Biography Edition: Charlie Munger's Playbook for the Painting Entrepreneurs

Welcome to the Profitable Painter Podcast, Biography Edition, where we delve into the lives of some, of some of history's most successful individuals to uncover the strategies, tactics, and mindsets that propelled them to greatness. Today, we're exploring the extraordinary life of a figure whose keen observations and common sense led to one of the greatest massings of wealth in the last 100 years. Join me as we navigate the journey of this remarkable individual and extract invaluable lessons you can apply to elevate your professional painting business. Get ready to be inspired, to learn, and to transform the way you think about success and leadership in your own entrepreneurial journey. Charlie Munger is an American investor, businessman, and philanthropist best known as the vice chairman of Berkshire Hathaway, the conglomerate that led— that's led by Warren Buffett. And he's born in Omaha, Nebraska in 1924. Munger is revered for his sharp wit, profound wisdom on investment and life, and his straightforward approach to business and economics. Alongside Buffett, he played a crucial role in growing Berkshire Hathaway from a struggling textile company into one of the largest and most successful corporations in the world. With a diverse portfolio of businesses and investments, Munger is also celebrated for his multidisciplinary approach to problem solving and decision making, often drawing on a wide range of disciplines beyond economics, including psychology, history, and physics. Beyond his business achievements, he is noted for his significant philanthropic efforts, having donated millions to various causes and institutions. So I read Poor Charlie's Almanac this past week And it was a— highly recommend this book, has a lot of wisdom in there that I was able to extract, and, and I'm going to go through it with you today. And basically, Poor Charlie's Almanac is kind of like a biography in the beginning, and then it goes into several different talks that Charlie gave where he's basically giving advice to people on how to live their lives and to make money. And so, uh, here's a quote from the book: The quotes, talks, and speeches presented here are rooted in the old-fashioned Midwestern values for which Charlie has become known: lifelong learning, intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, and willingness to test one's own beliefs. So Let's dive into Charlie's life. Here's a quote from the book: Charlie's teachers remember a smart kid who was also inclined to be a bit of a wise— a wiseacre. He enjoyed challenging the conventional wisdom of teachers and fellow students with his ever-increasing knowledge gained through voracious reading, particularly biographies. So Charlie started reading biographies from an early age. And he's known for having like a huge library and is able to recall and give examples of famous people throughout history to prove his points. So he is an avid reader that— this is an encyclopedia. He's basically a walking encyclopedia, or he was. I should note that Charlie Munger did pass away late last year. Definitely a great loss, but he did live a full life and he did pass on a lot of lessons to us. So here's another quote from the book: Charlie's grandfather was a respected federal judge. Charlie's immediate family was not dramatically affected by the Depression, but some members of Charlie's extended family were. This era provided real learning experiences for young Charlie. He witnessed the generosity and business acumen of his father as he helped rescue a small bank that was owned by Charlie's Uncle Tom. Because of the miserable economy and drought-damaged crops, the bank's farm-based clients were defaulting on loans. Tom had rolled up $35,000 in uncollectible notes when he called upon Grandpa Munger for support. The judge risked nearly half of his assets by exchanging $35,000 in sound first mortgages for the bank's weak loans, thus enabling Tom to open his doors after Roosevelt's bank holiday. The judge eventually recovered most of his investment, but not until a great many years later. Judge Munger also sent his daughter's husband, a musician, to pharmacy school and helped him buy a well-located pharmacy that had closed, had closed because of the Depression. The business prospered and secured the future for Charlie's aunt. Charlie learned that by supporting each other, the Mungers weathered the worst economic collapse in the nation's history. So basically, I think the takeaway for this is you need to have a mission that's larger than just yourself, right? You want to be dependable for your family and maybe extend that to family and friends. You want to be a dependable person for your, your tribe. And this is, this is what I try I try to do in my life, and I think it definitely pays to do this. It's not just selfless, I think it's self-serving as well, because if you're helping others, they want to help you. And so it goes on, you know, Charlie's life wasn't all sunshines and rainbows. He definitely had some challenges in his life. Here's a quote from the book: Despite outward appearances, all was not sunny in Charlie's world. His marriage was in trouble, and he and his wife finally divorced in 1953. Not long after, Charlie learned that his adored son Teddy was terminally ill with leukemia. It was a significant burden for 29-year-old Charlie in that era. Before bone marrow transplants, there was no hope. A friend remembers that Charlie would visit his son dying in the hospital and then walk the streets of Pasadena crying. So definitely, probably one of the worst things that you could experience in your life is the death of your child, especially at such a young age. So Charlie definitely had some challenges throughout his life, and he didn't actually meet Warren Buffett until he was in his, his 30s. Charlie Munger started out as a lawyer He got a degree from Harvard, who he actually never got a bachelor's degree, but he, um, he was still accepted into Harvard Law School. And then he started a law firm, but then he eventually met Warren Buffett. And so this is a quote from the book out of that meeting. So during homecoming dinner, Charlie and Warren realized they share many ideas. It also became evident to others at the table that he was going— this is going to be a two-way conversation. As the evening progressed, the two young men, Warren, 29, and Charlie, 35, became engrossed in a wide-ranging dialogue covering many aspects of business, finance, and history. Where one was knowledgeable, the other was just excited to learn. Warren was unenthusiastic about Charlie's continued practice of law. He said that while law might be a good hobby for Charlie, it was far less promising business than what Warren was doing. Warren's logic helped Charlie to decide to quit the law practice at the earliest point he could afford to do so. When Charlie returned to Los Angeles, the conversations continued via telephone and lengthy letters, sometimes as long as 9 pages. It was evident to both that they were meant to be in business together. There was no formal partnership or contractual, uh, relationship. The bond was created by a handshake and and backed by two Midwesterners who understood and respected the value of one's words. So this is the first meeting between Warren Buffett and Charlie Munger. Charlie was quoted as saying, "Trust is the greatest economic force on earth." I think this was gained by experience. The relationship between Charlie and Warren is basically a handshake, and they go into business together, and they've had that business going on decades and decades, and they've made a ridiculous amount of money doing this venture together. And I think if you're ever going into business with someone else, you probably should kind of look at what's worked in the past, because a lot of partnerships do not end well. And so it's very risky to go into business with a partner. So you really need to make sure you trust that person. It's basically like a marriage. You want to treat a partnership basically like you're gonna marry this person, because you are from a business perspective. So I think Charlie and Warren definitely gelled quite well, and they've proven that, that it was a good marriage to go forward with. Now I'm gonna kind of shift into kind of taking pieces out of the book on different themes. One of the themes is learning. Charlie was— is a lifetime learner. He's He was quoted as saying, you know, you should wake up each day or go to bed each day a little wiser than you were the day before. And here's a quote from the book: Charlie's affinity for Benjamin Franklin's expansive career in government, business, finance, and industry can be found in his many speeches. And whenever he holds an audience, large or small— at the 75th anniversary of See's Candies, Charlie said, I am a biography. Nut myself. And I think when you're trying to teach the great concepts that work, it helps to tie them into the lives and personalities of people who develop them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better for you in life and work better in education. It's a way— it's way better than just giving the basic concepts. So this is kind of what we're doing right now, right? We're going through biographies and connecting ideas with people and their story, and it kind of helps things to sink in better, at least for me. And it appears like it did so for Charlie as well. There's another quote for the book: his insatiable appetite for learning, his uncanny ability to evaluate businesses using simple frameworks that produced more reliable analysis than complex financial statements and his partnership with Buffett. He was always learning and he was able to grab mental models from other, from multiple disciplines and kind of use them in his decision-making process in a checklist format to evaluate his thinking and to make wise decisions and execute good judgment. So that was kind of his superpower. And we're going to go more into mental models here in a bit. First, I want to cover one of the other themes is avoiding misery. He did a whole talk on how you can avoid misery. It was a speech he gave at a university graduation. He actually modeled it off of a talk or a speech that Johnny Carson did before, and he just kind of took that same idea and expounded on it. Instead of doing a, a talk on how to be happy, he, um, he did an inverse of that and said how to guarantee misery. So his talk was on how to guarantee misery. So this is one of the mental models that he uses a lot, which is inverse. Always look at it from an inverse— something from an inverse perspective to get better insight into it. He talks about how to guarantee misery. There's 4 things basically. One, you want to be unreliable if you want to guarantee misery, you know, not be dependable. Number 2, you want to ignore the best work done by others. Basically, you don't want to learn from the past. You just want to ignore that. Don't learn from history. Just do whatever comes to mind to you and don't worry about what happened in the past. Obviously, that's not— that's definitely a way to guarantee misery, because humans have learned so much over thousands of years, and we should definitely use that to our advantage as we grow and go through our lives. So we want to look back on what others have done to improve our own lives. And number 3 was to give up at the first setback. If you want to guarantee misery, give up at the first setback. Number 4 is approach problems in a standard way and only believe information that agrees with your previous conclusion. So obviously this is— number 4 is kind of you're not learning and you're not evaluating your thinking, and you're just kind of going with the confirmation bias and only, you know, finding information that supports your, your current conclusion. So those were the 4 things that he said. That you should do if you want to guarantee misery: be unreliable, ignore the best work of others, give up at the first setback, and approach problems in a standard way and look at information that supports your previous conclusion. Um, so that kind of goes into the next theme of, of, uh, the book, which is mental models. So I'm going to read a quote from the book: His models supply the analytical structure that enables him to reduce the inherent chaos and confusion of a complex investment problem into a clarified set of fundamentals. Especially important examples of these models include the redundancy and backup system models from engineering, the compound interest model for mathematics, the breakpoint tipping moment and autocatalysis models from physics and chemistry, the modern Darwinian synthesis model from biology, and cognitive misjudgment models from psychology. Charlie basically thought that you should have a bunch of these models in your mind, and so whenever you're faced with a new problem, you kind of go through those models. And the models don't have to be— you don't have to know the details of everything, you just have the big ideas in your head. So you can kind of test the problem against those ideas, those big, big picture ideas in your head, and kind of make sure you're thinking through things clearly. So I'm going to go through some of the tendencies. These are like psychological tendencies. He kind of used these psychological tendencies as a checklist for his own thinking to make sure he wasn't making bad decisions. This was in Talk 11, which is towards the end of the book. One of the tendencies was reciprocation tendency. So people tend to feel obligated to reciprocate favors or gifts even when it may not be in their best interest. And he has a lot of anecdotes on these. Basically, you can use this reciprocation tendency to protect yourself. Like if somebody If you go to a car salesman and they're treating you all nice, they give you a cup of coffee, you know, and sit you down in a nice chair and all that stuff, the tendency for humans is to pay that car salesman back by maybe agreeing to the initial price, you know, not wanting to negotiate as much. And so you can keep that in mind when you're going through those experiences and try to protect yourself against that. Also, you can use it to your advantage in your sales process, like Providing a gift to a prospective client, you know, when you go over an estimate, bring over a nice little gift to thank them for the opportunity to provide them an estimate. And you can kind of exploit the reciprocation tendency for your own purposes. Another bias or tendency was the incentive-caused bias. So people's behavior can be heavily influenced by incentives, sometimes leading to unethical or irrational decisions. So incentives was a big thing that Charlie hit on a lot, making sure you get the incentives right in your business, especially because if you can get the incentives right, it's like a superpower for your business. It will— that's the rocket fuel. If you can get everybody on the same page, moving the same direction. But if you get the incentives wrong, that's also bad. Or if the incentives can be faked, if you can fake the numbers, that's going to be bad as well. Because people are going to do things that are in their, that are in their interest. So you got to get the incentives right. Number 3, with social proof, individuals often look to the actions of others to determine their own behavior, especially in uncertain situations. So this is the social proof tendency. If everybody else is doing it, maybe I'll do it too, kind of thing. You can use this to your advantage, this tendency to your advantage when you're in your sales process. For example, if you have stacks and stacks of social proof of all the people used your business, you know, that's gonna be very compelling because it's exploiting that reciprocation tendency. And if you can stack all the, a lot of these tendencies together, if you're doing providing a gift, you're doing social proof, you're providing some sort of incentive for them to sign up with you today. If you're stacking these tendencies in your sales process, for example, or whatever situation, it's gonna have what Charlie Munger calls a Lollapalooza effect, where it's just gonna be overwhelmingly compelling for that person to act. So that's something really cool that you can kind of go through. Tocqueville goes through all these tendencies. Those are 3 of the 25 he goes through. Now, the next topic I'm gonna talk about is the incentives. I'm gonna read a quote from the book here. Almost everyone thinks he fully recognize— fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so. I think I've been in the top 5% of my age cohort almost all my adult life in understanding the power of incentives, yet I've always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower. 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 the employer wanted was not maximize billable hours of employee service, but fault-free rapid performance of a particular task. Maybe this, the per— the 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 had a similar experience. He couldn't understand why its new machine was selling so poorly in relation to its older and inferior machine. He found out that the commission arrangement with the salesmen gave a larger and perverse incentive to push the inferior machine on customers. This maxim is a wise guide to, to a great and simple precaution in life: never ever think about something else when you should be thinking about the power of incentives. The most important rule in management is get the incentives right. Just this one idea you can implement in your business. When I heard it, this part of the book, it just made me rethink my incentive structures in my business. So making sure your crews are incentivized to perform work that is efficient and providing good service, making sure your, your sales team is incentivized to close work that is profitable, and making sure you've incentivized your production managers to produce work that is efficient but also getting you high customer satisfaction ratings. So those are— you have to build in those things, you know, bonuses, a performance-based system, something to get everybody on the same page, moving towards the same goals. And then the last thing here, last note, is the focus and patience. There are huge advantages for early birds. This is a quote from the book: Huge advantages for early birds. When you're an early bird, there's a model that I call surfing. When a surfer gets up and catches the wave and just stays there, he can go a long, long time. But he gets off the wave, he becomes mired in the shallows. But people get long runs when they're right on the edge of the wave, whether it's Microsoft, Intel, or all kinds of people, including National Cash Register. Surfing is a very powerful model. So basically, once you're in a— once you get a good business going, the whole thing is surfing, staying there, improving, continuing. People get distracted and they want to, "Oh, I'm doing really good here, maybe I'll do something else too." They get distracted and they start diversifying their efforts and their focus. And that is not a good thing to do. People who are— get massive, massive success is because they focused on one thing for a long time. And so here's an example. Disney is an example of autocatalysis. So autocatalysis is the reaction where a product of itself acts as a catalyst for the reaction. So it's like self-reinforcing. And there's A quote from the book about Disney here: Disney is an amazing example of autocatalysis. They had all those movies in the can, and just as Coke could prosper when refrigeration came, when the video cassette was invented, Disney didn't have to invent anything or do anything except take the thing out of the can and stick it in the cassette. And every parent and grandparent wanted his descendants to sit around and watch that stuff at home on videocassette. So Disney got this enormous tailwind from life, and it was billions of dollars worth of tailwind. Obviously, that's a marvelous model if you can find it. You don't have to invent anything. All you have to do is sit there while the world carries you forward. By the time it's done, The Lion King alone is going to do plural billions. And by the way, when I say when it's done, I mean 50 years from now or something. But plural billions from one movie. So if you— basically the takeaway I think from this quote is if you stay in the game long enough, you can get lucky and ride a wave, and you can potentially get in a situation where you're just getting results fed to you. But the key is you get to stay in the game and be in there for the long term and not kind of jump around and get distracted and pursue other opportunities. Then the final theme here is a circle of competence. So the circle of competence is simple, and this is a quote from Charlie Munger: each of us through experience or study has built up useful knowledge on certain areas of the world. Some areas are understood by most of us, while some areas require a lot more specialty to evaluate. And then he goes on I think about things where I have an advantage over other people. I don't play in a game where the other people are wise and I'm stupid. I look for a place where I'm wise and they're stupid. You have to know the edge of your own competency. I'm very good at knowing when I can't handle something. 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. So not only do you need to stay engaged in the same, uh, endeavor for a long period of time, but during that period of time, you're probably going to get that circle of competence. You're going to gain a great deal of competence in that area, and it behooves you to stay in that competence area because you're going to be wiser than other people. You're making better decisions, doing more creative strategies, and so on. So it's going to be self-reinforcing to stay in longer, uh, in that. So it's just a common thing that I've fallen into in my own life is once you get more successful, there's other opportunities that present itself, and those can seem very attractive, and you might like want to jump ship in your own— the thing that got you to success— to go pursue another opportunity because it looks really, you know, the grass is always greener. But that's usually not the right move. Just staying focused on your area of expertise and where you've made your success is probably the right move to stay in that area and continue to to improve, get better, develop that circle of competence, and continue that focus. So overall, this book was— is just full of lessons from Charlie Munger. So I highly recommend you pick up a copy of Poor Charlie's Almanac and just get some of the life lessons that he passes on. He had a long life and he had a huge amount of success that he's directly passing on to you. So It's definitely worth the few dollars of investment to grab the book and get some pointers from Charlie Munger himself. And with that, we'll see you next week.