant of duty.

Talk 11: Psychology of Misjudgment

We are prone to misjudgment, manipulation, and error. Here Munger spells out the most common forms of bias / misjudgment and provides antidotes for them.

The tendencies (pages 448-449):

Reward and Punishment Supperresponse Tendency

We repeat behavior that works / provides a benefit.

Never a year passes I get some surprise that pushes a little further my appreciation of incentive super-power.

(page 450)

Incentive-caused bias: driven by incentives, man drifts into immoral behavior and rationalizes it (page 452).

The antidotes: fear advice when it could benefit the advisor, use basic elements of the trade in dealing with an advisor, and double-check / disbelieve much of what you’re told.

Agency costs are the results of incentive-caused biases (page 455). Think principal-agent problem

“Granny’s Rule”: complete unpleasant tasks before pleasant ones—carrots before dessert (page 456).

Liking/Loving Tendency

A man who is so constructed that he loves admirable persons and ideas with a special intensity has a huge advantage in life.

(page 458)

Disliking/Hating Tendency

Doubt-Avoidance Tendency

Inconsistency-Avoidance Tendency

The rare life that is wisely lived has in it many good habits maintained and many bad habits avoided or cured.

(page 460)

People hold on and never re-examine their own wrong fixed conclusions and attitudes (page 461).

Curiosity Tendency

Kantian Fairness Tendency

Envy/Jealousy Tendency

Reciprocation Tendency

The standard antidote to one’s overreactive hostility is to train oneself to defer reaction.

(page 466)

Influence-from-Mere-Association Tendency

Responsive behavior, creating a new habit, is directly triggered by rewards previously bestowed.

(page 469)

The effectiveness of luxury goods (page 470):

With luxury goods, the process works with a special boost because buyers who pay high prices often gain extra status from thus demonstrating both their good taste and their ability to pay.

Antidotes for associating too heavily with past success: carefully examine each past success specifically looking for non-causative factors and look for new variables in the next undertaking that were not there during your past success (page 470).

Simple, Pain-Avoiding Psychological Denial

Excessive Self-Regard Tendency

The best antidote to folly from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity.

(page 476)

The best form of pride is pride in trustworthiness (page 476).

Overoptimism Tendency

One standard antidote to foolish optimism is trained, habitual use of the simple probability math of Fermat and Pascal … The mental rules of thumb that evolution gives you to deal with risk are not adequate.

(page 477)

Deprival-Superreaction Tendency

Social-Proof Tendency

Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.

(page 483)

Contrast-Misreaction Tendency

When a man’s steps are consecutively taken toward disaster, with each step being very small, the brain’s Contrast-Misreaction tendency will often let the man go too far toward disaster to be able to avoid it. This happens because each step presents so small a contrast from his present position. Cognition, misled by tiny changes involving low contrast, will often miss a trend that is destiny.

(page 484)

Stress-Influence Tendency

Availability-Misweighing Tendency

Use procedures and checklists (page 486):

The great algorithm to remember in dealing with this tendency is simple: An idea or a fact is not worth more merely because it is easily available to you.

Use-It-or-Lose-It Tendency

Throughout his life, a wise man engages in practice of all his useful, rarely used skills, many of them outside his discipline, as a sort of duty to his better self.

(page 487)

Drug-Misinfluence Tendency

Senescence-Misinfluence Tendency

Authority-Misinfluence Tendency

Twaddle Tendency

Reason-Respecting Tendency

Learning is most easily assimilated and used when, life long, people consistently hang their experience, actual and vicarious, on a latticework of theory answering the question: Why?

Lollapalooza Tendency

Why does all of this matter? (page 494)

The psychological thought system described, when properly understood and used, enables the spread of wisdom and good conduct and facilitates the avoidance of disaster.