Charlie Munger – The Complete Investor - Book Summary

 Attain ataraxia or perfect imperturbability – Becoming unshakeably calm and

collected.
 If you cannot write down your idea – you have not thought it through.
 If you can learn to overcome behaviour that drives poor decisions, you can gain
a clear edge over investors.

THE BASICS OF THE GRAHAM VALUE INVESTING SYSTEM

1. The critical point of Graham’s system is that it is simple.

2. While creating a successful investing process, complexity is not an investors
friend.
3. We have a passion for keeping things simple.
4. If something is too hard, just move on to something else. What can be simpler
than that ?
5. Use 3 baskets, IN, OUT and TOO TOUGH…….unless you have a special insight,
just put it in the too touch basket.
6. If you cannot accept investing underperformance in the short term to achieve a
long term investment outperformance, you are not a candidate for graham value
investing.
7. Very often the shortcut to being smart, is to simply not be stupid.
8. Knowing what you don’t know is more useful that being brilliant.
9. The idea that everyone can have wonderful results from the market is inherently
crazy. Nobody expects everyone to succeed at Poker.
10. Successful Graham value investors spend most of their time reading and
thinking, waiting for significant folly to inevitably raise its head.
11. Paradoxically when ‘dumb’ money acknowledges its limitations, it ceases to be
dumb.
12. You don’t have to hire out your thinking if you keep things simple.

PRINCIPLES OF THE GRAHAM VALUE INVESTING SYSTEM

FIRST PRINCIPLE – Treat a share as a proportional ownership of a business.

1. If you do not understand the actual business of the company, you cannot
understand the value of assets related to that business.
2. Effective Graham investors are like great detectives.
3. You do not have to have a way to value all companies, which is fine, because
you do not really need to do so.
4. Be motivated when you’re buying and selling securities by reference to intrinsic
value instead of price momentum.
5. When stocks are a bargain, people are fearful; when stocks are expensive,
people are greedy.
6. Mimicking the herd invites regression to the mean.
7. If you are an investor, your focus is on what the asset is going to do, if you are a
speculator, you are focusing on what the price is going to do.
8. A mine is a hole in the ground, owned by a liar.
9. The best way to determine the value of a business is based on the price a private
investor would pay for the entire business.
10. An investment objective to beat inflation by 10% is a good one.
11. Munger doesn’t invest in gold because it is not an income producing asset. Gold
has speculative value and commercial value, but not calculable intrinsic value.

SECOND PRINCIPLE – Buy at a significant discount to intrinsic value.

1. The idea of margin of safety, will never become obsolete.

2. Margins of safety are achieved when stocks are purchased at prices that can
accommodate for human error, bad luck or extreme volatility.
3. In engineering, people have a big margin of safety. But in the the financial world,
people don’t give a damn about safety. They just let it balloon and balloon and
balloon.

THIRD PRINCIPLE – Make Mr. Market your slave

1. Mr.Markets bipolar nature is the biggest gift to Graham investors.Occasionally

he will present you with great bargains, at other times he will buy your assets at
a huge premium. Do not treat him as a wise man, instead use him as your
servant.
2. If you are the crowd, then you cannot, by definition, beat the crowd.
3. The idea of being objective and dispassionate, will never be obsolete.

WORLDLY WISDOM

1. You must know big ideas in the big disciplines, and use them routinely – all of
them and not just a few.
2. You can’t remember isolated facts and try to bang them back. If the facts don’t
hang together on a latticework of theory, you don’t have them in a usable form.
3. The nature of human psychology is that you’ll torture reality so that it fits your
models.
4. There are factors that are terribly important, but there is no precise numbering
you can put to these factors. People overweigh the stuff that can be numbered.
This is a mistake that has to be avoided.
5. People calculate too much and think too little.
6. People who cannot be alone with their own thoughts are terrible candidates to
become successful value investors.
7. Man’s imperfect, limited brain easily drifts into working with what is easily
available to it.
8. People who are not the smartest, not even the most diligent can continuously
rise in life if they are learning machines.
9. Own businesses, that given given your experience and education are easy to
understand.
10. If you cannot explain why you failed after you made a mistake, the business was
too complex for you.

THE PSYCHOLOGY OF HUMAN MISJUDGEMENT

1. (Possibility of Gain * Amount of Gain) – (Possibility of Loss* Amount of

Loss). This is an imperfect equation, but one with fantastic insights.
2. The rule of nature is that you get what you reward for. If you want ants to come,
put some sugar on the floor.
3. Its very hard to convince a man to believe non-X, when his way of making a living
requires him to believe X.
4. Loaning money to friends and relatives is fraught with danger. It is usually a
better idea to give away money and not expect it back.
5. A year in which you don’t change your mind on some big idea that is
important to you is a wasted year.
6. Avoid evil, particularly if they are attractive and members of the opposite sex.
7. Life is too short to do business with people you don’t like.
8. Its counterproductive for a prey that is threatened by predator to take a long time
in deciding what to do.
9. I was born innately curious. It that does’nt work for you, figure out your own damn
system.
10. Tolerating a little unfairness to some to get a greater fairness to all is a model
that i recommend.
11. Envy is really stupid because its the one you could never possibly have any fun
at. There is a lot of pain and no fun. Why would you want to get on to that trolley
?
12. Someone will always be getting richer faster than you. This is not a
tragedy.
13. It is not greed that drives the world. It is envy.
14. One should recognise reality, even when one does not like it.
15. Failure to handle psychological denial is a common way for people to go broke.
16. What a man wishes, he will believe.
17. We all feel losses 2.5x more than we feel gains.
18. Good ideas tend to cause more mischief than bad ideas. It is so easy for
all of us to really push up a good idea to wretched excess.
19. All skills attenuate with disuse.
20. Three things can ruin people : Drugs, Liquor and Leverage.
21. Addiction can happen to any of us, through a subtle process where the
bonds of degradation are too light to be felt until they are too strong to be
broken.
22. Why play dice with something that can ruin your life forever ?
23. Only seek bets with a huge upside and a limited downside.(positively
optionality). Just ignore the ones with huge downsides and limited
upsides.(negative optionality).
24. I try to get rid of people who always confidently answer questions about which
they don’t have any real knowledge.

THE RIGHT STUFF

1. We don’t feel the compassion to swing. We’re perfectly willing to wait for
something decent to come along. In certain periods we have a hell of a time
finding places to invest our money.
2. Success is about being very patient, but aggressive when it is time.
3. If you don’t get basic probability theory into your skill set, you will go
through life as a one legged man in an ass-kicking contest.
4. People calculate too much and think to little.
5. Reading without thinking and reflecting is an absolute waste of time.
6. We fret a lot earlier than other people. We left a lot of money on the table through
early freeing. Its just the way we are – you just have to live with it.
7. Dont fo fooling things just to be active. Discipline yourself in avoiding any damn
thing just because you cannot stand inactivity.
8. Very high IQ people can be completely useless, and many of them are.
9. Passion will more often than not beat intelligence.
10. If the rascals really knew how well honour worked, they would come to it.
11. I have a black belt in chutzpah. I was born with it.
12. The ethos of not fooling yourself is one of the best you could possibly have. It is
so powerful because it is so rare.
13. It is really hard to think on a long term basis when you just get started.
Getting to the first million is a bitch.
14. Understanding the power of compounding is not natural state for the human race,
however, it is a critical task.
15. If you have missed the link between passion and success, you have not been
paying attention.
16. Passions tend to grow in a non-linear way after a really slow start.
17. In my whole life, i have known no wise people who didn’t read all time –
none, zero.
18. Even Einstein didn’t work in isolation. But he never went o large conferences.
Any human being needs conversational colleagues.
19. Having a certain kind of temperament is more important than brains. You need
to keep raw irrational emotion under control.
20. Unsuccessful investors are dominated by emotion. Rather than responding holly
and rationally to market fluctuations, they respond emotionally with greed and
fear.
21. Using stock price volatility to measure risk is nuts. The only risks are
1. the risk of permanent loss of capital &
2. the risk of inadequate return

VARIABLES IN THE GRAHAM VALUE INVESTING SYSTEM

1. Intrinsic value is terribly important, but very fuzzy.

2. We have to deal with things that we are capable of understanding.
3. You have limited amount of time and talent and you have to allocate it smartly.
4. When Charlie thinks about things he starts by inverting. To understand how to
be happy, Charlie will study how to make life miserable. To understand how to
make businesses big and strong, he first studies how businesses decline and
die. While most people study how to succeed in the market, he is more interested
in why most have failed in the market.
5. We look for a horse with a 50:50 win which pays 3:1. You have to know
when a gamble is mispriced.
6. My predictions have been a little better than other peoples because i have trie d
to make fewer of them.
7. Business is easy. If you have a low downside and a big upside, you do it. If its
the opposite, you run away. The only time it can get confusing is if there is a big
downside and a big upside.
8. Investment is about quality as well as price. Just try to maximise the quality you
get for price.
9. We are partial to putting large amounts of money where we don’t have to make
another decision.
10. The difference between good businesses and bad businesses is that good
businesses throw up one easy decision after another. The bad businesses throw
up painful decisions time after time.

THE RIGHT STUFF IN A BUSINESS

1. Proper allocation of capital is the investors no 1 job.

2. I’d rather throw a viper down my shirt than hire a compensation consultant.
3. The only duty of a corporate executive is to widen the moat.
4. Hoping the negative impact of some dishonest people can be managed by mixing
them with honest people is a triumph of hope over experience.
5. We don’t train executives, we find them. If a mountain stands up as high as
Everest, you don’t have to be a genius to figure out that its a high mountain.
6. Just as animals flourish in niches, people who specialise in some narrow
niches can do very well.