Cover photo

$100k to $100m: Applying Charlie Munger’s Frameworks

I’m convinced that successful investing and decision-making hinges on the ability to see the world through a unique lens. This is where mental frameworks come into play - acting as powerful tools that shape our perception and guide our actions.

I’ve been thinking about this framework from Charlie Munger:

The first helpful notion is that it is usually best to simplify problems by deciding big no-brainer questions first.

The second helpful notion mimics Galileo's conclusion that scientific reality is often revealed only by math as if math was the language of God. Galileo's attitude also works well in messy, practical life. Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.

The third helpful notion is that it is not enough to think problems through forward. You must also think in reverse, much like the rustic who wanted to know where he was going to die so that he'd never go there. Indeed, many problems can't be solved forward. And that is why the great algebraist Carl Jacobi so often said, "Invert, always invert," and why the Pythagoreans thought in reverse to prove that the square root of two was an irrational number.

The fourth helpful notion is that the best and most practical wisdom is elementary academic wisdom. But there is one extremely important qualification: You must think in a multidisciplinary manner.

You must routinely use all the easy-to-learn concepts from the freshman course in every basic subject. Where elementary ideas will serve, your problem-solving must not be limited, as academia and many business bureaucracies are limited, by extreme balkanization into disciplines and subdisciplines, with strong taboos against any venture outside assigned territory. Instead, you must do your multidisciplinary thinking in accord with Ben Franklin's prescription in Poor Richard:

"If you want it done, go. If not, send."

If, in your thinking, you rely entirely on others-often through purchase of professional advice-whenever outside a small territory of your own, you will suffer much calamity. And it is not just difficulties in complex coordination that will do you in. You will also suffer from the reality evoked by the Shavian character who said, "In the last analysis, every profession is a conspiracy against the laity."

Indeed, a Shavian character, for once, understated the horrors of something [George Bernard] Shaw didn't like. It is not usually the conscious malfeasance of your narrow professional adviser that does you in. Instead, your troubles come from his subconscious bias. His cognition will often be impaired, for your purposes, by financial incentives different from yours. And he will also suffer from the psychological defect caught by the proverb "To a man with a hammer, every problem looks like a nail."

The fifth helpful notion is that really big effects, lollapalooza effects, will often come only from large combinations of factors. For instance, tuberculosis was tamed, at least for a long time, only by routine, combined use in each case of three different drugs. And other lollapalooza effects, like the flight of an airplane, follow a similar pattern.

This can be turned into an actionable checklist that you can work through to understand a core problem and find solutions.

I want to present an example of how to use the framework. Imagine, if you will, that the goal is to turn an initial $100,000 crypto fund into a $100,000,000 fund. It’s an overly ambitious articulation of any kind of investment target, but it’s worth thinking through:

1. Simplifying the problem:

  • No-brainer question: Is it theoretically possible for me to 1000x my investment fund in 10 years? Yes, with an annual return of 116%.

  • Breaking it down: Focus on (1) maximizing my annual returns and (2) managing risk to avoid large drawdowns.

2. Quantifying the problem:

  • Looking at relevant data: Historical crypto asset price data, on-chain metrics (transaction volume, active addresses), and fund inflows/outflows.

  • Math insights: Need to achieve a 116% compound annual growth rate (CAGR). Using the Rule of 72 - the fund must double every ~8 months on average.

3. Inverting the problem:

  • The opposite of 1000x growth for the fund is going to zero. Avoid this by: Not using excessive leverage, diversifying holdings, and cost-averaging.

  • Working backwards: 1000x over 10 years requires 10x growth each year. Focus on achieving 10x short-term, then repeat.

4. Using multidisciplinary thinking:

  • Economics: thinking through the macroeconomic environment, interest rates, business cycle. Being wary of bubble-like conditions.

  • Psychology: manage behavioral biases like FOMO, recency bias. Take emotions (as much as reasonably and humanly possible) out of the decision-making.

  • Philosophy: have strong investment principles - in this case, the principle of sit-on-your-ass investing. Be patient and avoid impulsive decisions. Think long-term.

5. Considering lollapalooza effects:

  • Variable 1: Exploring crypt-niche investment strategies like yield farming, staking rewards, arbitrage.

  • Variable 2: Monitoring emerging narratives and new crypto categories like SocialFi.

  • Variable 3: Avoiding the temptation of timing my entries/exits based on crypto market cycles and sentiments, knowing this kind of knife-catching can have a massively negative impact.

  • By combining active management with long-term holding of conviction assets, I believe it’s possible to create outsized returns.

6. Seeking advice, but thinking for myself:

  • Consulting with experienced crypto fund managers and economists about market outlook.

  • Thinking independently - avoiding herd mentality and maintaining strong contrarian instincts.

Potential solutions:

  1. Deploying a barbell strategy - keeping the majority of the fund in Ethereum, but dedicating a portion to finding early-stage crypto projects with 100x+ potential. Capture the reliable appreciation of established coins while maintaining exposure to hyper-growth opportunities.

  2. Prioritizing risk management - limiting position sizing, rebalancing the portfolio regularly, and setting clear profit-taking targets. Avoiding large drawdowns is crucial for long-term compounding. Incorporating hedging techniques like limited options or limited short positions.

  3. Optimizing for lollapalooza effects - combining multiple return streams like staking, yield farming, and long-term appreciation. Working to identify emerging narratives early and size positions accordingly. Aiming to have strong conviction and a long time horizon.

The keys the framework produces are having a long-term mindset, strong risk management, seeking out asymmetric opportunities, and patiently letting compounding work. With disciplined execution over 10 years, growing a crypto fund 1000x is an ambitious but attainable goal.​​​​​​​​​​​​​​​​

Munger's mental frameworks, honed over decades of experience and deep reflection, have allowed him to navigate the complexities of the financial world with remarkable clarity. His multidisciplinary approach, drawing from fields as diverse as psychology, economics, and biology, has enabled him to identify patterns and connections that others often miss.

Where most investors might focus solely on the potential upside of an investment, Munger also considers the downside, the ways in which things could go wrong. He inverts. This "inversion" framework has helped him to avoid costly mistakes and to spot opportunities that others have overlooked.

In a world of uncertainty, he understands that nothing is guaranteed. By considering the likelihood of different outcomes, he is able to make more informed decisions, to take calculated risks when the odds are in his favor.

The most powerful of Munger's tools is his ability to combine multiple mental models into a cohesive whole. He recognizes that no single framework can provide a complete picture of reality. By using a "latticework" of mental models, he is able to see the world from multiple perspectives, to understand the complex interplay of factors that drive outcomes.

This multidisciplinary approach allowed Munger to succeed both in investing, and in life more broadly. His mental frameworks gave him a rare clarity of thought and a calmness in the face of uncertainty.

In fields ranging from science to politics to personal development, the ability to see the world through a unique lens can be transformative. It allows us to break free from the constraints of conventional thinking, to find creative solutions to seemingly intractable problems.

Developing these frameworks is not an easy task. For me, it has taken a commitment to lifelong learning and a willingness to constantly challenge my own assumptions. I spend my time seeking out perspectives I disagree with, learning from the wisdom of others while still trusting my own judgment.

The power of mental frameworks is in both their ability to help us make better decisions, and in their capacity to shape our entire worldview, to see the hidden connections that link seemingly disparate phenomena, to find order in the chaos of modern life.

Collect this post to permanently own it.
idle thoughts logo
Subscribe to idle thoughts and never miss a post.
  • Loading comments...