Seeking Wisdom

1. “What does Warren Buffett mean by “understanding?” Predictability: Our definition of understanding is thinking that we have a reasonable probability of being able to assess where the business will be in 10 years.” He continues: “The only way we know how to make money is to try and evaluate businesses. And if we can’t evaluate a carbon steel company, we don’t buy it. It doesn’t mean it isn’t a good buy. It doesn’t mean it isn’t selling for a fraction of what it's worth. It just means that we don’t know how to evaluate it.”

2. “Before attacking a problem, ask if it is worth solving or spending time on. Warren Buffett explains one of the reasons for his and Charles Munger’s success in life and business: “There are two questions you ask yourself as you look at the decision you’ll make. A) Is it knowable? B) Is it important? If it is not knowable, as you know there are all kinds of things that are important but not knowable, we forget about those. And if it’s unimportant, whether it’s knowable or not, it won’t make any difference. We don’t care.””

3. “I’ve heard Warren say since very early in his life that the difference between a good business and a bad one is that a good business throws up one easy decision after another, whereas a bad one gives you horrible choices - decisions that are extremely hard to make: “Can it work?” “Is it worth the money?” One way to determine which is the good business and which is the bad one is to see which one is throwing management bloopers - pleasant, no-brainer decisions - time after time after time.”

4. “Warren Buffett agrees: “We haven't succeeded because we have some great, complicated systems or magic formulas we apply or anything of the sort. What we have is just simplicity itself.” Charles Munger adds: “If something is too hard, we move on to something else. What could be more simple than that?””

5. “We need to understand what is behind the numbers. Warren Buffett says that, “return on beginning equity capital” is “the most appropriate measure of single year managerial performance. Informed use of that yardstick, however, requires an understanding of many factors, including accounting policies, historical carrying values of assets, financial leverage, and industry conditions.”

6. “Have patience in waiting for opportunities. Resist the temptation to always do something. If we are in a hurry, it's easier to make misjudgments. This is key in investing. Warren Buffett says, “In allocating capital, activity does not correlate with achievement. Indeed, in the fields of investments and acquisitions, frenetic behavior is often counterproductive.””

1. Invert, Always Invert

Charlie Munger's most famous mental model: approach problems backwards by thinking about what you want to avoid rather than what you want to achieve. Instead of asking "How do I succeed?", ask "How do I fail?" This inversion helps you identify and avoid major pitfalls that derail most people.

2. Develop a Latticework of Mental Models

Don't rely on a single way of thinking. Build a toolkit of mental models from multiple disciplines—psychology, physics, biology, economics, mathematics—and use them together to understand complex situations. The more models you have, the better you can analyze problems from different angles.

3. Understand Your Circle of Competence

Know what you know, know what you don't know, and stay within your area of expertise. Most mistakes come from venturing outside your circle of competence without recognizing it. It's better to be excellent in a narrow area than mediocre across many areas.

4. Avoid the Standard Causes of Human Misjudgment

Munger identified dozens of psychological tendencies that lead to poor decisions: confirmation bias, social proof, authority bias, incentive-caused bias, and many others. Simply being aware of these tendencies helps you recognize when they're influencing your thinking and make better choices.

5. Focus on Elementary Worldly Wisdom

Master the basic principles that govern how the world works rather than getting lost in complex theories. Simple concepts like compound interest, supply and demand, and incentive alignment explain most of what you need to know about business, investing, and human behavior.