There are not many people like Charlie Munger. At 95 years young, Munger is vice chairman of the venerable Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) and business partner of Warren Buffett. Although Munger does not share as much spotlight as Buffett, his investment approach is said to have keenly influenced Buffett over the years. Here’s a collection of some of his best advice.
1. “Spend each day trying to be a little wiser than you were when you woke up.”
Munger is a voracious reader. He has long recommended that people keep reading and learning throughout their lives and that they do not restrict themselves to any single topic. He has spoken often about how various disciplines intersect and inform one another.
Munger knows that knowledge compounds with time. He adds, “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.”
2. “Invert, always invert.”
Munger likes to look at problems in reverse. He believes successful investing is more about avoiding losers, than finding winners. To him, it is easier to avoid failures, than to strive for success directly.
As you endeavour to hold your stocks for the long term, you must remain vigilant to new threats that could derail your investments. Rather than seek out evidence confirming that your investment thesis is correct – as many investors are prone to do – you will be better served by looking for evidence that you are wrong.
3. “The No. 1 idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage.”
The vast majority of market participants think of stocks as pieces of paper to be traded, not an entitlement of claim to the underlying earnings of a business. These investors take their cues about their investment decisions and the company they have bought from short-term price movements rather than the performance and outlook of the underlying business. As such, a stock price decline must imply that the outlook of a company is deteriorating, and vice versa.
But successful investors understand that stock prices are frequently irrational, and can have little semblance to what a company is worth. Over the longer term, a company’s share price must reflect the value of the business and the future earnings of that company. Hence the quality of a business should be judged in terms of its competitive advantage – the factors or attributes that allow a given company to produce more affordable or higher quality of products than its competitors.
4. “All intelligent investing is value investing”
This quote from Munger cuts right to the heart of the matter: if you are not investing based on fundamental valuation principles, you are not investing. Munger words imply that a true investment is made only when you have the right data and reasoning, followed by a suitable price that ensures a margin of safety. Putting capital to work any other way is, by its nature, speculative.
5. “A great business at a fair price is superior to a fair business at a great price.”
For investors who take a value approach in their investing strategy, the goal is to find stocks selling at a bargain price. Yet too often, low-priced stocks are cheap for a good reason, and what appears to be solid value turns out to be a value trap for the unwary.
Meanwhile, many value investors never bother looking at high-growth stocks trading at expensive valuations, because they see those stocks as being contrary to their investing philosophy. Yet Munger’s quote points to the true nature of what value is, emphasising that companies with the best prospects are often worth buying even when you cannot pick up shares for less than their reasonable value.
Price matters, but quality matters even more. Strong businesses can compound wealth at high rates over many years. In contrast, an investor who purchases an average business at a discount can only expect the investment to yield mediocre returns and will likely be best served by selling it once it reaches its fair value.
6. “We have three baskets for investing: yes, no, and too tough to understand.”
Like Buffett, Munger seeks simplicity in companies that he invests in. He is not afraid to say that a business is too complicated for him to understand. And if it is not obvious that a company is a good investment, he quickly moves on to the next candidate.
Similarly, he believes that “excessive diversification is madness.” Munger never saw the reason to buy additional stocks just for the sake of diversification, when the best ideas should get the bulk of an investor’s attention. In this view, an investor will get better rewards if they truly understand their investments. Risk is considerably reduced when an investor can explain his investment thesis clearly and succinctly.
7. “The big money is not in the buying or selling, but in the waiting.”
Munger is a long-term investor. Buying great businesses and holding them for many years is the foundation of his approach, and Berkshire’s tremendous success. To him, the first rule of compounding is to never interrupt it unnecessarily.
Yes, you can be lucky and grab a quick gain in the short run on a stock. But that pales in comparison to multiplying your money over the longer term. Holding positions for at least three, five or ten years is what it takes to deliver those kinds of stunning returns, not trading in and out of stocks.
8. “It takes character to sit with all that cash and to do nothing. I don’t get to where I am going after mediocre opportunities”
Many investors find it hard to simply hold onto cash and wait for the right opportunity. This is doubly true during a bull run as stock prices rise ever higher. Seeing other people make money in a buoyant market can cause anyone to have a serious case of FOMO – the fear of missing out. Because of this, some investors rush to invest and end up investing in weaker companies or overpriced stock.
But Munger understands that success means being very patient but aggressive when it is time. He says, “A lot of opportunities in life tend to last a short while, due to some temporary inefficiency… For each of us, really good investment opportunities aren’t going to come along too often and won’t last too long, so you’ve got to be ready to act and have a prepared mind.”
Yes, it sounds like an oxymoron. But to be able to move fast, you must at times be willing to do the opposite by sitting still. You must on occasion be ready to sit on cash, to allow yourself the chance to move quickly to capture any opportunities which present themselves.
9. “Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime.”
Lastly, investment success can be summarised in a simple formula: Invest in a few great stocks held over many years. Live well within your means so that you will have the funds to invest; and when these opportunities arise, do not be afraid to invest significant sums when the odds of success are heavily stacked in your favour. Done well, you cannot help but create vast amounts of wealth over time.