Charlie Munger is the vice chairman of Berkshire Hathaway and the longtime partner of Warren Buffett. He is also a renowned investor, thinker and philanthropist. He has a unique and multidisciplinary approach to stock selection, which he calls the **latticework of mental models**¹.
Munger believes that investors should master the best ideas from various disciplines, such as psychology, economics, mathematics, physics, biology and history, and use them to analyze and evaluate businesses. He argues that this method can help investors avoid cognitive biases, identify hidden risks and opportunities, and make better decisions¹².
One of the mental models that Munger uses frequently is the **inversion principle**, which he borrowed from a German mathematician named Carl Jacobi. This principle involves solving problems by reversing them or looking at them from a different perspective. For example, instead of asking how to succeed, one can ask how to avoid failure. Munger applies this principle to stock selection by avoiding companies that have poor management, low returns on capital, weak competitive advantages or unsustainable growth²³.
Another mental model that Munger uses is the **circle of competence**, which he shares with Buffett. This model suggests that investors should only invest in businesses that they understand well and can evaluate with confidence. Munger advises investors to be honest about their limitations and avoid venturing into areas where they have no expertise or edge²³.
Munger’s stock portfolio reflects his investment philosophy and mental models. He tends to invest in high-quality businesses that have strong moats, consistent earnings growth, favorable long-term prospects and trustworthy management teams. He also prefers to concentrate his portfolio in a few stocks that he has high conviction in rather than diversify widely³ . Munger uses the mental model of “opportunity cost” to evaluate investments by comparing them with other potential investments.
Some of the biggest positions in Munger’s stock portfolio as of September 2022 are Costco Wholesale Corp (COST), Bank of America Corp (BAC), Wells Fargo & Co (WFC), Alibaba Group Holding Ltd (BABA) and BYD Co Ltd (BYDDF).
(1) Charlie Munger on the Art of Stock Picking – Yahoo Finance. https://finance.yahoo.com/news/charlie-munger-art-stock-picking-160811831.html.
(2) Four Lessons From Warren Buffett And Charlie Munger – Forbes. https://www.forbes.com/sites/bill_stone/2022/05/08/four-lessons-from-warren-buffett-and-charlie-munger/.
(3) Charlie Munger Stock Portfolio: 5 Biggest Positions – Yahoo Finance. https://finance.yahoo.com/news/charlie-munger-stock-portfolio-5-211212203.html.