📖Charlie Munger

Permutations and Combinations

🌿 Intermediate★★★★☆

Mental models must become second nature — internalized deeply enough to apply automatically.

💬

You have to learn the models in such a way that they become part of your repertoire.

— The Collected Speeches of Charlie Munger，2000

🏠 Everyday Analogy

Just as a doctor must consider various combinations of symptoms to diagnose an illness, investors need to analyze the potential outcomes arising from different combinations of factors. For instance, varying permutations of elements such as economic growth, inflation, and policy changes can create vastly different investment environments and opportunities.

📖 Core Interpretation

Fundamental mathematical thinking involves understanding the various possible combinations of events and calculating probabilities and expected values.
💎 Key Insight：Knowing about mental models intellectually isn't enough. They must be practiced and internalized until they become automatic thinking tools. Like a chess grandmaster who sees patterns instantly, a skilled investor should recognize psychological biases, competitive dynamics, and valuation signals without conscious effort. This fluency comes only from years of deliberate practice.

AI Deep Analysis

Get personalized insights and practical guidance through AI conversation

❓ Why It Matters

Many issues in business and investment are, in essence, matters of probability.

🎯 How to Practice

Learn fundamental probability theory and consider various possibilities and their probabilities when making decisions.

🎙️ Master's Voice

You don't have to pee on an electric fence to learn not to do it.
Munger believes in learning from others' mistakes. You do not need to make every error yourself to gain wisdom.

⚔️ Practical Guide

✅ Decision Checklist

  • Am I learning from others' mistakes?
  • Have I studied investment failures?
  • Am I avoiding known errors?

📋 Action Steps

  1. Study famous investment failures
  2. Learn vicariously from others
  3. Build a checklist from others' errors

🚨 Warning Signs

  • Only learning from own mistakes
  • Ignoring others' failures
  • Repeating known errors

⚠️ Common Pitfalls

✕Do not overestimate the occurrence of low-probability events.
✕Nor should one underestimate tail risks.

📚 Case Studies

1
See's Candies Purchase (1973)
Munger applied combination thinking: strong brand, pricing power, low capital needs. Berkshire bought See's for $25M when many focused only on book value multiples.
✨ Outcome：Investment produced over $2B in pretax earnings, illustrating power of correctly combining qualitative and quantitative factors.
2
Avoiding Subprime Exposure (2008)
Munger analyzed permutations of mortgage risks, derivatives, and leverage. Concluded many financial firms faced catastrophic tail outcomes and avoided highly leveraged or opaque instruments.
✨ Outcome：Berkshire largely sidestepped the worst subprime losses and instead invested selectively in stronger franchises during the crisis.

See how masters handle real scenarios?

30 real investment dilemmas answered by legendary investors

Explore Scenarios →