Charlie Munger

The Geometry of Wealth – Brian Portnoy

The Geometry of Wealth – by Brian Portnoy
Date read: 7/4/18. Recommendation: 9/10.

A look into the relationship between money and meaning. Portnoy suggests that wealth and investing are about funding contentment and underwriting a meaningful life, as defined by you. Not about getting rich, having "more," and losing yourself on the hedonic treadmill. He explains that simplification is the path towards effectively managing expectations in money and life–and the trajectory of a happy life is shaped by expectations. The Geometry of Wealth is as practical as it is philosophical. À la Charlie Munger, Portnoy emphasizes individual behavior, mainly self-control and self-awareness, as the most important factor in investment success. He suggests we focus on being "less wrong" over being "more right," in the sense that asset allocation is far more important than security selection and market timing. But he also takes a deeper look at experienced happiness, reflective happiness, expectations, and human nature, which adds an entire extra dimension to this fascinating book.

See my notes below or Amazon for details and reviews.

 

My Notes:

"Do not hurry; do not rest." -Johann Wolfgang von Goethe

Examines the relationship between money and meaning, and how wealth figures into a joyful life.

Difference between rich and wealthy
-Rich is having "more" - hedonic treadmill on which satisfaction is fleeting
-Wealth is funded contentment, ability to underwrite a meaningful life, as defined by you
-Wealth is only achievable when purpose and practice are calibrated

Simplification is the smart path toward effectively managing expectations. In general terms, met expectations lead to temporary happiness and unmet ones lead to temporary sadness.

A "good" investment is one that meets expectations. And when expectations of the future don't match reality, we end up with dismal outcomes–not only financially, but emotionally. 

Dual Process Theory: "System 1" versus "System 2" (as popularized by Daniel Kahneman)
System 1: Fast brain loves consistency, biased to confirm beliefs and see patterns even when they don't exist. Avoid ambiguity and doubt.
System 2: Specializes in effortful mental activities, slow brain requires significantly more energy (glucose and other chemicals)

Three factors which determine lifelong happiness:
-Genetic disposition ~ 40%. This is your set point, return to this level (features and attitudes you're born with).

-Circumstance ~ 10%. Only a slight impact (and these are the attributes many of us define ourselves by). Where you live, what type of house you have, physical appearance, family dynamic, job, etc.
How can these have such a small impact? The brain is wired with an ability to adapt to whatever situation we find ourselves in, and it does it so much more quickly than we anticipate. It's a remarkable defense mechanism, for it allows us to transcend most setbacks in life. 

-Intention ~ 40%. Conscious decision-making and deliberate actions have significant impact on our quality of life experiences. Empowering, while you can't get around biological set point, still have capacity to make a big difference through personal drive and self-improvement.

"[Those who far better in life] have better coping strategies in the face of adversity–they confront problems rather than avoid them, plan better for the future, focus on what they can control and change, and persist when they encounter obstacles instead of giving up." -Timothy Wilson

Prepared mind = better life outcomes

When it comes to money, simplicity means having a limited number of clearly articulated concepts that both make sense of a noisy world and drive sharp, reasonable decisions.

Experienced Happiness: Maximize pleasure, narrower in scope, shorter in duration, hedonic, daily mood.
*Impact of money on experienced happiness caps out around $75k/year. Life's basic comforts met (which we become quickly accustomed to). Good and bad moods come at same pace for someone making $100k vs. $1m.

Reflective Happiness: Maximize contentment, broader in scope, longer in duration, eudaimonic (human flourishing), purpose, deeper sense of fulfillment.
*Reflective happiness does not cap out a specific income level. Does not diminish, keeps growing. But it always remains relative to your current position ($1000 raise for new college grad has larger impact than it would for CEO). When money is spent to underwrite sources of contentment, money buys happiness. 

Contentment = control (afford better nutrition, healthcare, more independence, time, flexibility), competence (invest in skills, potential), connection (sociality of experience, networks, memberships, access), context (time to find purpose). 

The "good life" is not the tweak of ephemeral pleasure, but the engagement with more meaningful, virtuous pursuits. Momentary pleasures are distinct from the enduring gravity of meaningful experience. 

"[Success stems not from] beating others at their game. It's about controlling yourself at your own game." -Jason Zweig
*Your own behavior far most important factor in investment success.

Much of what humans are good at does not center on weighing consequences of a possibility many years in the future.

Getting the restaurant right is more important than picking the right dish. Choosing investments works similarly. Big choice at hand is asset classes. Don't fetishize precision. Get it roughly right. Save yourself time and mental energy.

Asset allocation = far more influential than security selection and market timing. 
*90% of performance differences among investors are explained by asset allocation

Prioritize being "less wrong" over being "more right."

Only a handful of basic principles needed to achieve good investment results (but we crave complexity so we fail to execute):
-Buy low and sell high
-Diversify
-Stick to your plan

Crave complexity because we crave choice, which is a proxy for the control we perceive to have over our lives. More choice translates into a greater sense of safety (however false it might be).

A "good" decision is one that leads to a reasonable and appropriate outcome, not one that achieves other arbitrary goals like beating the market or trumping others. A "bad" decision starts with either vague or unrealistic expectations.

Accept the uncertainty of this game, remain humble in the pursuit of better things, and there's a decent chance that things will be okay.

"To achieve satisfactory investment results is easier than most realize; to achieve superior results is harder than it looks." -Benjamin Graham

The trajectory of a happy life is shaped by expectations. When the future meets or exceeds our expectations, we tend to be happy' when it doesn't, we're not.

Assessing annualized returns -- the longer the time frame, the narrower the range of outcomes (+/-10%). Shorter time frame, large (and more erratic) range of outcomes (170 to -70%). 

When we say that stocks make about 10% per year, it would be a mistake to assign the outcome of the entire group to any one member. Individual stock can be a dud or rocket ship. Best bet is to own a broad swath of the market.

With true diversification, there will always be something in your portfolio that sucks (and that's okay).

Compounding is the quiet protagonist in more tales of progress than nearly any of us has considered. Einstein supposedly called it the most powerful force in the universe.

Charlie Munger: "The first rule of compounding: Never interrupt it unnecessarily."

"Approximately 99% of the time, the single most important thing investors should do is absolutely nothing." -Jason Zweig

"The authentic individual is neither an end nor a beginning but a link between ages, both memory and expectation. Every moment is a new beginning with a continuum of history. It is fallacious to segregate a moment and not to sense its involvement in both the past and future." -Abraham Heschel

Our ability to think through time and see our future selves has limitations. Most profoundly, we discount the future: we value today more than tomorrow. Time discounting is an evolutionary instinct. We didn't pass on killing the small animal right in front of us in hopes of maintaining our energy to attack a larger herd of fatter animals that may or may not come later. We tend to live in the now because it seems the safer thing to do.

"Human beings are works in progress that mistakenly think they're finished." -Daniel Gilbert

Narrative of the book: Stoic playbook for navigating money life, moving from perception to action to will. Self-awareness and self-control are key principles. Embrace adaptive simplicity. 

Poor Charlie's Almanack – Charles T. Munger

Poor Charlie's Almanack – by Charles T. Munger & Peter D. Kaufman
Date Read: 11/1/17. Recommendation: 9/10.

This is one of those must-read books because Munger's concepts are foundational to so many other authors and their ideas. To set expectations, the book is a monster. It took me months and multiple attempts to get through because there is so much there. It's comprised of 11 speeches given by Munger over the years. He details his now-popularized concept of "multiple mental models" and building a latticework of these models to improve cognition. Munger explains that adopting a more multidisciplinary approach is critical to achieving this, and cites Keynes when he suggests that it's better to be roughly right than precisely wrong. He also outlines "sit-on-your-ass investing" and the general approach that led to his success alongside Warren Buffett at Berkshire Hathaway. Poor Charlie's Almanack is one of those that you should sit with and reflect on so you can take it all in.

See my notes below or Amazon for details and reviews. 

 

My Notes:

Lollapalooza: The critical mass  obtained via a combination of concentration, curiosity, perseverance, and self-criticism, applied through a prism of multidisciplinary mental models.

To Cicero, if you live right, the inferior part of life is the early part.

Cicero points out how silly it is to complain of reaching old age. According to Cicero, the best a young person can hope for is to get old before he dies, and it is not fitting to complain about getting the best outcome you could have ever reasonable wanted. 

"I've long believed that a certain system–which almost any intelligent person can learn–works way better than the systems that most people use. 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."

"Multiple Mental Models" serve as a framework for gathering, processing, and acting on information.

Just as multiple factors shape almost every system, multiple models from a variety of disciplines, applied with fluency, are needed to understand that system.

Sit on your ass investing (not buying or selling very often): "You're paying less to brokers, you're listening less to nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum."

It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities.

Reduce complex situations to their most basic, unemotional fundamentals, but avoid "physics envy," human craving to reduce enormously complex systems to one-size-fits-all Newtonian formulas.

"A scientific theory should be as simple as possible, but no simpler." –Albert Einstein

Charlie's methods could be summarized as, "Quickly eliminate the big universe of what not to do, follow up with a fluent, multidisciplinary attack on what remains, then act decisively when, and only when, the right circumstances appear."

It's kind of fun to sit there and outthink people who are way smarter than you are because you've trained yourself to be more objective and more multidisciplinary.

"If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter." –Warren Buffett

Few businesses survive over multiple generations.

Intellectual humility–Acknowledging what you don't know is the dawning of wisdom.

Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.

Compound interest is the eighth wonder of the world.

Be fearful when others are greedy, and greedy when others are fearful.

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.

One of the key elements to successful investing is having the right temperament–most people are too fretful; they worry too much.

Stocks are valued partly like bonds, based on roughly rational projections of producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up so far.

If stocks trade more like Rembrandts in the future, then stocks will rise, but they will have no anchors. In this case, it's hard to predict how far, how high, and how long it will last.

Indexing can't work well forever if almost everybody turns to it. But it will work all right for a long time.

I think that, every time you see the word EBITDA [earnings before interest, taxes, depreciation, and amortization], you should substitute the words "bullshit earnings."

"Abraham Lincoln once asked: 'How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn't make it a leg.' Likewise, just because an actuary says you can earn 9% on pension-plan assets, it doesn't magically alter the reality of your future liability." –Buffett

The Importance of Mental Models: "You must know the big ideas in the big disciplines and use them routinely–all of them, not just a few. Most people are trained in one model–economics, for example–and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail."

I don't know anyone who's wise who doesn't read a lot. But that's not enough: You have to have a temperament to grab ideas and do sensible things.

In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time–none, zero. You'd be amazed at how much Warren reads–and at how much I read.

There's a lot wrong with American universities...You have these squirrelly people in each department who don't see the big picture.

Slug it out once inch at a time, day by day. At the end of the day–if you live long enough–most people get what they deserve.

 

Talk One: Harvard School Commencement Speech (6/13/86)

Johnny Carson speech, said he couldn't tell the graduating class how to be happy, but he could tell them prescription for sure misery: 1) Ingesting chemicals in an effort to alter mood or perception, 2) Envy, 3) Resentment.

Charlie adds a few more prescriptions for misery: be unreliable, learn everything you possibly can from you own experience, go down and stay down when you encounter a reverse in the battle of life. 

Invert, always invert...many hard problems are best solved only when they are addressed backward.

Reliability is essential for progress in life.

 

Talk Two: The University of Southern California Marshall School of Business (4/14/94)

You can't really know anything if you just remember isolated facts and try to bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form.

You've got to have models in your head. And you've got to array your experience–both vicarious and direct–on this latticework of models...And the models have to come from multiple disciplines–because all the wisdom of the world is not to be found in one little academic department.

So you have to figure out what your own aptitudes are. 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. And you've got to play within your own circle of competence.

Benjamin Graham's best idea was the concept of "Mr. Market"–not efficient, but manic depressive.

Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer.

The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.

Three Rules for Your Career:

1) Don't sell anything you wouldn't buy yourself. 2) Don't work for anyone you don't respect and admire. 3) Work only with people you enjoy.

You don't have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.

 

Talk Three: Stanford Law School (4/19/96)

Heavy ideology is one of the most extreme distorters of human cognition.

Warren adored his father–who was a wonderful man. But Warren's father was a very heavy ideologue (right wing, it happened to be), who hung around with other very heavy ideologues (right wing, naturally). Warren observed this as a kid. And he decided that he was going to stay a long way away from it. And he has throughout his whole life. That has enormously helped the accuracy of his cognition.

You can have heavy ideology in favor of accuracy, diligence, and objectivity. But a heavy ideology that makes you absolutely sure that the minimum wage should be raised or that it shouldn't–and it's king of a holy construct where you know you're right–makes you a bit nuts...Being totally sure on issues like that with a strong, violent ideology, in my opinion, turns you into a lousy thinker. So beware of ideology-based mental misfunctions.

"What a man wishes, that also will he believe." –Demosthenes

Workers' compensation system in California: Trouble with such a compensation practice is that it's practically impossible to delete huge cheating. And once you reward cheating, you get crooked lawyers, crooked doctors, crooked unions, etc., participating in referral schemes...So you were trying to help your civilization. but what you did was create enormous damage, net.

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.

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

People go broke that way–because they can't stop, rethink, and say, "I can afford to write this one off and live to fight again. I don't have to pursue this thing as an obsession–in a way that will break me."

 

Talk Seven: Breakfast Meeting of the Philanthropy Roundtable (11/10/00)

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

Suppose all pension funds purchased ancient art, and only ancient art, with all their assets. Wouldn't we eventually have a terrible mess on our hands, with great and undesirable macroeconomic consequences? And wouldn't the mess be bad if only half of all pension funds were invested in ancient art? And if half of all stock value became a consequence of mania, isn't the situation much like the case wherein half of pension assets are ancient art?

Efficient Market Theory: Professors were too much influence by "rational man" models of human behavior from economics and too little by "foolish man" models from psychology and real-world experience.

"Regard your good name as the richest jewel you can possibly be possessed of–for credit is like fire; when once you have kindled it you may easily preserve it, but if you once extinguish it, you will find it an arduous task to rekindle it again. The way you gain a good reputation is to endeavor to be what you desire to appear." –Socrates

 

Talk Nine: Herb Kay Undergraduate Lecture, University of California, Santa Barbara, Economics Department (10/3/03)

"If you would persuade, appeal to interest and not to reason." –Benjamin Franklin

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. 

But if you've got a full list of tools and go through them in your mind, checklist-style, you will find a lot of answers that you won't find any other way.

Practically everybody (1) overweighs the stuff that can be numbered because it yields to statistical techniques they're taught in academia and (2) doesn't mix in the hard-to-measure stuff that may be more important.

Too little attention in economics to second-order and even high-order effects...the consequences have consequences (it gets very complicated). 

All human systems are gamed, for reasons rooted deeply in psychology....The people who design easily gameable systems belong in the lowest circle of hell.

Are people who game systems bad or intrinsically dishonest? No. "They just don't think about what terrible things they're doing to the civilization because they don't take into account the second-order effects and the third-order effects in lying and cheating."

Keynes said, "It's not bringing in the new ideas that's so hard. It's getting rid of the old ones." And Einstein said it better, attributing his mental success to "curiosity, concentration, perseverance, and self-criticism." By self-criticism, he meant becoming good at destroying your own best-loved and hardest-won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift.

What I've urged is the use of a bigger multidisciplinary bag of tricks, mastered to fluency, to help economics and everything else.

Keynes: Better roughly right than precisely wrong.

If you skillfully follow the multidisciplinary path, you will never wish to come back.

No matter how smart you are, there are smart people out there who can fool you if they really want to. So, be sure you can trust the smart people you work with.

 

Talk Ten: USC Gould School of Law (5/13/07)

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

The acquisition of wisdom is a moral duty. It's not something you do just to advance in life. And there's a corollary to that idea that is very important. It requires that you're hooked on lifetime learning. Without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You're going to advance in life by what you learn after you leave here.

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 that morning. 

The way complex adaptive systems work, and the way mental constructs work, problems frequently become easier to solve through "inversion." (i.e. if you want to help X, ask how you can hurt X?)

Mozart was utterly miserable most of the time. And one of the reasons was that he always overspent his income.

Self-pity is always counterproductive. It's the wrong way to think. And when you avoid it, you get a great advantage over everybody else, or almost everybody else, because self-pity is a standard response. And you can train yourself out of it.

You particularly want to avoid working under somebody you don't admire and don't want to be like.

Intense interest in any subject is indispensable, if you're really going to excel in it.

In your own life what you want to maximize is a seamless web of deserved trust.

 

Talk Eleven: The Psychology of Human Misjudgment

Doubt-Avoidance Tendency is some combination of (1) puzzlement and (2) stress. And both of these factors naturally occur in facing religious issues.

Inconsistency-Avoidance Tendency: The brain of man conserves programming space by being reluctant to change, which is a form of inconsistency avoidance. 

Also tending to be maintained in place by anti-change tendency of the brain are one's previous conclusions, human loyalties, reputational identity, commitments, accepted role in a civilization, etc.

And so, people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of good evidence that they are wrong.

Charles Darwin trained himself, early, to intensively consider any evidence tending to disconfirm any hypothesis of his, more so if he thought his hypothesis was a particularly good one. The opposite of what Darwin did is now called confirmation bias.

As he was rising from obscurity in Philadelphia and wanted the approval of some important man, Franklin would often maneuver that man into doing Franklin some unimportant favor, like lending Franklin a book. Thereafter, the man would admire and trust Franklin more because a nonadmired and nontrusted Franklin would be inconsistent with the appraisal implicit in lending Franklin the book.

"It is not greed that drives the world, but envy." -Warren Buffett

The standard antidote to one's overactive hostility is to train oneself to defer reaction.

Social-Proof Tendency: An automatic tendency to think and act as he sees others around him thinking and acting. 

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

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?