Munger's mental models #6: The power of checklists

Mental models

In this short series of blogs and videos, in honour of the late Charles Munger, I take a look at some of his most powerful mental models.

Biases & blind spots

Munger suggested that we should consider the power of a checklist.

A checklist can help us to overcome or compensate for our inherent biases & blind spots, and flaws in our attentiveness, memory, or thoroughness.

Every time I go to the shops and come back without the one thing my wife requested that I buy...I have to learn this lesson. 

When buying a home or investment property it helps for us to have a checklist for consideration, to avoid overlooking issues which may become a problem later, such as checking the property's zoning, for building inspection issues, or historic price performance for the suburb, for example.

Building an investment checklist

They say that what gets measured gets done, so it's smart to have a simple written plan for your career, business, investing, and life goals, and to revisit it regularly. 

When considering an investment strategy work through Munger's checklist by considering:

-risk & reward - consider how best to avoid the risk of permanent financial loss 

-analytical rigour - use a scientific and numbers-based approach, and try looking at problems from various angles 

-independent thought - don't follow the crowd, just because the crowd is following a certain approach...the crowd is often wrong at the top and the bottom of the market 

-intellectual humility - stick to what you understand (and be honest with yourself about what you don't know)

-continuous preparation - read widely and resolve to never stop learning

-your own risk tolerance & asset allocation - be flexible, bet when the odds are in your favour, and be mindful of opportunity cost

-patience & discipline - resist the natural human bias towards acting too quickly or frequently, never interrupt compounding unnecessarily, and avoid unnecessary transaction costs & capital gains taxes

-decisiveness & conviction - be greedy when others are fearful, and be fearful when others are greedy; when a great opportunity comes along, be prepared to grab it decisively

-embracing change - the world changes over time, so be prepared to rethink your beliefs when the facts change

-the focus and simplicity of your investment thesis - beware of overconfidence and over-trading, stick to your key investment plan and goals, and be clear about what you want to achieve, and why, and how. 

Try not to become bogged down with irrelevant information, and keep it simple.

A word of warning...

A caveat, however.

Checklists can be powerful when they are used mindfully, but they should not be used mindlessly or on autopilot.

A problem in the world of regulation is that checklists can become a replacement for common sense (see the Sarbanes Oxley rules, for example!).

So a checklist can be extremely useful, but should also never be used as a substitute for your own common sense and rational thought processes.

I discussed this a little further in the short video below:

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