1: There are currently eight companies worth over $1 trillion.
Six are technology companies. The seventh is Amazon, the world’s largest retailer, which some consider a technology company.
The eighth trillion-dollar company is Berkshire Hathaway.
“One of these things is not like the other,” goes the saying.
Berkshire Hathaway was led for many years by Chairman Warren Buffett and Vice Chairman Charlie Munger until he died in 2023 at the age of 99.
Berkshire invests in and acquires other companies. Not only is it not a technology company, but the firm generally avoids technology investments. Said Charlie: “Warren and I don’t feel like we have any great advantage in the high-tech sector.”
2: What Berkshire did have was Charlie’s investment methodology, which was “quite different from the more rudimentary systems used by most investors,” writes Peter Kaufman in Poor Charlie’s Almanack, the Wit and Wisdom of Charlie Munger.
Charlie’s approach to investing involved using what he called a “multidisciplinary approach,” which relied on the main mental models from a broad array of disciplines.
“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,” Charlie writes.
What we “need is a latticework of mental models in our heads. And we hang your actual experience and our 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.”
Charlie explains: “I’m really asking you to ignore jurisdictional boundaries. And the world isn’t organized that way. It discourages the jumping of jurisdictional boundaries. Big bureaucratic businesses discourage it. And, of course, academia itself discourages it. All I can say there is that, in that respect, academia is horribly wrong and dysfunctional.”
Charlie had little interest in superficial financial analysis. Instead, he “conducted a comprehensive analysis of both the internal workings of the investment candidate as well as the larger, integrated ecosystem in which it operates,” writes Peter Kaufman.
Warren and Charlie “borrow from and neatly stitch together the analytical tools, methods, and formulas,” Peter writes, “from such traditional disciplines as history, psychology, physiology, mathematics, engineering, biology, physics, chemistry, statistics, economics, and so on.”
So how many mental models did Charlie utilize? About 100, he estimated.
What were some of the critical ones? “Especially important examples of these models include the redundancy and backup system models from engineering; the compound interest model from 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,” Peter notes.
Why was this approach so successful? “His models supplied the analytical structure that enabled him to reduce the inherent chaos and confusion of a complex investment problem into a clarified set of fundamentals,” Peter observes.
Given the success of Berkshire Hathaway, why don’t more investors follow his path? “For most people,” Peter writes, “Charlie’s multidisciplinary approach is simply too hard. Further, few investors share Charlie’s willingness to appear foolish by not following the herd.”
3: Getting better at getting better is what RiseWithDrew is all about. Monday through Thursday, we explore ideas from authors, thought leaders, and exemplary organizations. On Fridays, to begin 2025, I am sharing some of Charlie’s wit and wisdom.
Let’s take a high-level look at Charlie’s process.
He began by identifying an “easy-to-understand, dominant business franchise that can sustain itself and thrive in all market environments,” Peter writes.
This step eliminated the vast majority of all companies.
Next up, the companies were screened against Charlie’s mental models. Peter writes: Charlie detested “the process of sifting through piles of sand for specks of gold. Instead, he applies his ‘big ideas from the big disciplines’ to find the large, unrecognized nuggets of gold that sometimes lie in plain site on the ground.”
All the while, Charlie was open to the “maximization or minimization of a single factor (notably specialization, as he likes to point out regarding Costco’s discount warehouses),” Peter notes, which can make that single driver “disproportionately important.”
Charlie also considered a “seemingly endless” list of additional factors, including such things as: “the current and prospective regulatory climate; the state of labor, supplier, and customer relations; the potential impact of changes in technology; competitive strengths and vulnerabilities; pricing power; scalability, environmental issues; and, notably, the presence of hidden exposures.”
He would then reclassify all financial statements to align with his sense of reality, including the liabilities listed on the balance sheet.
Charlie also delved into the quality of the company’s management “well beyond conventional number crunching—in particular, the degree to which they are ‘able, trustworthy, and owner-oriented,'” Peter notes.
Throughout all of these factors and analyses, Charlie was looking to understand the nature of the company’s competitive advantage in every respect, “including products, markets, trademarks, employees, distribution channels, societal trends, and so on—and the durability of that advantage,” Peter states.
Charlie’s term for competitive advantage was its moat: “Superior companies have deep moats that are continuously widened to provide enduring protection,” Peter relays. “In this vein, Charlie carefully considered competitive destruction forces that, over the long term, lay siege to most companies.”
Warren and Charlie are “laser-focused on this issue,” Peter writes. “Over their long business careers they have learned, sometimes painfully, that few businesses survive over multiple generations. Accordingly, they strive to identify and buy only those businesses with a good chance of beating these tough odds.”
Charlie believed “a great business at a fair price is superior to a fair business at a great price.” Says Warren: “Charlie understood this early. I was a slow learner.”
Charlie’s process was deliberate and intentional. It led to long periods with little activity. “This habit of committing far more time to learning and thinking than to doing is no accident,” Peter surmises.
So, what made for a great business or business model for Charlie?
Peter writes: “His recommended reading materials provide some guidance. Guns, Germs, and Steel, The Selfish Gene, Ice Age, and Darwin’s Blind Spot all have a certain theme: a focus on the issue of competitive destruction and an examination of why some activities are nevertheless able to adapt, survive, and even dominate over time. . .
“Charlie was possibly without peer,” Peter notes, “when it comes to the checklist of atypical investment factors he considers and his deep fluency in the diverse disciplines from which they are drawn.”
More next week!
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Reflection: How can I apply Charlie Munger’s multidisciplinary approach to enhance my own decision-making and problem-solving skills?
Action: Identify one mental model from a discipline outside my expertise and explore how it can be integrated into my current thinking or work.
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