Invert, always invert: Charlie Munger's mental models that helped build his ‘30-second mind’ (2024)

Warren Buffett once said that his business partner, the late Charlie Munger, has a 30-second mind.

Buffett, the Chairperson of Berkshire Hathaway and known as The Oracle of Omaha, said: "Charlie has the best 30-second mind in the world. He goes from A to Z in one go. He sees the essence of everything even before you finish the sentence."

Munger, the vice-chair of Berkshire Hathaway and an investing genius, passed away on November 29, 2023, almost a month away from his 100th birthday on January 1.

Also read:‘A titan of business’: Tributes to Charlie Munger from Warren Buffett, Tim Cook and others

He was famous for advocating a "latticework of mental models". Mental models are simply a way of understanding how things work.

For example, margin of safety helps you respond to unexpected events, and game theory helps you understand how groups work together and benefit from trust.

"Eighty or ninety important models will carry about 90 percent of the freight in making you a worldly wise person. And, of those, only a mere handful really carry very heavy freight," said Munger.

Where can you find all the wisdom of the world?

He said that these models have to come from various disciplines, such as microeconomics, psychology, engineering and physics, "because all the wisdom of the world is not to be found in one little academic department--and these models can be used to quickly gauge a situation and respond to it”.

Munger warned about relying on one mental model because then the human mind will distort reality to fit into that mental model.

He said that this is the first rule: “You’ve got to have multiple models—because if you have just one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does".

Munger said that people trained in one model will try to solve all problems with that model. "You know the old saying: to the man with a hammer, the world looks like a nail. This is a dumb way of handling problems," he said.

Mental models that draw from various disciplines help a person avoid blind spots. If a mental model were a window into one perspective, using different models gives different perspectives, and, therefore, gives a fuller picture for a person to make a decision.

While there are mental models drawn from specific disciplines, there are also 'general' mental models that come from big disciplines.

Collector ofbad-judgement calls

For example, there is inversion.

Munger said that he was inspired by algebraist Carl Jacobi who said: "Invert, always invert."

He was so influenced by Jacobi that he "sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes". In his speech titled ‘Psychology of Human Misjudgement’, Munger said that he also became "so avid a collector of instances of bad judgment" that he paid no attention to boundaries between professional territories.

"I could already see that real-world problems didn’t neatly lie within territorial boundaries. They jumped right across," he said.

‘All I want to know is where I'm going to die, so I'll never go there’

“It involves starting from the end. That is, looking at an outcome and seeing how to get there or looking at an adverse outcome and seeing how to avoid it. All I want to know is where I'm going to die, so I'll never go there," he said.

Therefore, if you want to retire comfortably, you don't just think about how to do that. But think about the things to avoid retiring in penury--for example, avoid bad spending habits, avoid investing in risky get-rich-quick schemes and so on.

Another example would be the ever-so-popular first principles thinking, which involves breaking down an idea that you are trying to grasp into its most elementary or essential parts, and then rebuilding it.

This would fall in line with what Munger advocated, of studying the basics -- to avoid relying excessively on professional advice. Professionals, according to Munger, suffered greatly from the man-with-the-hammer syndrome.

“You must routinely use all the easy-to-learn concepts from the freshman course in every basic subject. Where elementary ideas will serve, your problem solving must not be limited, as academia and many business bureaucracies are limited, by extreme balkanisation into disciplines and sub-disciplines, with strong taboos against any venture outside assigned territory."

First-principles mental model and Elon Musk

A modern-day poster boy for the first-principles mental model is Elon Musk, who dug deeper into why rockets are so expensive if the commodities used to make them are so cheap--even two percent of the cost of the rocket.

He decided to buy the raw materials and build a rocket from ground up, and thus made rockets that are multiple times cheaper than what was available in the market.

While first principles thinking takes a generalist approach to success, Munger also advocated a mental model that involves concentrating on your "circle of competence".

"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," he said.

Munger pointed out that a person, without the natural aptitude, may never win a chess tournament or stand in the centre court in a tournament but this person can "rise quite high in life" if he/she focuses on their circle of competence.

Also watch:What Charlie Munger once said about competing with the ‘Patels from India’.

Munger on diversification

This was extended to advice on investing behaviour. Munger said that diversification made sense if you don't know what you're doing and aren't embarrassed to admit it. But he thought the better way was to choose a few good securities and invest only when you have "extra knowledge" than the market.

The idea of diversification is "ridiculous" when an investor is pursuing excellence. "It doesn’t work. It gives you an impossible task. What fun is it to do an impossible task over and over again? I find it agony. And just who would want to do it? And I don’t see why," he said.

While there are several mental models that can be drawn from Munger's advice, we close with the "Lollapalooza effect", which is another way to win big. It involves getting two to three forces to work together.

"You get the Lollapalooza effect when two, three or four forces are all operating in the same direction. And, frequently, you don’t get simple additions. It is often like critical mass in physics where you get a nuclear explosion if you get to a certain point of mass—and you don’t get anything much worth seeing if you don’t reach the mass.”