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Charlie Munger on the Power of Mistakes

·3 min read

- By

Charlie Munger (Trades, Portfolio) is best known for his investment prowess. However, over the years, he's also spoken at length about human psychology.

Munger spends a tremendous amount of time reading and learning. He also spends a lot of time thinking. This provides him with the insight and time required to develop thoughts on psychology and analyze the human condition.

He might not be known for his views on human psychology, but that doesn't mean we should disregard his thoughts. Indeed, the billionaire investor has issued some very astute advice over the years on how to live a good life and improve one's thought process.

How to succeed in life

In a speech to the Harvard School in June 1986, Munger spoke about his tips for living a good life and how to construct a life that allows one to achieve the best possible results.

In a classic Munger way, rather than standing there and telling the audience what not to do, the speaker inverted the problem. He went on to outline what he called the five "prescriptions for sure misery."

To put it another way, if one followed the prescriptions the speaker laid out, one would have a miserable life. But if one avoided these prescriptions, the quality of one's life would significantly improve.

The five prescriptions the billionaire laid out were:

  1. Ingesting chemicals in an effort to alter mood or perception

  2. Being envious or resentful

  3. Being unreliable

  4. Letting life get you down

  5. Not learning from past mistakes

As this is an article about investing, I'm not going to spend a lot of time debating the ethical considerations of ingesting certain chemicals and the psychological implications of letting life get you down.

However, I do believe that not learning from past mistakes is one of the biggest errors investors can make. As such, I wanted to highlight the comments Munger made on this topic:

"You can see the results of not learning from others' mistakes by simply looking about you. How little originality there is in the common disasters of mankind -drunk driving deaths, reckless driving maimings, incurable venereal diseases, conversion of bright college students into brainwashed zombies as members of destructive cults, business failures through repetition of obvious mistakes made by predecessors, various forms of crowd folly, and so on. I recommend as a memory clue to finding the way to real trouble from heedless, unoriginal error the modern saying: 'If at first, you don't succeed, well, so much for hang gliding.'"

As Munger explained in 1986, there are many things we can learn from the mistakes of others, especially when it comes to business.

I don't have to look very far to provide an example. At the time of writing, one of the biggest stories in the financial press is the resignation of the CEO and chief financial officer of electric vehicle start-up Lordstown Motors (NASDAQ:RIDE). The duo resigned after the company warned that it is at risk of failing because of a lack of funds. It has also revealed that it has been overstating initial order values.

The company, which used a SPAC to go public, is a great case study of the risks of any public offering. While we don't know how this situation will unfold, what is clear is that the business needed to present the most optimistic business case to investors to get them to buy.

The same risks are present in any IPO process. The company, or in the case of an IPO, the investment banks, want to present the most optimistic view possible because they are the sellers. They are trying to sell an asset and want to get the best price possible. The whole situation favors the seller.

This is just one case study that provides a learning experience. As Munger noted in 1986, overlooking and ignoring these past mistakes is one of the most egregious errors an investor can make.

This article first appeared on GuruFocus.