📖Charlie Munger

First Principles Thinking

🌳 Advanced★★★★★

Reason from fundamental truths rather than by analogy to similar situations.

💬

I think it's important to reason from first principles rather than by analogy.

— Berkshire Hathaway Annual Shareholders Meeting，2010

🏠 Everyday Analogy

Just like building a house, you cannot simply copy how others construct theirs. Instead, you must first understand the basic elements such as soil conditions, load-bearing structures, and material properties, and then design according to your own actual circumstances. The same applies to investment: one must think from the fundamentals of a company, the nature of the industry, and the laws of economics.

📖 Core Interpretation

Return to the most fundamental facts and reason from first principles, rather than relying on analogies or precedents.
💎 Key Insight：Most people reason by analogy: "this worked before, so it will work again." First-principles thinking breaks problems into their most basic elements and rebuilds from there. It's harder and slower, but it produces original insights that analogical thinkers miss. In investing, this means understanding WHY a business makes money, not just that similar businesses have.

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❓ Why It Matters

Analogical thinking is easily misled by history, while first-principles thinking can uncover true causal relationships.

🎯 How to Practice

Deconstruct the problem into its most fundamental components and verify the validity of each underlying assumption.

🎙️ Master's Voice

You're looking for a mispriced gamble. That's what investing is.
Munger sees investing as finding situations where the odds are in your favor but the market has mispriced them. It is probabilistic thinking combined with value recognition.

⚔️ Practical Guide

✅ Decision Checklist

  • Are the odds in my favor?
  • Has the market mispriced this?
  • Is this a good bet at this price?

📋 Action Steps

  1. Think in probabilities
  2. Look for mispriced odds
  3. Size bets by expected value

🚨 Warning Signs

  • Ignoring probability
  • Fair odds or worse
  • No margin of safety

⚠️ Common Pitfalls

✕First-principles thinking is mentally taxing and not suitable for all decisions.
✕Distinguish what constitutes the genuine fundamental facts

📚 Case Studies

1
See’s Candies Acquisition (1973)
Munger and Buffett study See’s from first principles: durable brand, pricing power, loyal customers, minimal capital needs, not just accounting metrics.
✨ Outcome：They pay above book value; See’s becomes a legendary Berkshire investment, generating enormous cash with little reinvestment.
2
Blue Chip Stamps to Quality Businesses (1972)
Munger analyzes how trading stamps business declines while high-quality subsidiaries like See’s and Buffalo News can compound. Focus on economic reality, not conglomerate optics.
✨ Outcome：Capital is redirected toward superior businesses, greatly increasing intrinsic value versus stamp operations alone.

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