Rich Charlie and his models

Hey There,

Did you hear about Charlie Munger? Yes, the legend himself! At an incredible 99 years old, he's finally stepped back from the investment game. You know Warren Buffett, right? Some say he's the top investor in history. But, here's a fun fact: even Buffett admitted that it was Munger who transformed his way of thinking! Munger introduced him to the idea of buying "wonderful companies at fair prices, rather than fair companies at wonderful prices.”

So, what can we learn from a guy like Munger? For me, the standout lesson is how he uses a ton of mental models to guide his decision-making. In his book - Poor Charlie's Almanac, he talks about using over 100 different mental models from fields as diverse as physics, biology, psychology, and even warfare studies to shape his investment decisions.

What do we need models?

First let’s Just look around - our world is a complex, always-changing whirlpool of events and phenomena. To make sense of it all, we use models, simplified versions of the real deal. Think back to your physics class when you first learned about gravity. Remember calculating the speed of a falling object? Your teacher might have told you to forget about air resistance. In reality, it's not zero, but imagine the headache if we had to account for it in every calculation!

Models, though they often oversimplify, can still give us surprisingly practical results. As George Box put it, "All models are wrong, but some are useful." No model can capture reality perfectly. I mean, a perfect model would be like a 1:1 scale map – not exactly handy, right? So, when we choose a model, we're deciding which factors to focus on and which to let go.

Even though no model can mirror the world perfectly, as long as they offer a decently accurate insight for evaluating the complexity around us, they can be helpful in improving our decisions. A great illustration of this would be the 80/20 rule, suggesting that a few key variables have a larger impact on the result than all other variables combined.

Why would we need so many models tho?

"Yes knowing models is beneficial," you might say, "but why would Munger require so many models?" Have you ever heard of information theory? This theory suggests that adopting various perspectives can enrich our understanding of a problem. It's akin to listening to all sides of a story to grasp the full picture.

For example, suppose a company says it's all about customer retention, but their financials show high customer turnover. That's a red flag, right? The company's strategy and its actual performance are like two different models. By comparing these, we can spot inconsistencies, like a gap between the company's customer focus claim and its high turnover reality. This helps us uncover possible issues, like poor customer service or product quality, that might have been missed otherwise.

In the same way, the more models we have, the fuller our view of the situation. If you're just fixated on one or two, you're probably going to bend reality to fit your models.

Some of the mental models that I am using on a day-to-day basis as a professional management consultant:

• The MECE principle:
  • MECE stands for "Mutually Exclusive, Collectively Exhaustive", meaning that we will break down a problem into categories that are mutually exclusive (no overlapping) and collectively exhaustive (no gaps). Imagine you're organizing a bookshelf.
  • Applying the MECE principle, you decide to categorize the books by genre. Ensuring it's "mutually exclusive", each book falls into one and only one genre, avoiding confusion. The "collectively exhaustive" aspect means your genres cover all the books, no book is left without a category.
  • The power of MECE lies in its simplicity. It allows you to break down a large objective into smaller, actionable parts that do not overlap. Since it's collectively exhaustive, you can be confident that if all the items on the list are completed, you should be good to go.
• Inversion:
  • Remember the "what might screw up list" we discussed during my workshop preparation? (Check out this post https://shermans-weekly-digest.ghost.io/avoid-mess-up-to-level-up/ if you haven't!)
  • Using inversion, we first identify potential pitfalls such as inadequate preparation, unclear objectives, or insufficient participant engagement.
  • By acknowledging these factors upfront, we can strategically plan to evade these issues, enhancing the likelihood of a successful workshop.

How might you apply the learning?

• Are you embracing lifelong learning? How can you incorporate continuous learning into your daily routine?
• Are you diversifying your knowledge base? How can you step out of your own field or industry to learn about various other disciplines?
• Are you actively applying your new knowledge and mental models to your daily life? How can you practice this more?
• Are you reflecting regularly on your decisions and actions? How can this practice help you improve your decision-making process?
• Are you engaging in intellectual discussions with people from diverse fields? How can these discussions expose you to different thought processes and ideas?

Try to use this Prompt:

Things that I found interesting this week:

📚 Book — Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger

Charlie Munger is not just an investment legend, he's a master of decision-making. His secret weapon? A vast arsenal of mental models. In "Poor Charlie's Almanack," you'll dive into over 100 models from diverse fields that Munger uses to shape his decisions.

📚 Book — Model Thinkers by Scott Page

I recommend this book to you since I know you might be interested in expanding your thought processes and decision-making toolkit. Scott Page's "Model Thinker" takes the concept of mental models, introduced by Charlie Munger, to the next level. It's been my favorite read in 2022 as it provides detailed explanations on when and how to apply different models, along with their underlying assumptions. This makes it an excellent supplement to Munger's book. Trust me, if you're keen on learning how to navigate complexity and make better decisions, this is a must-read!

🎬 Video — How superpowers survive: War, Money, Size | John Mearsheimer and Lex Fridman

I came across this really cool video on how superpowers survive, presented by Lex Fridman, a well-known YouTuber with a knack for deep, intellectual discussions. It delves into 'Offensive Realism', a model that beautifully explains the dynamics of current global politics. I love Lex's channel - it's my top podcast on Spotify this year! His interviews are always thought-provoking and stimulating. This video, in particular, is a must-watch as it challenges our understanding of power and survival in the global landscape. I'm sure you'll find it fascinating!

📃 Blog —Mental Models: The Best Way to Make Intelligent Decisions (~100 Models Explained) (fs.blog)

This blog by FS offers a concise explanation of the mental models that Munger has used. While many of these models might seem like common sense, their real strength lies in actively using them to enhance decision-making. Highly recommend you to check those out!

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