BCG Henderson Institute

How to Think Clearly in Turbulent Times: Lessons from Charlie Munger

Munger’s success was built on a system for decision-making—not a classical investment philosophy, but rather a mental discipline underpinning one. We outline four ideas strategists can learn from Munger to think more clearly in turbulent times.

Enthusiasm for new technologies, fear of geopolitical strife and climate disaster, and our society’s polarized politics are driving the agenda of business. This creates a turbulent environment, which “we are navigating by the stars under cloudy skies”, in the words of Federal Reserve Chair Jerome Powell. In this context, clear judgment—calmly applied—becomes a source of advantage.

Charlie Munger, vice chairman and—according to founder Warren Buffett, “architect” of Berkshire Hathaway (BRK) for nearly 45 years—was a master of this approach, as his excellent performance track record shows: During his tenure, BRK achieved a compounded annual return of nearly 20%—double that of the S&P500. He excelled particularly in turbulent times: BRK outperformed its peer group (diversified financial firms) in 15 of the 17 crisis quarters it faced between 1995 and 2020.[1]Crisis quarters are defined as those in which industry TSR saw a peak decline of at least 15 percentage points from the start of the quarter. Between 1995 and 2020, the diversified financials … Continue reading

Munger’s success was built on a system for decision-making—not a classical investment philosophy, but rather a mental discipline underpinning one. In this article, we outline four ideas strategists can learn from Munger to think more clearly in turbulent times.

1. Keep your enthusiasm in check

AI had its breakout year in 2023. The technology climbed to the apex of the hype curve and attracted major investment from venture capitalists and business leaders hoping to be at the forefront of the next technology revolution. While AI promises to be transformational, short-term payoffs have not yet manifested for most firms—and many executives appear to be pulling back and entering “observer mode.” How could they have learned from Munger to not become swept up by the hype, or the subsequent correction, and instead make decisions calmly?

Munger advocated for understanding both sides of an argument before forming an opinion, bringing intellectual humility to his decisions: “I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.” By embracing counterarguments, strategists can avoid rushing headlong into decisions. In the case of AI, one counterargument might be that there is no clear-cut case for sustainable competitive advantage: Since many of the AI models are open source or publicly available, productivity gains enabled by their use can quickly be replicated by competitors. In the absence of a specific, hard-to-replicate, and easy-to-monetize use case enabled by AI, investments should be scrutinized.

Munger also warned against the dangers of becoming too entrenched in any single ideological perspective. He advocated for a multidisciplinary approach to thinking, drawing on insights from a wide range of fields and perspectives to form a more nuanced and well-rounded view. Remaining open-minded and searching for perspectives broadly helped him adopt a balanced approach to decision-making.

Finally, Munger emphasized the importance of avoiding falling victim to psychological biases. While using our intuition to complement analytical reasoning—particularly in uncertain and intractable situations—can be beneficial, our instincts can also mislead us, especially when subject to social pressures. Munger believed that avoiding irrational decision-making is critical to success. To help achieve this, he built mental guides, such as a list of 25 human misjudgments or psychological biases. When analyzing investment decisions, Munger would toggle through this list to make sure he did not fall victim to such biases.

Embracing these principles enabled Munger and BRK to avoid many a crisis. For example, before the dot-com bubble, investors were drawn to internet companies with enormous growth potential. However, Munger recognized the absence of solid business fundamentals and clear paths to profitability, as well as the significant potential for losses, associated with many of these investments. Berkshire refused to invest in tech stocks and underperformed the S&P 500 by more than 40% in 1999, at the height of the bubble. However, from 2000 to 2002, after the bubble burst, Berkshire outperformed the S&P by more than 60%.

To not fall victim to over-exuberant decision-making, businesses need to foster a culture of healthy skepticism. This may take the form of conducting a “pre-mortem” analysis and listing potential reasons an investment may fail. Venture capital fund Sequoia uses this approach as a forcing mechanism to ensure that it considers the critical risks associated with its potential investments.

A complementary step is to make the assumptions underlying decisions explicit. For example, Rita McGrath and Ian McMillan propose an approach to decision-making whereby the assumptions are listed—ranked by their impact on the outcome as well as their associated uncertainty level. This makes us more aware of the risks associated with a decision and motivates us to both test and validate our assumptions and to evolve our levels of certainty.

As an alternative, companies can set up “red teams” that are tasked with challenging assumptions and developing counterarguments to counteract self-reinforcing groupthink dynamics.

Another idea, practiced by Bessemer Venture Partners, is to make the opportunity costs of decisions explicit: The investment firm builds an anti-portfolio to review companies they chose not to invest in, but that later grew into successful players.

Finally, because humans have a tendency to overestimate their impact, it is crucial to untangle skill from luck—the circumstantial factors that often drive large proportions of an outcome. To avoid exuberance, corporations need to review not just outcomes, but also the decisions that led to them: A military-style post action review can help identify whether the right decision was made, given the capabilities and knowledge of the context at the time. Having a view on how luck drove outcomes will enhance the caution with which future decisions are approached.

2. Think independently from the crowd

Homo Sapiens is a highly social species, wired to mimic the thoughts and actions of others. Munger recognized that overcoming our biology is crucial to calm and clear decision-making. As such, he advocated for establishing an independent mindset, and for building the argumentation underlying decisions from the ground up. This should not be confused with Warren Buffett’s famous saying “to be fearful when others are greedy and to be greedy only when others are fearful”: It’s not as simple as going against the grain. Rather than thinking differently, think independently.

This principle underlay BRK’s decision to exit the textile business in the 1980s. Over several years, BRK’s subsidiaries in this industry—and their competitors—had invested significantly to reduce their variable costs. While standard ROI assessments projected large payoffs from these investments, BRK decided not to expend further capital and instead exit the industry. It did so precisely because all the players were making similar moves, which, in the highly competitive environment, would mean that efficiencies flowed to customers, rather than the bottom line.

How can businesses foster a capacity for independent thinking? For one, they need to embrace diverse perspectives. This is partially a matter of talent strategy: Hiring people with different backgrounds and experiences, ensuring that different cognitive skillsets (for example, creativity versus analytical prowess) are recognized and rewarded in recruiting and performance management, and encouraging internal mobility to make sure fresh views are shared across the organization. Moreover, it means fostering an environment in which diverse perspectives are valued, for example, by creating an open competition of ideas. This is what PayPal and Japanese HR firm Recruit Holdings do with their regular internal idea “festivals,” during which individuals or teams make pitches and winners receive funding to turn them into reality.

Another trick is to inject variation into the decision-making process itself, ensuring that you are not locked into a mode of thinking based on emulating others. This can be accomplished at different levels. For example, you can vary the selection mechanism (the rhythm the search proceeds at), the step size (how close a new idea must be to the status quo), the heuristics (whether an analysis is conducted top-down versus bottom-up), or the problem-solver (make different people responsible for the search).

3. Stay within your circle of competence

Amid intense competitive pressure facilitated by digital business, global business, and efficient financial markets, competitive advantage and its drivers are eroding faster than ever before. Static characteristics like scale or market positioning alone are no longer guarantees of sustained success; neither are static skills, like mastery of a specific technology. In this context, it is more important than ever to be aware of your current competencies and to consider their limits in your decision-making.

Munger understood this well, suggesting that operating within your circle of competence—focusing on what you know, and what you are good at—is key to remaining calm in turbulent times, because it allows you to act from a position of confidence and strength. As a result of this philosophy, BRK avoided investments in companies outside of their circle of competence, in unfamiliar industries, or with complex and unproven products, for example, biotech or cryptocurrencies.

To find their circle of competence, companies need to foster a culture of transparency with regard to their competencies and shortcomings. For example, in the early 1990s, Dell had established a successful business model by building entry-level computers at very low costs. Over time, however, it carved out more and more of its manufacturing supply chain to Taiwan-based Asus. By 2005, Asus had the capabilities to build its own brand of computers. Dell understood that it its competencies in low-cost manufacturing and logistics no longer created a strong advantage, and successfully re-applied its skillset by moving into the higher-profit server business.

Companies can also exert a more conscious effort to understand and hone their current competencies. Google, for example, has conducted a multi-year research initiative to understand how its middle management drives success—and what makes a great manager at the company.

Crucially, while Munger emphasized the importance of heeding your competencies, he did not see them as fate. In investing, having expertise on only a limited set of industries would mean missing out on opportunities. As such, Munger worked to expand and shift his circle of competence over time. For instance, BRK initially neglected investments in tech players, which Buffett said they did not understand. However, BRK later took a major stake in Apple. It recognized that as tech had become integral in all parts of the economy, ignoring it would not be feasible, and it understood that Apple was less a traditional tech player and more a consumer products firm with a strong brand and loyal customer base.

Accordingly, strategists should foster an awareness of the changing competencies required to achieve competitive advantage, as well as hone the mental adaptiveness crucial to moving beyond previous sources of success. It’s the skill Kodak and Blockbuster lacked, but which Apple has developed. The latter moved from a strategy focused on innovation, with the Macintosh being the first PC with a graphical user interface or the iPhone being the first smartphone to incorporate multi-touch controls, to one centered around ecosystems and the integration of hardware, software, and services.

4. Avoid hyperactivity—but when acting, act decisively

In our fast-moving world, it is easy to feel the need to always be doing something for fear of being left behind. For example, in PC operating systems, in just the last decade the major players have pushed their offerings toward mobile-first, cloud-first, mixed- or virtual reality-first, and AI-first. These options are not all compatible (in the same device or software), and some pivots have not paid off.

Munger advocated against hyperactivity, emphasizing that “the big money is not in the buying and the selling, but in the waiting.” At BRK, he and Buffett embraced a punch card strategy, assessing opportunities as if they only had 20 investment possibilities in their lifetimes. This reserved approach helped them to remain calm in the face of turbulence.

But calculated decision-making is only half the battle. It must be coupled with the possibility of decisive action. As Munger said, “Pounce with vigor when the opportunity arises.” As a result of these philosophies, BRK has highly concentrated investments, taking substantial stakes. Its portfolio is almost 80% comprised of its five main holdings: Apple, Bank of America, American Express, Coca Cola, and Chevron.

An example of a decisive move in building up these stakes came during the 1963 Salad Oil Scandal, in which a New York-based commodities trader had fraudulently obtained large loans by using as collateral tanks of salad oil, which were mostly filled with water. American Express, one of the chief creditors, was significantly impacted by the scandal and its stock price halved. Buffett and Munger saw value in the firm’s solid fundamentals and brand and invested 40% of BRK’s available capital in American Express shares, which proceeded to increased fivefold over the next five years.

Munger also emphasized the importance of setting yourself up to act decisively by proactively addressing constraints. For one, BRK is known to store significant cash reserves, even though this is potentially inefficient in the short run. Moreover, BRK worked to avoid being beholden to others: By consistently communicating (and delivering on) their long-term, value-investing approach, BRK attracted a shareholder base aligned with this philosophy, reducing pressure on short-term performance. The knowledge that you can act autonomously and decisively when the opportunity arises instills confidence, a prerequisite for calmness and clear thinking.

How can businesses balance hyperactivity with decisive action? For one, they need to embrace long-term thinking. Hyperactivity is often driven by a focus on short-term success and myopic KPIs as well as incentives. Adopting forward-looking metrics is crucial to prioritizing the longer-term. For example, 3M pioneered the new product vitality index (NPVI), a metric that tracks the share of sales from products that didn’t exist five years ago. An alternative is our own measure of vitality, which assesses potential for long-term growth.

Moreover, businesses need to hone the ability to scale up solutions quickly. This requires a culture of constant experimentation and developing options that could form the basis of future success. While this means being constantly active (trying new things in a controlled fashion, always looking to learn) it does not mean being hyperactive (frantic, undirected, chasing trends and short-term returns). A great example of experimentation culture in practice is Chinese white goods giant Haier, which CEO Zhang Ruimin recast from a corporate giant into an assembly of hundreds of small, autonomous teams with their own P&L responsibility, whose offerings must be validated by real, external customers in order to scale up.

First steps toward clear thinking

How can executives begin to cultivate a culture of clear thinking? First, they must make their own mental model for decision-making explicit: Which factors are taken into consideration? Are decisions based on explicit argumentation or heuristics? And how does that change with the subject (of the decision) or the context (speed required or complexity of the environment).

Second, they must apply the same kind of transparency exercise for the strategy process in their organizations—across analysis and decision-making stages.

Third, they should compare this model to the approach of Munger by asking questions like:

  • How are we keeping our enthusiasm in check?
  • How can we be aware of the biases potentially shaping our decisions?
  • How are we making sure we think independently from the crowd?
  • How are we staying aware of our circle of competence, and considering it in our decisions?
  • How are we avoiding hyperactivity, and how are we preparing for decisive action?

This will help identify what to do differently to steer toward clearer thinking.

Beyond this set of principles, there are many more models and decision-making guides to borrow from Munger, such as his list of 25 psychological biases or his investment check-list (in brief: Do I understand it, does it have a moat, is the management good and trustworthy, and is it available at a sensible price?). So, don’t stop at our list. As Munger would say: “You’ve got to have multiple models. And the models have to come from multiple disciplines—because all the wisdom of the world is not to be found in one little academic department [or in one little article].”

Sources & Notes


1 Crisis quarters are defined as those in which industry TSR saw a peak decline of at least 15 percentage points from the start of the quarter. Between 1995 and 2020, the diversified financials industry faced 17 crisis quarters.