Musk v. Munger: Their (Surprising) Similarities Can Make You a Better Investor.
Charlie Munger and Elon Musk have radically different styles and seem to be polar opposites. But when you dive deep into the methods of these two successful billionaires, they are more similar than you might think.
At first glance, Musk and Munger seem as far apart as Mars is from Earth.
Munger invests for insurance company Berkshire (he and Warren Buffett’s investment vehicle) and speaks of risk minimization. Munger focuses on what he knows and avoids unknown unknowns. He’s looking for defensive moats and businesses built to survive. Munger embraces boring businesses.
Musk avoids boring (except his train tunnel business, called Boring).
Musk tweets about Doge coin (a meme crypto) and uses SpaceX rocket launches as Tesla marketing events.
Musk bets on big things that matter, reaches for the unknowns and is unafraid to jump on extreme meme momentum (and equally unafraid to sell into the frenzy he creates). He brings in unexpected experts, looks at things sideways, and changes perspective.
Musk says go big, and keep going big, and plan big.
Wait a minute, what? Musk plans? Sounds a bit like Munger.
I set out to learn from their differences. I was surprised to find their approaches are more alike than not. These billionaire investors’ similarities can help you refine your own investing style.
Risk, Allocation, Focus, and Decisiveness
a) Munger and Musk both make risky allocations
Risk is the big red flag for most investors. The classic advice is to diversify, allocating your capital across many bets. However, diversification can reduce your returns along with your risk. Munger doesn’t avoid big bets. He matches the size of his conviction to the size of his bet.
Billionaires look for asymmetric bets where risk is reduced while returns are not.
Musk’s allocation is focused, so in public he is not a fan of Munger and Buffett’s process.
“Let me take Warren Buffett for example,” Musk said. “To be totally frank, I’m not his biggest fan, but he does a lot of capital allocation. He reads a lot of annual reports and accounting, and it’s pretty boring really.”- Elon Musk
Musk may seem diversified across all his projects, but he did start with several huge bets.
“My proceeds from the PayPal acquisition were $180 million. I put $100 million in SpaceX, $70m in Tesla, and $10m in Solar City. I had to borrow money for rent.” - Elon Musk
Musk was in his 20s, already had seen success, and calculated that he could recover if it failed.
Allocation of capital may be an investor’s number one job, yet this doesn’t mean diversification.
Know where you’re placing your bets. How should you allocate? Think about opportunity costs: the highest and best use of capital is measured by your alternatives. Good ideas are rare, so when the odds are greatly in your favor, bet (allocate) accordingly.
Allocate based on your situation and the opportunities you see.
b) Musk is known for focused bets, and surprisingly Munger values focus more than diversification.
Focus is a way to reduce risk in investing
Munger and Musk focus on not getting overloaded in minutiae, keeping things simple, and remembering what they set out to do.
Musk is famous for removing parts from his rockets, questioning if each and every part is needed for the mission. He marvels at how past NASA rockets had parts that were there simply because they were there in the previous rocket.
Extra parts is extra weight, reducing the chance of success.
Like tackling your top priority first each day, focus is about facing your biggest investment problems or opportunities and not allowing them to be overshadowed by a long list of smaller ones.
While Munger may be thought of as more risk-averse than Musk, he values focus. He focuses on his “circle of competence” the areas where he has built up knowledge and expertise, and has made large focused bets in those areas. Musks builds his circle of competence in the areas of his focused bets.
“A small leak can sink a great ship”. - Charlie Munger
For your investing, where have you built up knowledge (Munger) or where are you so passionate that you are dedicated to building up knowledge (Musk)? These may be prime areas for focus.
c) Even though they may be different in style, they are both very decisive.
Musk is known for being decisive. Munger’s focus on avoiding big mistakes and permanent capital losses may seem different from Musks, but Berkshire makes big bets.
Munger says his biggest mistakes were lack of decisiveness, another similarity to Musk.
"What really costs are the blown opportunities. When I was somewhat younger, I was offered 300 shares of Belridge Oil. Any idiot could have told you there was no possibility of losing money, and a large possibility of making money. I bought it, and the guy called me three days later and offered me 1,500 more shares. This time I had to sell something to buy the d*** thing [which Munger did not end up doing] - that mistake, if you trace it through, has cost me $200 million! And all because I had to go through the slight inconvenience of having to sell something."- Charlie Munger
When you approach investments with research and focus, decisiveness can reduce risk.
When proper circumstances appear, both Munger and Musk act with decisiveness and conviction. Munger’s greatest regrets are failures to act. Acting is often decisively going against the crowd.
“Be fearful when others are greedy, and greedy when others are fearful.” - Charlie Munger
Optimize your risk through focus, allocation, and decisiveness.
2. Long-time Frames, Curiosity, and Patience
a) Munger and Musk both invest with very long time frames
Munger buys and holds companies for decades. He has co-piloted Berkshire for over 40 years. When they initially purchased BYD, the founder was pivoting from cell phone batteries to making electric vehicles, yet Munger envisioned a huge future as potentially one of the largest automakers in the globe. This was far from obvious at the time.
On Wang, founder of BYD: “This guy is a combination of Thomas Edison and Jack Welch—something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it.” - Charlie Munger
Elon Musk is the epitome of a long-term visionary. He electrified the US auto industry by creating Tesla while simultaneously leapfrogging NASA with SpaceX. Musk blames his unrealistic expectations on optimism.
Even if his companies' projects are late, he does tend to deliver:
"I think I do have an issue with time. This is something I’m trying to get better at. I say when I think it can occur, but then I’m typically optimistic about these things — but hopefully less optimistic over time. It pretty much always happens, but not exactly on the timeframe." - Elon Musk
Give your investments time to work. The world is not on your timeline. Keep asking if you are wrong (or right), and be open to new evidence.
Being able to have long time frames is a huge competitive advantage.
b) Munger and Musk both value curiosity - from different angles.
“Curiosity can provide both fun and wisdom, and occasionally trouble. Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.” - Charlie Munger
Munger uses curiosity to unearth useful mental models. Munger studies mental models from different disciplines, and applies them to new ones. When he identifies conflicting evidence, Munger goes back and questions his mental models with more curiosity.
Both Musk and Munger keep asking: “why, why, why?”
Musk uses his curiosity to fuel his first principles thinking: boiling things down to "the most fundamental truths" and then reasoning up from there. Musk goes back to basics, looking at the obvious before the esoteric.
Musk and Munger are nearly identical in their curiosity.
“Think forwards and backwards—Invert, always invert.” - Charlie Munger
Where can you use your curiosity and interest to dive deeper into an area of investing?
c) Munger and Musk express patience differently, with Musk seeming more impulsive.
Tightly tied to long-time frames, patience is a virtue for both Munger and Musk.
Munger speaks of resisting the natural human bias to act, so your investment has time to work and compound.
“Einstein said: ‘Compound interest is the eighth wonder of the world” never interrupt it unnecessarily.” - Charlie Munger
Munger advises avoiding unnecessary transactional taxes and frictional costs. Never take action for its own sake. Be alert for the arrival of luck. Part of patience is enjoying the process along with the proceeds, because the process is where you live.
Musk often seems impulsive, tweeting about cryptocurrencies, and speaking out.
Yet often his initial words (i.e. frustration with California politics), end up with later action that makes economic sense (moving Tesla headquarters to a more tax friendly state, and closer to SpaceX factories). His impulsiveness may catalyze long term actions.
“Patience is a virtue, and I’m learning patience. It’s a tough lesson.” - Elon Musk
Musk has stuck with his big bets with as much patience as Munger.
When you invest, be patient, and at the same time, don’t be afraid to shake things up and question your thinking.
3. Adaptability, Change, Mistakes, and Competence
a) Munger and Musk excel at adapting to change.
Change seems to be the purview of Musk, yet Munger has survived decades of change, and Musk sticks with his bets over decades.
Munger advises living with change and accepting non-removable complexity. Don’t over-simplify just because you don’t like uncertainty. See and adapt to the world, instead of expecting it to adapt to you.
Both Munger and Musk continually challenge their best ideas.
This allows them to adapt to change and embrace the unknown. They are minimizing their blind spots and opportunity costs. Adapting to change is not constantly pivoting, but instead recognizing when reality has meaningfully shifted.
“Recognize reality even when you don’t like it—especially when you don’t like it.”- Charlie Munger
Use your curiosity to learn and adapt to change, for you and your investments.
b) Munger and Musk are confident investors, yet not too proud to admit their mistakes.
“I don’t think it’s necessary to be as dumb as we were.” - Charlie Munger
Part of being adaptable is admitting mistakes. Munger does this regularly as part of his annual meeting with Berkshire shareholders.
“There’s no way that you can live an adequate life without many mistakes... One trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.” - Charlie Munger
While Musk can put on a show and is clearly confident in his brilliance, he too will admit mistakes. In fact, he searches them out as a way to improve.
“There's going to be mistakes. It's important to recognize those mistakes, acknowledge them and take corrective action” - Elon Musk
c) Although they both adapt to change, Munger stays inside his Circle of Competence, and Musk draws outside the lines.
Munger and Buffett were famous for avoiding investing in technology for decades, because it was outside their circle of competence.
While they vastly out-performed during the internet bust, they did miss participating in the largest innovations ever seen propagating across our economy (Google, Apple, Facebook, Amazon). Munger did adapt to change and start investing in technology once he brought on additional portfolio managers.
“The game of investing is one of making better predictions about the future than other people. How are you going to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much.” Charles Munger
Musk seems to live outside the lines. He started in digital payments (Paypal), and started a car company (Tesla) with zero background in autos, simultaneously starting a rocket company with no background in rockets. However, Musk is an avid learner focused on first principles. He has both built competence in these areas and argued it was a significant advantage that he started fresh, with no knowledge to taint his thinking.
When Musk, with degrees in economics and physics, launched SpaceX, he cold-called NASA rocket scientists.
Musk’s answer is great advice for investors:
I read books and talked to people. I mean that's kind of how one learns anything. There's lots of great books out there and lots of smart people. - Elon Musk.
As radically different as Munger and Musk are, they share the values of assessing risk, focusing on the long term, and remaining adaptable. Regardless of your investing style, fundamentals are shared by top players.
When thinking about risk, diversification won’t necessarily reduce your risk. Focus on the biggest opportunities, keep learning and allocate decisively.
Remember time is not under your control. Let compounding work for you, be patient, and also remain curious and open to changing course.
Remain adaptable to your own mistakes, to changes in the world and to redefining your circle of competence.
Where did you end up? Who’s a better investor? Who do you want to emulate?