Mental Models: Part 2

Remember Mental Models Part 1? Where we discussed Charlie Munger’s Mental Models? That’s ok. You can read Part 1 ? Here. When you’re ready, let’s continue on our journey of creating the best mind in the world: “Charlie has the best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you can even finish the sentence.” – Warren Buffet 

⏮ Invert, Always Invert 

At a Harvard Commencement Speech back in 1986, Charlie enlightened us as to 3 things that are guaranteed to make life a misery: 1) Drugs 2) Envy 3) Resentment. He went on to describe 4 things that are guaranteed to make you a failure (cheerful, right?):
1) Being unreliable 2) Learning everything yourself 3) Giving up early 4) Ignoring the advice of inverting ?

INVERSION ➡️ Oftentimes in life it is hard to know how to create something. In fact, it’s easier to identify how NOT to create something and then avoid those pitfalls. This is the practise of inversion. Let’s use an example:

• How do you become a profitable crypto trader? Ouch. That’s the millionaire dollar question, isn’t it? And one hardly knows where to start!
• How do you NOT become a profitable crypto trader? Immediately, obvious things come to mind such as having good security in place to profit your funds and knowing how to use stop losses (to mention a few elements). For those interested, we have a Cryptocurrency Security Guide? and Stop Loss Video Tutorial?

To use Munger’s words: “try to be consistently not sutpid, instead of trying to be very intelligent”. Or, consider how to invert problems and avoid clear dangers, rather than aiming for a moonshot at your first attempt. Oftentimes, there is more to lose on the downside than there is to gain on the upside!

☃️ Compounding 

This is one of the most important concepts in investing: the value of a portfolio tends to grow exponentially.

• Diminishing returns tend to only come at very big numbers. Money begets money.
• A snowball is often used as an analogy here. As a snowball rolls it continues to get bigger and bigger. Compound interest can have a similar effect on your finances.
• Of course, there are management fees, brokerage fees and unnecessary taxes that ought to be avoided. 

For more on compounding, check out this video ? where we use thought experiments to convey the power of compound interest.

? Be Open To Changing Your Beliefs

Think back to the man with the hammer in Part 1. He probably loves that hammer. In fact, it’s a family heirloom, passed down through generations. It’s no wonder therefore, that he will struggle to use different tools.There are many psychological tendencies that cause us to hold on to old ideas. We need only be aware of this truth when we go through life.

To quote Munger again: “one should recognise reality even when one doesn’t like it. Indeed, especially when one doesn’t like it.”

? Faced between the choice to change our mind or search for proof to defend our current belief system, how often do we start searching for proof? This type of behaviour stops us from learning. Why be a man with a hammer when you can have an entire toolbox? Indeed each new idea is a new tool that can make you more effective in the future! This doesn’t make your hammer any less useful. It might just make you better equipped for future challenges, which may require a screwdriver.