Poor Charlie's Almanack by Peter D. Kaufman
I finished this book in July 2026. I recommend this book 9/10.
Why you should read this book:
This book is a collection of Charlie Munger’s speeches, in which he introduces some of his mental models and twenty-five psychological tendencies. The book will make you think about wisdom differently and realize that, with a few basic mental habits, you can often make better decisions than someone with a much higher IQ.
Get your copy here.
🚀 The book in three sentences
Mental models are the systems for thinking—the tendencies are the human biases that get in the way.
Be a pilot in life: learn broadly, use checklists, and practice often.
Allocate more time to think through situations—and then be willing to challenge your own thinking.
đź“ť My notes and thoughts
P37. Although Charlie is a described conservative Republican, chief among his causes is Planned Parenthood. He believes that every child deserves to be born to a welcoming mother.
P63. But Charlie does not immediately rush out and buy it. Knowing that a necessary companion to proper valuation is proper timing, he applies yet a finer screen, a "prior to pulling the trigger" checklist, which is especially useful in evaluating what he refers to as close calls. The checklist includes such items as: What are the current price, volume, and trading considerations? What disclosure timing or other sensitivities exist? Do contingent exit strategies exist? Are better uses of capital currently or potentially available? Is sufficient liquid capital currently on hand or must it be borrowed? What is the opportunity cost of that capital? And so on.
P63. Charlie's exhaustive screening process requires considerable self-discipline and results in long periods of apparent inactivity. But, as Charlie says, "Hard work is an essential element in tracking down and perfecting a strategy, or in executing it." For Charlie and Warren, the hard work is continuous, whether it results in current investing activity or not—and usually it does not. This habit of committing far more time to learning and thinking than to doing is no accident. It is the blend of discipline and patience exhibited by true masters of a craft: an uncompromising commitment to "properly playing the hand." Like world-class bridge player Richard Zeckhauser, Charlie scores himself not so much whether he won the hand but rather on how well he played it. While poor outcomes are excusable in the Munger-Buffett world—given the fact that some outcomes are outside of their control—sloppy preparation and decision-making are never excusable because they are controllable.
P65. An investing principles checklist:
Risk: All investment evaluations should begin by measuring risk, especially reputational.
Incorporate an appropriate margin of safety.
Avoid dealing with people of questionable character.
Insist upon proper compensation of risk assumed.
Always beware of inflation and interest rate exposures.
Avoid big mistakes; shun permanent capital loss.
Independence: Only in fairy tales are emperors told they are naked.
Objectivity and rationality require independence of thought.
Remember that just because other people agree or disagree with you doesn't make you right or wrong—the only thing that matters is the correctness of your analysis and judgement.
Mimicking the herd invites regression to the mean (merely average performance).
Preparation: The only way to win is to work, work, work, work, and hope to have a few insights.
Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.
More important than the will to win is the will to prepare.
Develop fluency in the mental models from the major academic disciplines.
If you want to get smart, the question you have to keep asking is "Why, why, why?"
Intellectual humility: Acknowledging what you don't know is the dawning of wisdom.
Stay within a well-defined circle of competence.
Identify and reconcile disconfirming evidence.
Resist the craving for false precision, false certainties, etc.
Above all, never fool yourself, and remember that you are the easiest person to fool.
Analytic rigor: Use of the scientific method and effective checklists minimizes errors and omissions.
Determine value apart from price, progress apart from activity, wealth apart from size.
It is better to remember the obvious than to grasp the esoteric.
Be a business analyst, not a market, macroeconomic, or security analyst.
Consider the totality of risk and effect; look always at potential second-order and higher-level impacts.
Think forward and backward, invert, always invert.
Allocation: Proper allocation of capital is an investor's number one job.
Remember that the highest and best use is always measured by the next best use (opportunity cost.)
Good ideas are rare—when the odds are greatly in your favor, bet (allocate) heavily.
Don't fall in love with an investment—be situation-dependent and opportunity-driven.
Patience: Resist the natural human bias to act.
"Compound interest is the eighth wonder of the world" (Einstein); never interrupt it unnecessarily.
Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake.
Be alert for the arrival of luck.
Enjoy the process along with the proceeds, because the process is where you live.
Decisiveness: When proper circumstances present themselves, act with decisiveness and conviction.
Be fearful when others are greedy and greedy when others are fearful.
Opportunity doesn't come often, so seize it when it does.
Opportunity meeting the prepared mind—that's the game.
Change: Live with change and accept unremovable complexity.
Recognize and adapt to the true nature of the world around you; don't expect it to adapt to you.
Continually challenge and willingly amend your best-loved ideas.
Recognize reality even when you don't like it—especially when you don't like it.
Focus: Keep things simple and remember what you set out to do.
Remember that reputation and integrity are your most valuable assets—and can be lost in a heartbeat.
Guard against the effects of hubris and boredom.
Don't overlook the obvious by drowning in minutiae.
Be careful to exclude unneeded information or slop: "A small leak can sink a great ship."
Face your big troubles, don't sweep them under the rug.
P126. What should a young person look for in a career?
Don't sell anything you wouldn't buy yourself.
Don't work for anyone you don't respect and admire.
Work only with people you enjoy.
P126. What overall life advice do you have for young people?
Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step-by-step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day, and at the end of the day—if you live long enough—like most people, you will get out of life what you deserve. Life and its various passages can be hard, brutally hard. The three things I have found helpful in coping with its challenges are:
Have low expectations.
Have a sense of humor.
Surround yourself with the love of friends and family.
P131. How do you get worldly wisdom? What system do you use to rise into the tiny top percentage of the world in terms of having sort of an elementary, practical wisdom? I've long believed that a certain system, which almost any intelligent person can learn, works way better than the systems that most people use. As I said at the USC Business School, what you need is a latticework of mental models in your head. And you hang your actual experience and your vicarious experience that you get from reading and so forth on this latticework of powerful models. And with that system, things gradually get to fit together in a way that enhances cognition.
P134. You can reach out and grasp the model that better solves the overall problem. All you have to do is know it and develop the right mental habits. And it's kind of fun to sit there and outthink people who are way smarter than you are because you've trained yourself to be more objective and multidisciplinary.
P165. I like the Navy system. If you're a captain in the Navy and you've been up for 24 hours straight and have to go to sleep, and you turn the ship over to a competent first mate in tough conditions and he takes the ship aground, clearly through no fault of yours, they don't court-martial you, but your naval career is over. You can say, "That's too tough. That's not law school. That's not due process." Well, the Navy model is better in this context than would be the law school model. The Navy model really forces people to pay attention when conditions are tough, because they know that there's no excuses. Napoleon said he liked luckier generals—he wasn't into supporting losers. Well, the Navy likes luckier captains. It doesn't matter why your ship goes aground, your career is over. Nobody's interested in your fault. It's just a rule that we happen to have, for the good of all, all effects considered. I like rules like that. I think that the civilization works better with some of these no-fault rules. But that stuff tends to be anathema around law school: "It's not due process. You're not really searching for justice." Well, I am searching for justice when I argue for the Navy rule—for the justice of fewer ships going aground. Considering the net benefit, I don't care if one captain has some unfairness in his life. After all, it's not like he's being court-martialed. He just has to look for a new line of work. And he keeps vested pension rights and so on. So it's not like it's the end of the world. So I like things like that. However, I'm in a minority.
P179. Talk 4. The story of Coca Cola and mental models in action.
First order
Simple math
Invert
Systems
Lollapalooza (multi-discipline)
P191. In so behaving, the University of Chicago is imitating Darwin, who spent much of his long life thinking in reverse as he tried to disprove his own hardest-won and best-loved ideas. And so long as there are parts of academia that keep alive its best values by thinking in reverse like Darwin, we can confidently expect that silly educationally practices will eventually be replaced by better ones, exactly as Carl Jacobi might have predicted. this will happen because the Darwinian approach, with its habitual objectivity taken on as a sort of hair shirt, is a mighty approach indeed. No less a figure than Einstein said that one of the four causes of his achievement was self-criticism, ranking right up there alongside curiosity, concentration, and perseverance.
P201. In piloting, as in other professions, one great hazard is a bad effect from man-with-a-hammer tendency. We don't want a pilot, ever, to respond to a hazard as if it was hazard X just because his mind contains only a hazard X model. And so, for that and other reasons, we train a pilot in a strict six-element system:
His formal education is wide enough to cover practically everything useful in piloting.
His knowledge of practically everything needed by pilots is not taught just well enough to enable him to pass one test or two; instead, all his knowledge is raised to practice-based fluency, even in handling two or three intertwined hazards at once.
Like any good algebraist, he is made to think sometimes in a forward fashion and sometimes in reverse, and so he learns when to concentrate mostly on what he wants to happen and also when to concentrate mostly on avoiding what he does not want to happen.
His training time is allocated among subjects so as to minimize damage from his later malfunctions, and so what is most important in his performance gets the most training coverage and is raised to the highest fluency levels.
Checklist routines are always mandatory for him.
Even after original training, he is forced into a special knowledge maintenance routine: regular use of the aircraft simulator to prevent atrophy through long disuse of skills needed to cope with rare and important problems.
P218. Most good things have undesired side effects, and thinking is no exception. The best defense is that the best physicists, who systematically criticizes themselves to an extreme degree, using a mindset described by Nobel laureate Richard Feynman as follows: "The first principle is that you must not fool yourself, and you're the easiest person to fool."
P258. Benjamin Franklin's observation in Poor Richard's Almanack: "If you would persuade, appeal to interest and not to reason."
P263. The nature of this failure is that it creates what I always call man-with-a-hammer syndrome. That's taken from the folk saying "To the man with only a hammer, every problem looks pretty much like a nail." That works marvelously to gum up all professions and all departments of academia and, indeed, most practical life. The only antidote for being an absolute klutz due to the presence of a man-with-a-hammer syndrome is to have a full kit of tools. You don't have just a hammer, you've got all the tools. And you've got to have one more trick: You've got to use those tools checklist-style, because you'll miss a lot if you just hope that the right tools is going to pop up unaided whenever you need it. But if you've got a full list of tools and go through them in your mind, checklist-style, you will find a lot of answers that you won't find any other way.
P270. Lollapalooza = Several forces align.
P278. Extreme economic ignorance was displayed when various experts, including PhD economists, forecast the cost of the original medicare law. They did simple extrapolations of past costs. Well, the cost they projected was less than 10 percent of the cost that happened. Once they put in place various new incentives, the behavior changed in response to the incentives, and the numbers became quite different from their projection. And medicine invented new and expensive remedies, as it was sure to do. How could a great group of experts make such a silly forecast? Answer: They oversimplified to get easy figures, like the rube rounding pi to 3.2. They chose not to consider effects of effects of effects, and so on. One good thing about this common form of mis-thinking from the viewpoint of academia is that businesspeople are even more foolish about microeconomics.The business version of the Medicare-type insanity is when you own a textile plant and a guy comes in and says, "Oh, isn't this wonderful? They invented a new loom. It'll pay for itself in three years at current prices because it adds so much efficiency to the production of textiles." And you keep buying these looms, and their equivalent, for 20 years, and you keep making 4 percent on capital; you never go anywhere. And the answer is, it wasn't that the technology didn't work, it's that the laws of economics caused the benefit from the new looms to go to the people that bought the textiles, not to the guy who owned the textile plant.
P281. Another example of not thinking through the consequences of the consequences is the standard reaction in economics to Ricardo's law of comparative advantage giving benefit on both sides of trade. Ricardo came up with a wonderful, nonobvious explanation that was so powerful that people were charmed with it, and they still are because it's a very useful idea. Everybody in economics understands that comparative advantage is a big deal when one considers first-order advantages in trade from the Ricardo effect. But suppose you've got a very talented ethnic group, like the Chinese, and they're very poor, and you're an advanced nation, and you create free trade with China, and it goes on for a long time. Now let's follow second-and third-order consequences. You are more prosperous than you would have been if you hadn't traded with China in terms of average wellbeing in the United States, right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It's obviously China. They're absorbing all the modern technology of the world through this great facilitator in free trade and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So you start in a place where you've got a weak nation of a billion and quarter people, and in the end, they're going to be much bigger, stronger nation than you are, maybe even having more and better atomic bombs.
P288. Keynes said, "It's not bringing in the new ideas that's so hard. It's getting rid of the old ones." And Einstein said it better, attributing his mental success to "curiosity, concentration, perseverance, and self-criticism." By self-criticism, he meant becoming good at destroying your own best-loved and hardest won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift.
P298. Once you have the ideas, of course, you must continuously practice their use. Like a concert pianist, if you don't practice you can't perform well. So I went through life constantly practicing a multidisciplinary approach.
P299. My advice to you is to be better than I was at keeping insights hidden. One of my colleagues, who graduated as number one in his class in law school and clerked at the US Supreme Court, tended as a young lawyer to show that he knew a lot. One day, the senior partner he was working under called him in and said, "Listen, Chuck, I want to explain something to you. Your duty is to behave in such a way that the client thinks he's the smartest person in the room. If you have any energy or insight available after that, use it to make your senior partner look like the second-smartest person in the room. And only after you've satisfied those two obligations do you want your light to shine at all.
P321. Harvard's great E.O. Wilson performed one of the best psychology experiments ever done when he painted dead ant pheromone on a live ant. Quite naturally, the other ants dragged this useful live ant out of the hive even though it kicked and otherwise protested throughout the entire process. Such is the brain of the ant. It has a simple program of responses that generally work out all right but which are imprudently used by rote in many cases. Another type of ant demonstrates that the limited brain of ants can be misled by circumstances as well as by clever manipulation from other creatures. The brain of this ant contains a simple behavioral program that directs that ant, when walking, to follow the ant ahead. And when these ants stumble into walking in a big circle, they sometimes walk round and round until they perish. It seems obvious, to me at least, that the human brain must often operate counterproductively, just like the ant's, usually in trying to solve problems more difficult than those faced by ants that don't have to design airplanes. The perception system of man clearly demonstrates just such an unfortunate outcome. Man is easily fooled, either by the cleverly thought-out manipulation of man, by circumstances occurring by accident, or by very effective manipulation practices that man has stumbled into during "practice evolution" and kept in place because they work so well.
P323. Error tendencies:
Reward- and punishment-superresponse tendency
Liking/loving tendency
Disliking/hating tendency
Doubt-avoidance tendency
Inconsistency-avoidance tendency
Curiosity tendency
Kantian fairness tendency
Envy/jealousy tendency
Reciprocation tendency
Influence-from-mere-association tendency
Simple, pain-avoiding psychological denial
Excessive self-regard tendency
Overoptimism tendency
Deprival-superreaction tendency
Social-proof tendency
Contrast-misreaction tendency
Stress-influence tendency
Availability-misweighing tendency
Use-it-or-lose-it tendency
Drug-misinfluence tendency
Senescence-misinfluence tendency
Authority-misinfluence tendency
Twaddle tendency
Reason-respecting tendency
Lollapalooza tendency—the tendency to get extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome.
P324. One of my favorite cases about the power of incentives is the Federal Express case. The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. The system has no integrity for the customers if the night work shift can't accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked. Early in the history of Xerox, Joe Wilson, who was then in the government, had a similar experience. He had to go back to Xerox because he couldn't understand why its new machine was selling so poorly in relation to its older and inferior machine. When he got back to Xerox, he found out that the commission arrangement with the salesmen gave a large and perverse incentive to push the inferior machine on customers, who deserved a better result. Then there is the case of Mark Twain's cat that, after a bad experience with a hot stove, never again sat on a hot stove, or a cold stove either. We should also heed the general lesson implicit in the injunction of Ben Franklin in Poor Richard's Almanac: If you would persuade, appeal to interest and not to reason." This maxim is a wise guide to a great simple precaution in life: Never, ever, think about something else when you should be thinking about the power of incentives.
P340. The human mind works a lot like the human egg. When one sperm gets into a human egg, there's an automatic shut-off device that bars any other sperm from getting in. The human mind tends strongly toward the same sort of result. And so, people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of good evidence that they are wrong.
P346. As I have shared the observation of life with Warren Buffett over decades, I have heard him wisely say on several occasions, "It is not greed that drives the world but envy."
P353. A man foolishly gambles in a casino and yet wins. This unlikely correlation causes him to try the casino again, or again and again, to his horrid detriment. Or a man gets lucky in an odds-against venture headed by an untalented friend. So influenced, he tries again what worked before—with terrible results. The proper antidotes to being made such a patsy by past success are 1) to carefully examine each past success, looking for accidental, non-causative factors associated with such success that will tend to mislead as one appraises the odds implicit in a proposed new undertaking; and 2) to look for dangerous aspects of the new undertaking that were not present when past success occurred.
P354. People disagree about how much blindness should accompany the association called love. In Poor Richard's almanack, Franklin counseled, "Keep your eyes wide open before marriage and half shut thereafter." Perhaps this eyes-half-shut solution is about right, but I favor a tougher prescription: "See it like it is and love anyway." Hating and disliking also cause miscalculation triggered by mere association. In business, I commonly see people under-appraise both the competency and morals of competitors they dislike. This is a dangerous practice, usually disguised because it occurs on a subconscious basis. Another common bad effect from the mere association of a person and a hated outcome is displayed in Persian messenger syndrome. Ancient Persians actually killed some messengers whose sole fault was that they brought home truthful bad news, say, of a battle lost. It was actually safer for the messenger to run away and hide instead of doing his job as a wiser boss would have wanted it done.
P361. The best antidote to folly from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity. This isn't easy to do well and won't work perfectly, but it will work much better than simply letting psychological nature take its normal course. While an excess of self-regard is often counterproductive in its effect on cognition, it can cause some weird successes from overconfidence that happens to cause success. This factor accounts for the adage "Never underestimate the man who overestimates himself." Of course, some high self-appraisals are correct and serve better than false modesty. Moreover, self-regard in the form of a justified pride in a job well done, or a life well lived, is a large constructive force. Without such justified pride, many more airplanes would crash. "Pride" is another word generally left out of psychology textbooks, and this omission is not a good idea. It is also not a good idea to construe the Bible's parable about the Pharisee and the publican as condemning all pride. Off all forms of useful pride, perhaps the most desirable is a justified pride in being trustworthy. Moreover, the trustworthy man, even after allowing for the inconveniences of his chosen course, ordinarily has a life that averages out better than he would have if he provided less reliability.
P365. Deprival-superreaction tendency often does much damage to man in open-outcry auctions. The social proof that we will next consider tends to convince man that the last price from another bidder was reasonable, and then deprival-superreaction tendency prompts him strongly to top the last bid. The best antidote to being thus triggered into paying foolish prices at open-outcry auctions is the simple Buffett practice: Don't go to such auctions.
P376. Through his life, a wise man engages in practice of all his useful, rarely used skills, many of them outside his discipline, as a sort of duty to his better self. If he reduces the number of skills he practices, and therefore the number of skills he retains, he will naturally drift into error from man-with-a-hammer tendency. His learning capacity will also shrink as he creates gaps in the latticework of theory he needs as a framework for understanding new experience. It is also essential for thinking man to assemble his skills into a checklist that he routinely uses. Any other mode of operation will cause him to miss much that is important. Skills of very high order can be maintained only with daily practice. The pianist [Ignacy Jan] Paderewski once said that if he failed to practice for a single day, he could notice his performance deterioration, and that after a week's gap in practice, the audience could notice it as well.
P386. Here is a short list of examples reminding us of the great utility of elementary psychological knowledge:
Carl Braun's communication practices.
The use of simulators in pilot training.
The system of Alcoholics Anonymous.
Clinical training methods in medical schools.
The rules of the US Constitutional Convention: totally secret meetings, no record vote name until the final vote, votes reversible at any time before the end of the convention, then just one vote on the whole Constitution. These are very clever, psychology-respecting rules. If the founders had used a different procedure, many people would have been pushed by various psychological tendencies into inconsistent, hardened positions. The elite founders got our Constitution through by a whisker only because they were psychologically acute.
The use of granny's incentive-driven rule to manipulate oneself toward better performance of one's duties.
The Harvard Business School's emphasis on decision trees. When I was young and foolish, I used to laugh at the Harvard Business School. I said, "They're teaching 28-year-old people that high school algebra works in real life?" But later, I wised up and realized that it was very important that they do that to counter some bad effects from psychological tendencies. Better late than never.
The use of autopsy equivalents of Johnson & Johnson. At most corporations, if you make an acquisition and it turns out to be a disaster, all the people, paperwork, and presentations that caused the foolish acquisition are quickly forgotten. Nobody wants to be associated with the poor outcome by mentioning it. But at Johnson & Johnson, the rule make everybody revisit old acquisitions, comparing predictions with outcomes. That is a very smart thing to do.
The great example of Charles Darwin as he avoided confirmation bias, which has morphed into the extreme anti-confirmation bias method of the double-blind studies wisely required in drug research by the FDA.
The Warren Buffett rule for open-outcry auctions: Don't go.
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