What is the rationale behind Charlie Munger’s checklist? What are the core principles in the investment checklist?
Charlie Munger’s checklist for investing is based on his latticework of mental models that help him identify and avoid cognitive biases that could lead to bad investment decisions. The checklist emphasizes thinking independently, analyzing vigorously, measuring risks, and allocating assets wisely.
Read on to discover more about Charlie Munger’s Checklist for investing.
Charlie Munger’s Checklist
Incorporating all the principles we’ve learned so far, here is the 10-step Charlie Munger checklist for making investment decisions.
1. Think Independently
- Don’t follow the folly of crowds. Make up your own independent mind, ignoring who agrees or disagrees with you.
- Following the herd guarantees you’ll regress to the mean and have average results.
2. Stay Humble
- Recognize your circle of competence and stay within it.
- Find evidence that disagrees with your most sacred beliefs.
- Recognize when you’re overconfident and deluding yourself about your certainty.
3. Prepare and Work Hard
- Learn constantly through continuous reading. Try to get a little smarter every day.
- Build a broad base of knowledge across many different fields of study. Build a wide latticework of mental models.
- Keep asking “why?” to understand how things work.
4. Analyze Rigorously
- Understand the value of businesses independent of price; real growth independent of motion; and wealth independent of size.
- Use checklists to avoid biases and omissions.
- Don’t lose the forest for the trees—understand the few major effects that really matter instead of the many minutiae that don’t.
- Look at second- and third-order effects.
- “Invert, always invert.”
5. Measure Risk
- Avoid working with people without integrity.
- Avoid big mistakes that can wipe you out.
- Seek compensation commensurate with risk taken.
- Build in a margin of safety.
- Safeguard your reputation—trust can be lost in a single decision.
6. Allocate Assets Wisely
- Remember that the real cost of an investment is the opportunity cost.
7. Be Patient
- If you don’t see good opportunities, be content to sit on your hands and do nothing. The tendency to act can lead to bad decisions and unnecessary costs.
- Allow compound growth to work its magic—being a little better over long periods of time can lead to amazing things.
8. Be Decisive
- “Be fearful when others are greedy, and greedy when others are fearful.”
- When the odds are in your favor, bet big.
9. Adapt and Change
- The world won’t adjust to you; you need to adjust to the world.
- Be willing to kill your most beloved ideas.
- Recognize when you’re wrong and learn from it. Denial hurts.
10. Stay Focused
- Don’t get overconfident. Don’t get bored.
- Make sure your investments and businesses perform optimally.
- If you have problems, face them head-on instead of ducking from them.
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- A collection of Charlie Munger’s best advice given over 30 years
- Why you need to know what you’re good at and what you’re bad at to make decisions
- Descriptions of the 25 psychological biases that distort how you see the world