Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger

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Charles T Munger passed away late last year, and I thought a good way to remember him would be to read “Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger” again. It is a compilation of speeches and thoughts from Charlie Munger, Warren Buffett’s long-time business partner at Berkshire Hathaway.

The book offers insights into Munger’s investment philosophy, life principles, and his concept of ‘elementary, worldly wisdom.’ It emphasizes the importance of multidisciplinary learning, mental models, and the psychology of human misjudgment.

Munger’s approach to decision-making and problem-solving is presented through his unique blend of humor, history, and economics, providing valuable lessons on how to think better and make wiser choices in both business and personal life.

Pessimists sound smart. Optimists make money

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Pessimists sound smart. Optimists make money – Nat Friedman, former CEO of GitHub

Picture this: It’s early 2020, COVID-19 has the world in its grip, and you’re on a Zoom call discussing investments. Who grabs your attention more?

Is it the friend who confidently asserts, “Stay the course, the market will recover,” or the one who paints a grim picture of collapsing supply chains, stunted economic growth, and impending chaos, advising everyone to cut their losses and wait it out?

Chances are the second friend sounds more thoughtful and gifted superior skills and insights compared to the first friend comes across as a lazy and not in touch with ground realities and for sure does it sound exciting.

However, as this recent history has showed that if you had stayed invested and actually put in more money – you would have caught one the fastest rebounds in the market. Many others who pulled out money from the markets were never able to get in again the market.

We’ve survived wars, recessions, terrorist attacks, financial scams, and more. Yet, through it all, the markets have consistently grown. Pessimism might sound intelligent, but optimism, though often dismissed as naive, is what drives progress.

Matt Ridley in his book The Rational Optimist says – “If you say the world has been getting better you may get away with being called naïve and insensitive…If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize.”

This bias isn’t limited to finance. It’s rooted in us, from daily chores to life-changing decisions. It’s our genetic predisposition. Our ancestors have survived by being cautious, but today, optimism fuels our progress. As Nobel laureate Daniel Kahneman points out, we’re wired to prioritize threats.

For example – we have talked about “Peak Oil” and other natural resource shortages following this pattern. Predictions are typically based on “proven reserves”. When there is shortage, the market forces kick in – either the “unproven reserves” become viable or other alternatives resources/ technologies are identified.

Being an optimist isn’t naive; it’s strategic. It’s understanding that true change often comes from unexpected breakthroughs, not just known areas. Anticipating that we, as a society, will continue to innovate, adapt, and triumph despite today’s headlines.

Yes, skepticism has its place. It can protect us and encourage due diligence. But if it paralyzes us into inaction when opportunities knock, what good does it do?

My two cents: Save like a pessimist but invest like an optimist.

Where do you stand? Are you always retreating at the first sign of danger, or are you the kind that trusts the resilience and innovation that have always driven us forward?

It’s difficult to make predictions, especially about the future

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“It’s difficult to make predictions, especially about the future,” said that great baseball-playing philosopher, Yogi Berra. And yet we continue to try, churning out forecasts on everything from the commodity prices, price of oil to geopolitical shifts and even to the next world war.

In the areas of financial markets and planning, the track record of those making forecasts is not good.

For example – In the US, the investment firm Callan publishes every year an illustration of what it calls “The Callan Periodic table of Investments Returns”. Callan’s objective is to highlight the unpredictability of returns across various asset classes. In ranking investments from best to worst each year, Callan’s chart clearly shows the yearly swings of the asset class returns – performance is rarely consistent. It is usual to see asset classes that have delivered the best performance one year fall to last place the following year – there is no consistent pattern to investment performance, and often—just when it looks like there is a pattern developing — it reverses.

Similarly, in India – Mint Newspaper has been publishing the “Quilt ranking” at the end of every year for the last decade and results are (not surprisingly) like the results from Callan.

Yogi Berra was right. It is hard to predict the future, but that does not stop people from trying. 😀

So, what is the solution to this “feature” of the financial market – where they have a personality of their own and unpredictable, volatile, and influenced by millions of factors from global events to market sentiment. 🌍💹

While we cannot predict the future with certainty, we can prepare for it. That is where the art of financial planning comes into play. It is about creating a strategy that is robust enough to handle the market’s mood swings and flexible enough to adapt to life’s curveballs. The bedrock of this strategy is Diversification.

Remember, Diversification is not just a fancy investment term; it is the financial safety net. And an emergency fund is not a luxury; it is a necessity. When it comes to investing, thinking long-term. The market may dance to its own tune in the short run, but it is your steady written strategy that leads the way eventually.

So, what is your approach to planning for the unpredictable? Drop your thoughts, strategies, or questions below. Let us navigate this unpredictable journey together. 🚀

References:

  1. The Callan Periodic Table of Investment Returns: Year-End 2023
  2. Mint Asset Allocation Quilt: Year-End 2023

The Basics – Your Money, Your Way

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As a Personal Finance enthusiast, I’ve noticed a common trend – a lot of folks are navigating their financial journey without a roadmap. And let’s be honest, that’s like trying to find a hidden treasure without a map or compass. 🗺️💰

Without a solid plan, it’s easy to get swayed by the latest investment buzz, family advice, or even FOMO! But remember, there’s a method to the madness. Personal finance isn’t just about following your gut; it’s a beautiful blend of art and science. 🎨🔬

So, let’s break it down. Here’s a quick rundown of the steps you should consider to craft a truly “personal” financial plan that’s as unique as you are.

1️⃣ Goal Planning: Start by identifying your financial goals. Whether it’s buying a house, planning for retirement, or funding your child’s education, having clear goals is the first step towards financial freedom. As Zig Ziglar once said, “A goal properly set is halfway reached.”

2️⃣ Net Worth: Understand your current financial standing by calculating your net worth. This will give you a clear picture of where you stand today and what you need to do to reach your goals. As Warren Buffet wisely advises, “Do not save what is left after spending, but spend what is left after saving.”

3️⃣ Risk Profiling: Everyone has a different risk tolerance. Understand yours to make informed investment decisions. Remember the words of Benjamin Graham, “The investor’s chief problem—and even his worst enemy—is likely to be himself.”

4️⃣ Insurance: Protect your financial plan from unexpected life events. Ensure you have adequate life, health, and home insurance.

5️⃣ Emergency Fund: Life is unpredictable. An emergency fund acts as a financial safety net for unexpected expenses.

6️⃣ Debt Reduction: High-interest debt can be a significant roadblock in your financial journey. Prioritize paying off your debts. As Robert Kiyosaki suggests, “Good debt makes you rich and bad debt makes you poor.”

7️⃣ Investments: Finally, invest wisely. Diversify your portfolio and align your investments with your financial goals and risk profile. As Peter Lynch reminds us, “Know what you own, and know why you own it.”

Just as each person is unique, so too should be their financial plan. Your financial plan should be a reflection of your life, your dreams, and your comfort levels. It should be flexible enough to adapt to the changes in your life and robust enough to withstand market fluctuations.

A young professional starting their career might prioritize paying off student loans and building an emergency fund, while a mid-career professional might focus on retirement planning and children’s education. A retiree, on the other hand, might focus on estate planning and preserving wealth for the next generation.

I’ve seen the power of a comprehensive financial plan in action. It’s not just about numbers; it’s about crafting a roadmap to your dreams. 🗺️💰

Remember, Rome wasn’t built in a day, and neither will your wealth. It’s a journey, not a race. 🏃‍♂️💨

If this all sounds overwhelming, use Certified and SEBI registered Personal Financial Planners to help you with this important journey.

I’d love to hear your thoughts on this. What steps have you taken in your financial planning journey? What challenges have you faced? 💬