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  • DECEMBER 29, 2010

Lessons from Charlie Munger- I

Charles Thomas Munger. The name has an instant resonance. And with a blink, you recall another name- Warren Buffett. Both these names are inseparable. Sure, why not? Buffett has himself referred to both of them as "Siamese twins, practically". And Charlie Munger is often addressed as the legendary investor's alter ego. So while Buffett remains the face of Berkshire Hathaway, Munger has no lesser claim to credit for the fortunes of the company.

The Multi-disciplinarian

Both men have as many striking differences as similarities. One may typecast Buffett as purely an investor and philanthropist. And quite rightly so, for the man devotes his time almost exclusively to his business. Munger, on the other hand, is a generalist for whom investment is only one of a broad range of interests. In many ways, his personality has traces of his own hero-Benjamin Franklin, who along with being a great scientist and inventor, was also a leading author, statesman and philanthropist, and played four instruments. On similar lines, Munger hops around science, architecture, psychology and philanthropy with as much passion and curiosity as he does with business and investments.

Thinking errors and misjudgements

Munger very aptly follows this multidisciplinary approach in all kind of situations. He draws influences from fields as diverse as physics and psychology to his investment process. For long, he had been interested in standard thinking errors. Without diving much into academic psychology textbooks, he developed his own system of psychology more or less in the self-help style of Ben Franklin. In a series of articles that will follow, we will pick up insights from a speech that Munger gave on "24 Standard Causes of Human Misjudgment". But before we start discussing these thinking errors, let us tell you why these lessons have very powerful implications for investors.

Do we behave like ants?

We may take great pride in our evolutionary superiority over other creatures. But we also often behave like ants. Strange? Not really. Munger has pointed out some very intriguing observations about the behaviour of these social insects. Each ant, like each human, is composed of a living physical structure plus behavioural algorithms in its nerve cells. Mostly, the ant merely responds to stimuli with a few simple responses programmed into its nervous system by its genes. For instance, one type of ant, when it smells a pheromone given off by a dead ant's body in the hive, immediately responds by co-operating with other ants in carrying the dead body out of the hive. Harvard's great E.O. Wilson performed one of the best psychology experiments ever. He painted dead-ant pheromone on a live ant. Quite naturally, the other ants dragged this useful live ant out of the hive. This despite the poor creature kicked and protested throughout the entire process. Such is the brain of the ant.

Of course, our brain is far more complex and advanced. Ants don't design and fly airplanes. But under complex circumstances, don't we also find ourselves behaving counterproductively just like ants? And aren't stock markets a perfect playground for this kind of behaviour? We'll discuss this and a lot more in the forthcoming articles.

To be continued...

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