Charlie Munger - Methods to succeed in a competitive stock market

Key takeaways at the end

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We have three baskets for investing: yes, no, and too tough to understand. [...] Nobody expects you to know everything about everything. I try to get rid of people who always confidently answer questions about which they don't have any real knowledge.

We're always looking for something where we think we have an insight that gives us a big statistical advantage. [...] And we only find a few, maybe one or two a year. We have no system for having automatic good judgment on all investment decisions that can be made. Ours is a totally different system. We just look for no-brainer decisions. As Buffett and I say over and over again, we don't leap 7-foot fences. Instead, we look for 1-foot fences with big rewards on the other side. So we've succeeded by making the world easy for ourselves, not by solving hard problems.

[...] We tend to avoid that stuff, based on our personal inadequacies. Again, that is a very, very powerful idea. Every person is going to have a circle of competence. And it's going to be very hard to enlarge that circle. If I had to make my living as a musician... I can't even think of a level low enough to describe where I would be sorted out to if music were the measuring standard of the civilization.

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 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.

[...] It's so damned elementary that even bright people are going to have limited, really valuable insights in a very competitive world when they're fighting against other very bright, hardworking people.

[...] We don't have any system for giving you perfect investment judgment on all subjects at all times. That would be ridiculous. I'm just trying to give you a method you can use to sift reality to obtain an occasional opportunity for rational reaction.

[...] With our method, we only get a few opportunities. Fortunately, that happens to be enough. [...] If you wait for the big opportunity and have the courage and vigor to grasp it firmly when it arrives, how many do you need? For example, take the top 10 business investments Berkshire Hathaway's ever made. We would be very rich if we'd never done anything else – in two lifetimes.

And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. You're much more likely to do well if you start out to do something feasible instead of something that isn't feasible. Isn't that perfectly obvious? How many of you have 56 brilliant insights in which you have equal confidence?

Poor Charlie's Almanack (2023); Chapter Four; Talks Two and Three

* Bold emphasis added

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Key concepts and takeaways:

• Circle of competence and second-level thinking: To do well as an investor, you do not need to know everything about AI, US politics, or nuclear fission. You should focus on what you know well, for example an industry you like (maybe you are working in that industry) and develop your circle of competence. Understand the key business drivers, the megatrends, the competition. Investing is less about what you know but more about acknowledging what you realistically don't or can't know. To spot the out-of-favour stocks and industries, it is also helpful to develop second-level thinking, very often stocks are trading at respective prices for a good reason.

• Act decisively when an opportunity arises: Even once you have developed your circle of competence, do not expect that you will have many breakthrough insights or that opportunities will arise often. Look for the no-brainers. When you find one, act decisively, with confidence.