Do you think the only way to make money in investing is for stock prices to rise? If so, then in Charlie Munger’s view, you are very likely the man with the hammer. Munger said: To the man with a hammer, everything looks like a nail. You always think your investment method is best, yet you just don’t make money. The reason is simple: You invest for price differences, and you’ve been holding this unprofitable hammer all along.
What to do? You need to read Poor Charlie’s Almanack and use multidisciplinary mental models. Your friends, you yourself, and my investment practice have all proven that to make money in investing, a single mental model won’t work. You must use knowledge from multiple disciplines and analyze and think about problems from different angles to solve the various problems you encounter in investing.
I remember when I was a child in school, teachers often said: Learn math, physics, and chemistry well, and you can travel the world without fear. Thinking about it now, there is some truth to that. To build a multidisciplinary mental model in your brain, you need to know at least a little about different disciplines.
Munger said that although there are eighty or ninety multidisciplinary mental models for investing, you don’t need to master them all. From the perspective of the 80/20 principle, you only need to master three to five very important models. Two examples of the most commonly used ones in investing will make it clear.
First, compound thinking. This thinking comes from mathematics. With this thinking, you’ll understand that successful investing only requires doing three things well: work hard to save money, find good companies, and wait patiently. Among these three, the hardest and most important is patience. Getting rich slowly takes time—you can’t rush it!
Second, critical threshold thinking. This thinking comes from physics. It means that everything has a process, and only quantitative accumulation can lead to qualitative change. Investing is no exception. It is also a process of constant trial and error and constant review. During this process, you need to pass five passes and defeat six generals.
First, you must find the right investment method. Over my 16 years of investing, I’ve studied and used all kinds of money-making methods and techniques. In the end, I still think value investing is the most reliable path. I’ll put it this way: sooner or later, you will also walk this path. Why? Because when you, like me, have tried all the other paths in investing and not a single one worked, you’ll know what to do. In fact, Duan Yongping said long ago: All roads lead to Rome. Buffett’s value investing path may not be the best, but it will definitely get you there. I now deeply feel this.
Second, you must adhere to the correct investment philosophy of value investing, and never waver no matter when. A journey of a hundred miles is half over at ninety. Only by persisting through the last 10 steps can you reach Rome. Obviously, the 100th step here is the critical point. Unfortunately, 90% of people, perhaps just three steps into investing, lose a little money and then clutch their wallets tightly. Being cautious is not wrong, but for these people, the door to financial freedom through investing is completely closed from then on.
So far, which step has your investing reached? In investing, only by putting down the hammer of stock-price thinking and mastering the most important multidisciplinary mental models will you stop seeing everything as a nail!