Charlie Munger’s Investment Wisdom: Top 10 Mental Flaws to Avoid for Success!

Charlie Munger’s Investment Wisdom: Top 10 Mental Flaws to Avoid for Success!

Dive into the world of investment genius with our video on ‘Charlie Munger’s Top 10 Investment Principles‘!

📈🧠 In 1995, Charlie Munger, the renowned investor and Vice Chairman of Berkshire Hathaway, delivered a legendary lecture at Harvard not about investment strategies, but about the mental flaws that affect business decisions.

Charlie Munger's Investment Wisdom: Top 10 Mental Flaws to Avoid for Success!
Charlie Munger’s Investment Wisdom: Top 10 Mental Flaws to Avoid for Success!

In this blog/podcast/video, we unravel Munger’s insightful guidance on avoiding cognitive biases and mental errors that can skew decision-making. Munger’s principles go beyond investing; they offer a blueprint for making smarter decisions in business and life.

🔍 What you’ll learn:

  1. Overreaction to Loss: Understand why focusing too much on avoiding loss can lead to missing significant opportunities.
  2. Inconsistency-Avoidance: How clinging to beliefs can blind you to vital information.
  3. Availability-Misweighing: The dangers of oversimplifying complex situations.
  4. Twaddle Tendency: Recognizing when information is fabricated or exaggerated.
  5. Social-Proof Bias: The risk of following the crowd blindly.
  6. Overoptimism Tendency: Managing unrealistic expectations and assessing risks accurately.
  7. Reward and Punishment Superresponse: The underestimated influence of incentives in decision-making.
  8. Pain-Avoiding Psychological Denial: The tendency to distort reality to protect the ego.
  9. Influence-from-Association: Avoiding negative bias based on association.
  10. Lollapalooza Tendency: Identifying when multiple mental flaws combine to create extreme outcomes.

Munger’s wisdom is a key to unlocking exceptional decision-making skills, as evidenced by his success with Berkshire Hathaway.

Join us as we delve into each of these principles, providing real-world examples and actionable insights. Share your thoughts and experiences in the comments below! #CharlieMunger #InvestmentPrinciples #CognitiveBiases #BusinessWisdom #BerkshireHathaway”

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📖 Read along with the podcast:

So, back in 1995, Harvard University invited Charlie Munger to give a lecture to its students. Now, one might assume that Munger, being the Vice Chairman of Berkshire Hathaway and a highly respected figure in investing, would impart valuable insights on how to excel in the world of finance. But interestingly enough, Munger had a different approach. He focused on something far more important than investing advice – he delved into the realm of mental flaws that affect every single business decision we make.

See, our brains are fascinating organs that constantly take shortcuts when it comes to decision-making. It’s just the way we’re wired. But here’s the kicker – these shortcuts often lead us astray, tricking us into believing that our flawed thinking is actually accurate. So, what Munger recognized was that avoiding these mental flaws was the key to his success in building Berkshire Hathaway.

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In Munger’s most famous lecture, he emphasized the significance of being able to see and, importantly, avoid these mental flaws. He believed that it was more critical than any specific investing advice he could give. So, what were these mental flaws that Munger warned his Harvard students about? Let’s dive into the ten most critical ones.

The first flaw is the overreaction to loss. We have a tendency to overemphasize loss rather than focusing on potential gains. Munger advised his students not to miss out on a big opportunity just because they wanted to avoid a small loss.

The second flaw is inconsistency-avoidance. When we hold a belief, we tend to identify with it strongly. As a result, any information that clashes with our beliefs appears twisted or distorted. Munger urged his students to see information for what it truly is, without letting their preexisting beliefs cloud their judgment.

Next up is availability-misweighing. Munger pointed out that the simplest answers to complex situations often become viral and widely accepted. However, just because others provide a single explanation for why something happens, it doesn’t mean that the whole picture has been revealed. Munger encouraged his students to assume that they could be missing important information whenever they are presented with only one response.

The fourth mental flaw is what Munger called the “twaddle tendency.” People have a knack for making things up as they go along, especially when they want to appear more intelligent than they actually are. Munger advised his students to be skeptical and assume that some percentage of any given explanation is simply fabricated.

Then there’s the social-proof bias. As humans, we often tend to follow the crowd and assume that popular ideas must be true. But Munger cautioned against this tendency, reminding his students that popularity doesn’t equate to accuracy. It’s important to think critically and not blindly follow the masses.

Moving on to the sixth flaw, Munger highlighted the overoptimism tendency. We humans have a tendency to be overly optimistic, which can cloud our judgment and make it difficult for us to accurately assess risks. Munger advised his students to seek a third-party perspective to evaluate the downside risks of their decisions.

The seventh mental flaw is what Munger termed the “reward and punishment superresponse.” Essentially, we underestimate the impact that incentives have on driving behavior. Before working with others, it’s crucial to understand their incentives and motivations.

Next up is the pain-avoiding psychological denial. When faced with an uncomfortable truth, we often skew our perception of reality to avoid the pain that accompanies it. While this may protect our ego in the short term, it ultimately hampers our decision-making process. Munger encouraged his students to confront uncomfortable truths head-on and base decisions on accurate information.

Influence-from-association is another mental flaw Munger highlighted. Essentially, when we associate an idea with something negative, we automatically assume that the idea itself is bad. Munger advised his students to look for valuable lessons even in ideas that others tend to avoid due to negative associations.

Lastly, there’s the lollapalooza tendency. When multiple mental flaws come into play together, they can amplify each other and lead to extreme outcomes. Munger urged his students to be vigilant for situations where multiple flaws might be at work, as they can significantly impact the logic behind decisions.

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Now, here’s the thing – most people are not fully aware of just how much these mental flaws skew their decision-making processes. But Munger, with his exceptional ability to recognize and confront these flaws, was able to build Berkshire Hathaway into a powerhouse. So, the key takeaway here is to protect against these mental flaws in your own decision-making. By doing so, you can elevate yourself to the level of a top-notch decision-maker, just like Munger.

And with that, we’ve covered the ten critical mental flaws that Charlie Munger warned his Harvard students about. These flaws have the potential to significantly impact our decision-making, so it’s essential to be aware of them and actively work to counteract their influence.

Remember, decision-making is a multifaceted process, and understanding the common pitfalls can help us make better choices in both our personal and professional lives. So, take Munger’s wisdom to heart, and may your decision-making skills soar to new heights!

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In this episode, we explored the importance of avoiding mental pitfalls in business decisions and recommended “AI Unraveled” as a comprehensive guide to AI investing. Thank you for joining us on the “Djamgatech Education” podcast, where we strive to ignite curiosity, foster lifelong learning, and keep you at the forefront of educational trends – so stay curious, stay informed, and stay tuned with Djamgatech Education!

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  • account down -63% by 11 min meltdown at market open
    by /u/Arbitrage- (wallstreetbets) on July 12, 2024 at 4:10 am

    Long read. Account down -63% by actions taken during a melt down in the span of 11 minutes at market open this morning. Lessons at the end so you can avoid doing what I did. I held 100 $NVDA Jul 19 24 135 CALLS at $3.60 avg at close yesterday. NVDA was pumping into close, and I had done great trading it (+$9k day). Since they were weekly options, I decided I wanted to lock in profits (peel strategy) and leave a portion to ride, so I sold 80 of the calls and kept 20 at avg price of $3.60. Next day, today, CPI print came in below expectations, pre-market was PUMPING. NVDA closed yesterday at $134.91. It was into its follow through from a base breakout with momentum and volume that started Tuesday. Admittedly though, it was on its 3rd day of the breakout. Who cares about the 3rd day breakout (I should), here we were, pre market $NVDA 137.32 high. FUCK YES. Yet, something didn't sit right. I fucking sold 80 of my Jul 19 24 135 CALLS for $3.90 avg yesterday at 3:58 and 3:59 right before market close. All because I wanted to follow my rules and not carry 100% of my portfolio on weekly options. And this morning after CPI print, we saw Shrek's wiener in pre-market. I was more annoyed, if that’s the right feeling, than happy in pre-market. I had left money on the table. Regardless that my 20 calls were up. It didn't matter. Market opens, $NVDA at $135.75. Not bad, pulled back from its highs pre market. Calls I sold yesterday were at $ $4.30-35, when NVDA reached its high of the day at $136.15. Probably within the first 10-15 sec of market open. In my eyes, the continuation of the breakout, and momentum from pre-market high. Suddenly, the stock, and calls, began to drop. Jul 19 24 135 CALLS were at $4:15. Here was my chance to get back my calls that I closed yesterday on this pull back, I thought, buying 10 shares at 9:30:48 for $4.14 avg. At 9:32 the stock pulled back even further, as did my position of now 30 calls. And for some reason, even now as I'm writing this, I can't for the love of god understand why I put an order in to buy another 10 calls. But that’s what I did. At 9:32:47 for $3.95 avg. I'm a fucking dumbass. I'll call myself out. Why the fuck would I buy on that drop. I'm looking at the 1 min chart right now for today and I bought on momentum and high volume decline. What the fuck. And to top it off, the next 3 1 min candles are a pull back to the down side (i.e., stock go up) with LOW FUCKING VOLUME. And my dumbass for some reason thought it was a good time to buy. That fucking "don't catch a falling knife" saying got me. At 9:33:15, I bought another 15 calls for $3.75 avg. (notice I'm doubling, tripling down on a losing position - breaking another rule). However, by the close of the 9:33 1 Min candle, I FLET LIKE A FUCKING GENIUS. I was right I thought, this is a just a pull back, and we are back onto the breakout momentum now. So at 9:34:13 I bought another 35 calls at $3.90 avg. And then the 9:35 candle happened. Now I'm in a deep loss for the day, taking out most of the $9K gain from yesterday. Still mad about the whole "leaving money on the table" revenge trading spiral I was in, my dumbass bought another 10 calls at 9:36:13 for 3.70 avg, and another 10 at 9:36:42 for $3.75 avg. I caught the bottom on the 1 min at 9:36. Again, thinking we were about to reverse to the upside and continue the breakout and pre-market momentum. I was blind to the fact that we were trending down on the day, and with strong volume. Yes even on the 1 min. I wanted to get my losses from today's position back, and what I had "left on the table" from closing out the calls yesterday. I felt like a genius from 9:36 - 9:38. Then the 9:39 1 min candle happened. It was downhill from there. I assume I must of said fuck it because at 9:41:38 I bought my last 10 calls at $3.35 avg. I watched NVDA drop for the next 2 hours, breaking another rule and not cutting losses. It had to go back up I thought. I went and did some pressure washing around the yard for the rest of the day. Anything to keep my mind off the charts. My current position is 130 Jul 19 24 135 CALL at avg. price of $3.84. It is my entire portfolio. Position at -63%. I will determine what I will do with the position tomorrow once I see pre-market. All those buys happened in 11 minutes, with majority in first 6 mins. I honestly have no idea what came over me to make those decisions, blatantly breaking trading rules I've set up for myself. But I did. Writing this has helped me realize some of the mistakes I made in managing the position during this morning's melt down. Below in case anyone wants to learn from others mistakes so you don't have to be a dumbass yourself. Don't trade first 15 - 30 min (mainly day trading). Especially if you already have a position. Let it play out until next setup appears, and set a trailing stop incase position goes against you Don't add to a losing position Be mindful of volume on pull backs (reversal with strong volume, or pull back with weak volume that will continue trend) Don't put your entire portfolio on weekly options (who would of thought...) Maintain position size for account Maintain stop and cut losses quickly Follow "peeling" strategy (sell off portions of position into strength - can use trailing stop) Best regards. submitted by /u/Arbitrage- [link] [comments]

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    A bunch of household defensive names are at 52-week lows. This includes things like Johnson & Johnson, Bristol Myers and Pepsico. The AI hype has relegated defensive stocks to the dustbin, but this is about to change in a big way. July is historically the strongest month in the summer for tech and it also has the highest statistical odds for the NASDAQ to form a multi-month market top. Today's big sell-off in tech, in reaction to better than expected inflation report, may seem illogical but it actually was predictable. This AI led tech rally flew too close to the sun and it's getting a little crispy here. This is by no means the end of the tech rally, but it's a clear signal that big money is rotating money out of tech and into these beaten down defensives. Especially as we enter the seasonally bearish time of the year in any year, but particularly bearish in election years. The fall. This is no secret, hedge funds have been dumping tech stocks at a record rate in recent weeks ahead of this CPI read, and who's been buying? Retail. So what's the deal with $PEP, why is it a good deal here? 1- The stock is at 52-week lows, but fundamentally the company is still growing and beating estimates. 2- There's a defensive rotation starting right now, that happens every year but is especially pronounced in election years and if you catch it early you can make so much money. 3- The stock has flashed a couple of very strong technical buy signals. It is now at a major supporting trendline, where the stock bottomed twice before. In the late 2018 market correction and in the COVID crash. It's at this support trendline again right now. Just trading at a trendline is not enough on its own to trigger a buy signal. This is where you have to look for other clues that big money is buying and we have plenty of those here. Sector rotation trackers have been showing that big money has been selling tech and buying staples in anticipation of bearish end of summer into fall seasonality. The stock also formed a double bottom with a bullish divergence. A historically powerful bottoming signal. That indicates stronger conviction by investors at these levels. A simple mean reversion, to the middle of $PEP's historical uptrend would mean a rally to $190+ before the end of the year. And because $PEP is a low volatility name, options are cheap. Meaning the stock doesn't have to move up much for you to make money hand over first with calls. Position : $180 January 2025 call x 120 contracts submitted by /u/CaspeanSea [link] [comments]

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