In memory of Charlie Munger

The first rule of fishing is to fish where there are fish. The second rule of fishing is to remember the first rule.
To commemorate the passing of Charlie Munger, this wise old man, we have compiled some of his core thoughts. These thoughts, to some extent, explain what "wisdom" truly means.
First, my success stemmed from mastering and repeatedly applying several thinking methods during my youth.
Human society is complex and multifaceted. Behind every great success or failure lies a synergistic effect, and Warren's success is no exception.
The first factor: intellect. Warren is a very intelligent man, not so intelligent as to be able to bluff in a simultaneous chess game, but he is certainly naturally intelligent. Warren is a smart man, but his achievements surpass his intelligence.
The second factor: Warren has a strong interest in investing. As Sir William Osler said, "The first step to success in any field is to fall in love with it." Without a strong interest, success is impossible.
The third factor: Warren got started early. He developed a strong interest in investing around the age of 10. Success takes time, and starting early certainly has its advantages.
The fourth factor, and a very important one, is that Warren is a highly efficient learning machine; he learns until he dies.
The fifth factor is trust. When people gain the trust of others, they naturally feel a sense of pride.
Berkshire Hathaway has an open secret: we prefer companies that generate large amounts of cash in profits at the end of each year.
When valuing a company, failing to distinguish the nature of profits, whether they are cash profits or idle machines, and simply taking the profit figures and calculating directly will inevitably result in an inaccurate valuation.
Profits that are like machines piled up on empty ground, or uncollectible accounts receivable, or companies where cash is never seen, are worthless no matter how much profit they generate. Only companies with a steady stream of cash profits are truly valuable.
Psychology has a concept called the reinforcement effect. No matter what you do, if you are constantly reinforced, everyone can do better. If people are rewarded every time they do well, they will do better and better, and Warren Buffett is no exception.
I find making a list extremely useful when facing difficult problems. Listing all the issues on a list makes them clear at a glance, allowing for more comprehensive consideration and preventing any omissions.
When I answer questions, I don't just answer whatever you ask. I always choose to answer what I want to answer. This is my way of thinking. I think about what I don't want and how to avoid that outcome, and this way of thinking has benefited me a lot.
If I were to manage a business school, I would emulate the practices of Harvard Business School. In the past, Harvard Business School always started by teaching students American business history. I would present the history of large companies like General Motors in the form of value line charts, allowing students to familiarize themselves with company history and build a solid foundation before moving on to other topics.
Why did General Motors rise and fall? Why were railroad companies initially successful? Why did they fail later? Why did railroad companies cause investors huge losses in the past, but are now a better investment than before? Understanding these questions can teach you a lot. These questions are not easily explained; they are much more difficult than simply calculating beta coefficients.
I've done many foolish things, and I've always struggled with my own prejudices. Eliminating erroneous ideas is a good thing, and I've made it a personal pursuit. In life, many people cling to outdated ideas; their minds are full of old thoughts, and new ideas simply can't get in. There's a German proverb that says it well: "We always grow old too quickly and become wise too late." Everyone has this problem.
How can we avoid being part of the mad majority and instead stand with the sane minority? We must always remember Kipling's advice—stay calm when everyone around you is losing their minds. This is a rare and valuable quality for both investors and company executives.
Fully recognizing the limitations of objective conditions and one's own abilities, and operating cautiously within those limitations, is the key to making money. This key is less about "humility" and more about "restrained greed."
Warren and I are well aware of our limitations, and we know there are many things we can't do, so we cautiously stay within our "circle of competence." We both believe that our "circle of competence" is a very small circle.
When I was young, a friend said, "Munger only studies what's in his own business; he knows nothing about anything unrelated to his business." We draw a clear line between what we know and what we don't know, and we only operate within the circle of what we know.
Exceptional people are rare. Having the opportunity to follow them and work with them may be worth the premium, and you may reap rich rewards in the future.
As I've mentioned in several speeches, to think correctly, one must develop a multi-model mindset and master all the major models. No important model can be omitted. The most important models are few in number, but mastering them all will allow you to thoroughly analyze 98% of the world's issues.
Faced with difficulties, many people choose to escape. Our choice to send troops demonstrates a positive attitude—a willingness to endure immediate suffering in exchange for long-term peace. Many people always choose to run away, unwilling to bear short-term pain. Seeking hardship and actively enduring present difficulties is the correct approach to life. The same principle applies to investing: exchanging short-term pain for long-term gains.
People should constantly improve themselves. We should focus on learning the main knowledge of various disciplines, rather than getting bogged down in trivial details. I particularly emphasize absorbing the main knowledge of each discipline, so as not to miss the forest for the trees. Integrating the main knowledge of various disciplines can unleash tremendous power.
I have spent my entire life conversing with the ancients. The wisdom of the sages and philosophers is beyond the reach of many contemporary people. Meeting them is simple; there's no need for long journeys. Just open a book, and they will come to you. I suggest everyone make friends with the sages and philosophers of the past. I have benefited greatly from my interactions with them. I haven't learned much from many of you here, but Adam Smith was different; he taught me a great deal.
Regarding difficulties, I have another perspective. Life presents one challenge after another, and each difficulty is a test for us, an opportunity for us to prove ourselves. I suggest everyone face difficulties with this attitude. This attitude will be especially useful when you get older.
There are no shortcuts to learning model-based thinking. On the one hand, we must store a large number of models in our minds; on the other hand, we must be able to use each model skillfully. There are no shortcuts to learning this way of thinking. Perhaps there are, but I don't know them. My approach is simply "persistence."
Thomas Carlyle famously said, "It is better to be down-to-earth and do the present than to worry about the uncertain future." This is very true. Most of the time, we should do our best in the present, and leave the rest to fate.
I am not Jewish, but I greatly admire Jewish humor. Jews make up only 2% of the world's population, yet they create 60% of the world's humor. It's truly admirable that Jews, having endured so much hardship, can still face life with a smile. I greatly admire Jews. I suggest you, like me, learn from their positive attitude towards hardship.
How to become a wise and happy person? Persist in doing meaningful things; persist in being a valuable person; persist in pursuing reason, integrity, and honesty. One day, you will surely succeed. Actions speak louder than words. If you succeed, others will be more willing to learn from you. If you persist on the right path, you are more likely to succeed. You are already on the right path; all you need to do is persevere.
If you think through the problem thoroughly, you've solved half of it.
I have a method for categorizing problems, and I'll teach it to you. Many particularly difficult problems have a special category I've created called "Too Difficult." For me, there are many things that are too difficult; I don't even hesitate to throw them into the "Too Difficult" category. Simple things are few, but I only do simple things. This is my method for categorizing problems.
Looking back, there are always things we could have done better. However, everyone inevitably misses opportunities. I firmly believe that we shouldn't dwell too much on things we can't change. Complaining and blaming others are major pitfalls in life.
If you learn my methods, you too can succeed. I succeeded because I mastered several thinking methods when I was young, and I have used them repeatedly throughout my life.
First, I choose the main path, because fewer people walk it. Walking the main path is the path to true wisdom.
I also strive for rationality. Influenced by both my genetics and my family environment, I developed a habit of rationality from a young age, a valuable habit that has benefited me throughout my life. This is a tremendous advantage. In politics and business, foolish actions are countless.
Of all the people I've met, those who ultimately succeed are those who remain patient and rational. They live within their means and honestly. They are cautious and do things right. When opportunity knocks, they seize it. You, the new generation of young people, can also succeed by living like I've described.
No matter what happens, we should maintain a positive attitude. No matter how great the difficulties we encounter, we should find ways to overcome them.
In the long run, those who can delay gratification will live better lives. Some people can't control themselves from a young age, and as adults, they spend money recklessly, buying impractical things like Rolex and Patek Philippe watches. An adult should be thrifty, should delay gratification, and should not squander money.
The ability to delay gratification is largely innate, a conclusion confirmed by psychological research. If you have some talent for delayed gratification, and you can cultivate this talent, you are already on the road to success and happiness.
People who want to get what they want immediately will not only achieve nothing, but may also fall into the abyss.
Lee Kuan Yew had a favorite saying: "Find the right way and do it the right way." This principle is very simple, and everyone understands it, but few people can put it into practice.
My standard is this: If I have a viewpoint and others hold a contrary viewpoint, I have no right to speak on the issue unless I can refute my viewpoint more forcefully than others. Continuously practicing this way of thinking—constantly falsifying and questioning yourself—can reduce your own ignorance.
To be happy, the first rule is to lower your expectations. This is something you can control. Always having unrealistic expectations will inevitably lead to a life of suffering. I am very good at lowering my expectations, and that's why I live a good life.
When facing adversity, you must have the tenacity to grit your teeth and work hard. Complaining and blaming others will only make things more bitter and difficult.
People all hope to one day achieve high consumption and flaunt their wealth in front of others. Human desires are the driving force behind the development of modern capitalist society. I advise young people to avoid high consumption; that's not where you belong. Stay away from high consumption and flaunting wealth. The satisfaction of desires cannot bring happiness. However, people's pursuit of desires does indeed drive the development and progress of civilization.
When people ask me how to be happy, I always answer that you should lower your expectations, which means making your expectations more realistic.
II. How to become a qualified manager?
I once led a company that dealt in stamp duty, and watched its sales plummet from $120 million to $2 million. That's a 99% drop. I was powerless to stop its decline. I tried everything to halt the downward spiral, but all my efforts were in vain.
This experience taught me a profound lesson. There are two main factors that determine the outcome: the situation and the people involved. If the situation is too overwhelming, no matter how capable you are, it will be to no avail.
There was once a seasoned veteran in the investment world who, whenever young people suggested he take risks, would always say, "Those who drown in rivers are usually the best swimmers." If you encounter a whirlpool with a strong current, no matter how skilled you are at swimming, you can't escape. This shows that if you can win, fight; if you can't, run.
Warren Buffett highly values ​​excellent management teams, but in his investment process, he has never paid more than the asset value simply because the management team is excellent. He always buys assets at a price slightly below their intrinsic value. Excellent management is part of the asset; Warren does not pay more than the value simply because the management team is excellent.
In Warren's view, an excellent manager is like this: you throw him off a train, drop him into a remote town, don't give him any money, and he honestly and diligently runs his business in that town, and before long, he becomes rich again.
In his letter to Berkshire Hathaway shareholders, Buffett quoted David Ogilvy, saying, "Always hire people who are bigger than us, and we will all become giants." Buffett strongly agrees with this idea, and so do I.
In collaborating with others, Warren and I always hold ourselves to high standards. It is because of the hard work of excellent people who have worked alongside us that we have achieved what we have today.
There's only one way to find an excellent partner: you must be worthy of them. Similarly, to find excellent people to work with, you yourself must first be an excellent person.
Delegation is our style. I'm the type of person who either completely delegates and lets go, or I do everything myself. I don't know how to find a middle ground in this regard. Warren is a little better than me at both delegating and supervising, but not by much.
Throughout business history, many companies have enjoyed great success and made a lot of money, but when they are eliminated by new technological waves, their assets are quickly depleted, and they eventually perish.
Berkshire Hathaway's success is a miracle, but the vast majority of companies that fail will perish like Kodak. Bill Gates has specifically studied this issue, and his conclusion is that when a company's core business declines, the vast majority of companies will go bankrupt. Even a giant like General Motors cannot escape this rule.
Recently, I met the CEO of Johnson & Johnson. He made a very good impression on me. He told me that they regularly reflect on and summarize their acquisition strategy.
This system is excellent. If everyone could cultivate the habit of self-reflection, it could drive the progress of civilization throughout society. Many people always avoid facing their mistakes. Johnson & Johnson does a good job; they are not afraid to accept criticism or lose face. Learning from failures and mistakes is a virtue.
Any highly leveraged financial institution, no matter how diligent its managers are, may encounter unexpected losses.
The key is the ability to resolve problems immediately after an unexpected event. When problems are exposed, many companies' first thought is how to conceal them or use accounting tricks to cover them up. We believe the solution should be straightforward and immediate.
The methods of physics require us to always pursue the essence of things. In the real world, learning to see through the essence allows us to live more at ease. Exploring the essence is not something that can be accomplished overnight; it requires the spirit of sitting on a cold bench for ten years. I admire this spirit—a spirit of perseverance and never giving up until the goal is achieved.
Based on Berkshire Hathaway's actual situation, our current business strategy is quite reasonable. We tailor development strategies to the specific needs of each subsidiary, choosing the most suitable approach for it. Our management style is characterized by significant delegation. We respect the actual circumstances of each subsidiary, allowing them to operate autonomously, rather than sitting at headquarters issuing orders. For many years, this organizational structure has given Berkshire Hathaway a tremendous competitive advantage.
Whether investing in stocks or managing a business, the ability to judge people is crucial. How can one accurately assess people and avoid making mistakes? This isn't a simple question. It requires experience and understanding. Just like walking into a Ford dealership and analyzing the company's business success and the reasons behind it, the same principle applies to judging people: observe and reflect.
I prefer working with outstanding people to associating with mediocre ones. When I was a lawyer, there was a saying I always kept in mind: "In the legal profession, if you handle your cases well, you won't have to worry about business." The software business of our daily journal follows the same philosophy. As long as we work diligently and steadily, we will have no shortage of prospects. We will encounter adversity and failures, but we will not stop moving forward.
If we don't understand the specific software business, how can we lead the Daily Journal Company? We mainly rely on knowing people and assigning them appropriate roles.
I've always dealt with people who are good at delaying gratification. These people delay gratification again and again, putting it off until the very end of their lives, never enjoying it. We are like that. If you delay gratification like us, you will definitely become rich, and you will die rich too.
In running a company, if you understand how to delay gratification, you can run the company better and better. In life, if you understand how to delay gratification, you can die in glory.
Whatever you do, always be passionate, learn with an insatiable thirst, and relentlessly hone your skills. Given time, you will naturally reach a level that most people cannot. Some people can find a career they love and dedicate all their energy to it. Warren's achievements are breathtaking. If Warren hadn't been a quick learner, Berkshire Hathaway might have remained a small company forever.
Modern China boasts a vast high-speed rail network, and its achievements are remarkable worldwide. The United States developed by borrowing from Europe, while China's rise is based on self-reliance. They save half of their income and are particularly adept at delaying gratification. China's achievements are admirable, and its approach is highly effective. I have a very positive impression of China.
In my life, I have come to realize a truth: the closest friendships are formed when people have shared hardships and struggles, and worked together to build a better future. Such friendships cannot be built in a stable and prosperous life.
In adversity, we struggle and feel overwhelmed, but adversity is also the best way to strengthen our will, forge friendships, and nurture success. Only by fighting together in adversity can people build a bond of shared joys and sorrows, a bond that is invaluable.
Why did General Electric's performance plummet? On the one hand, there are external objective reasons; in the fierce competition of the business world, it is normal for a company to rise and fall. On the other hand, I believe that General Electric's senior management rotation system is unreasonable.
General Electric frequently rotates its senior executives, moving them between different departments. Is this an attempt to let them accumulate merits like military officers, eventually rising to the rank of general? Wouldn't it be better to let executives manage a single business unit for a long time, allowing them to deeply cultivate their expertise, like Berkshire Hathaway does? General Electric's decline may be partly related to its flawed management style.
The most common mistake in management is to hesitate to make a decision when you realize someone needs to be replaced, dragging it out for a long time before finally replacing the unsuitable person. Even people with many years of management experience are prone to making this mistake.
The larger the company, the harder it is to establish the right culture. Just look at giants like General Motors and AT&T; their cultures are generally lackluster. Large companies are particularly prone to bureaucracy, a chronic and difficult-to-cure problem.
Berkshire Hathaway remains highly vigilant against bureaucracy. We keep our headquarters largely empty, denying bureaucracy any opportunity to take hold. The absence of bureaucracy, coupled with clear-headed management at the top, gives us a significant advantage.
The more successful a company or government department is, the more easily it becomes blinded by success and corrupted by bureaucratic practices. As bureaucracy flourishes, a group of vested interests emerges, enjoying various privileges—good food, good drink, and good use. Outsiders hate bureaucracy, but those within it vehemently defend it. The success of modern civilization has spawned bureaucracy, and bureaucracy breeds folly and failure—this is the tragedy of modern civilization. Isn't that so? Bureaucracy is a chronic disease of modern civilization.
Some things are not something everyone can learn. Some people are just born better than you, and no matter how hard you try, you can't compare to them. Faced with this fact, my attitude is "it doesn't matter."
We succeed not because we are good at solving difficult problems, but because we are good at avoiding them. We simply choose to do the easy things.
Our Daily Magazine company also has its own principles. We don't sign contracts that allow us to slack off, lest we become corrupt.
If someone is a habitual drunkard, we'd definitely stay away from them. People can often judge whether a person is worth associating with based on one or two characteristics. We are quite good at identifying other people's traits. Over the decades, being good at judging and observing people has been of great help to us.
Third, there are only two or three good opportunities.
From an investment perspective, we should focus on groundbreaking technological advancements. First, we need to identify technological changes, and then we need to see if the industry possesses strong barriers to entry.
We should remain calm. When everyone sees an opportunity as promising, everyone knows it's real, reasonable, and has an exciting future—an opportunity that simply cannot be missed—people will inevitably flock to it, leading to a severe stampede. Opportunities that everyone sees as promising are most prone to stampedes, resulting in the most devastating losses.
Warren often talks about the difference between good and bad businesses. He says that in a good business, every decision is simple and requires no thought; in a bad business, every decision is difficult, and there's always a dilemma and a struggle. Personally, I believe that even when analyzing the rationality of fixed asset investments, companies should ideally make investments that require no further thought.
We love good business; good business throws us balls that are soft and yielding, and we hit them every time.
Through long-term investment practice, we have summarized some standards. The ideal company generates more cash than its net profit each year, providing owners with a large amount of freely disposable cash. Such companies are extremely rare; they are simple to describe but seldom seen in reality.
As long as I can withstand volatility, holding three stocks simultaneously is sufficient. I arrived at this conclusion through rough calculations and logical reasoning. As a poker player, I know that when the probability of winning is very high, you should place a large bet.
I am well aware that concentrated shareholding leads to greater volatility. I know I have a strong mental fortitude. I learned from my parents to persevere in the face of adversity. My personality is well-suited to this method of concentrated shareholding.
We are all value investors, but our scale is larger than yours. The investment environment has deteriorated; it's difficult for you, but it's even more difficult for us. Fortunately, we have already upgraded our thinking: some companies, even if we buy them at a very high price, are still far below their intrinsic value.
Investing in this way requires accurately judging a company's prospects. You must not only be able to see that a company's business is good now, but also that it will remain a good business for a long time to come. As long as you can truly select the five best performers from the "Nifty Fifty," you can still achieve excellent investment results. The key to this investment approach is to strike the right balance.
Three things we "should not do" when investing:
We are used to buying and holding for the long term, so this model may not be suitable for investing in companies that produce ordinary goods.
The telecommunications and utilities industries are not areas where we excel.
I never buy stocks at a price higher than their intrinsic value.
Our method is very basic. Investing like us only requires finding mispriced opportunities in the stock market. You should leverage your strengths, filter through your areas of expertise, and identify these mispriced opportunities. What we're talking about is very fundamental; mastering these basics is sufficient.
Wise people are good at comparing opportunity costs. Many problems become clear when considering opportunity costs. As I said at the Berkshire Hathaway shareholders' meeting, when choosing a life partner, you should select the best among those you can meet who are willing to walk alongside you. Some people are willing to walk alongside you, but you can't reach them, so they are not considered.
If it's clearly a good opportunity, what's there to discuss? Just do it! Strike while the iron is hot; there's no need to waste words. Investing is about finding these unambiguous, perfect opportunities. I wish we had more of these kinds of opportunities.
Fundamentally, it's essential to understand a company's business, including the threats it faces, the opportunities it possesses, and its competitive position. Simply looking at past performance, return on capital, and sales figures makes it difficult to accurately predict a company's future. Only with a deep understanding of the business can one predict its prospects with relative accuracy. In investing, truly understanding the business is crucial.
Warren often tells business school students that he has a method to help them improve their investment returns. Take a card with only 20 holes punched in it. Each hole represents an investment. Make an investment, punch one hole. Once all 20 holes are punched, you've used up all your investment opportunities for your lifetime. Warren says that by following his method, investors can achieve higher returns over their lifetime.
Warren was serious when he said that, and I'm repeating it here with the same seriousness. For a shrewd and disciplined investor, making only 20 investments in a lifetime will undoubtedly lead to a superior return. Because the number of investments in a lifetime is limited, each investment will be approached with utmost care, and the investor will be focused on identifying and capitalizing on significant opportunities.
A common sense principle in life is that when making decisions, both individuals and companies consider opportunity cost. A broader investment scope means more investment opportunities. While a broad investment scope is good, it can also lead to investing outside one's circle of competence. Our investment scope is broad, but we rarely stray from our circle of competence. Of the investment opportunities we review, 90% to 95% are deemed outside our circle of competence; we don't understand them and simply ignore them.
Graham proposed the principle of margin of safety, a concept that will never be outdated. Graham also taught us that the market is our servant, not our teacher, a concept that will also never be outdated. These two concepts proposed by Graham are the foundation of investing and will never be obsolete. From Graham's thought, we can also learn to remain calm and objective, unaffected by emotions, which will also never be outdated.
Most investors are too slow to act. In investing, one must be vigilant and wait for opportunities to arise; the other is to act decisively when opportunities do appear. Be prepared at all times—it's that simple.
Only by adopting a multi-model approach can we better understand reality. This is especially true for investing, where investors have a very broad range of interests, making it no easy task. Without the ability to integrate these elements, it's impossible to correctly understand reality.
Investing requires a certain level of resilience. Investing is a long-term endeavor. Since you're prepared for a long-term investment, when faced with a 50% drop, you must stand firm and not panic. I'm telling you from my own experience: cultivate yourself so that when faced with a 50% drop, you remain calm and composed, like a mountain collapsing before you.
The secret to investing lies in recognizing a few truly significant opportunities. When your big opportunity arises, you must understand it, while others cannot. As I said, seizing these few major opportunities is enough.
The widely circulated Kelly Criterion tells us how much to bet on each trade when we have a winning advantage. The higher your odds of winning, the greater the probability of the trade succeeding, and the larger your bet should be. My investment method is correct and supported by mathematical principles.
Sometimes, an opportunity is so good that it's practically a given, and it's perfectly reasonable to only seize that one chance. Good opportunities only come in two or three times.
Why is Li Lu so successful? On one hand, he can be considered the Chinese version of Warren Buffett; on the other hand, he's fishing in China. The American market has been exploited countless times, with fierce competition and overcrowding. The Chinese market is different; there, you can still exploit others' foolishness and laziness to uncover very worthwhile investment opportunities.
The first rule of fishing is: fish where there are fish. The second rule of fishing is: remember the first rule. In an extremely competitive environment, no matter how hard you try, it's useless.
There are many successful investment styles. Some people's style is to buy and sell quickly, and they do it very successfully. Buying and selling quickly is not my style. My style is long-term holding. I don't study how to exit.
The speed at which moats disappear is indeed rapid. Old-fashioned, traditional moats vanish in the blink of an eye. Perhaps this is an inevitable result of economic development; in the modern economic system, old moats are inevitably phased out.
Ultimately, there is only one type of investing: value investing. Why do I say this? Because every investment we make, every time we put money into something, is for the purpose of gaining more value in the future.
In investing, we can't multitask, just like you can't run marathons in 12 different places simultaneously. Therefore, you need your own methods to find areas worth studying in depth—that's your hunting ground. Regardless of which area you choose to cultivate, you're pursuing value.
In my view, value investing will never be outdated. As I understand it, regardless of what stocks you buy, value investing means paying a lower price to acquire higher value.
Some people think that value investing is about finding companies with lots of cash on hand but poor business performance. I think that's not the whole story of value investing. In my opinion, all correct investments are value investing. The difference is that some people look for value in good companies, while others look for value in bad companies. However, true value investors buy high value at low prices.
Some achievements are unattainable for ordinary people. Some people hire a large number of people to manage their investments and let many people make decisions for them. I think it's better to concentrate decision-making power in one person, choosing the right person, just like I chose Li Lu's fund. It's not easy for ordinary people to become investment masters.
Many rational investors have one thing in common: they choose to invest in things they feel comfortable with. Warren is no exception.
Investment styles vary from person to person; no single investment style suits everyone. Some people have the talent to understand things that are difficult to value and are capable of making highly complex investments. Others don't have that ability, so they shouldn't try to be clever and should choose investments they can understand. It's crucial to be clear about your own capabilities. If you entrust your money to someone else, you need to be aware of your fund manager's abilities. How you invest largely depends on your own capabilities.
In memory of Charlie Munger

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In memory of Charlie Munger

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