Most of us know about Warren Buffet aka the oracle of Omaha, but few are aware of Charlie Munger – his business partner.
Who is Charlie Munger?
He is vice chairman of Berkshire Hathaway, the company best known for its investment wizardry. A visionary like no other, Munger’s wit and wisdom provide valuable advice for the ages.
Warren Buffet has this to say about Munger:
“Charlie’s most important architectural feat was the design of today’s Berkshire. The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices. Consequently, Berkshire has been built to Charlie’s blueprint. My role has been that of general contractor, with the CEOs of Berkshire’s subsidiaries doing the real work as subcontractors.”
The success of Berkshire Hathaway can give you an idea of what kind of a towering intellectual Charlie Munger is, given that he has no formal training in economics, marketing, finance, or accounting.
Here are six quotes from Munger that will provide you invaluable advice for investing:
1. “The desire to get rich fast is pretty dangerous.”
Gambling on the short-term price direction of some stock or asset is pretty risky. Bet only on the long-term economics of a business, not the short-term swings of its stock price.
2. “Knowing what you don’t know is more useful than being brilliant.”
Stay away from investing in businesses you don’t understand. In the late 1990s, there was a bull market bubble in tech stocks. However, Charlie realized this was outside his circle of competence and avoided it completely. When the bubble burst, all the doubting Thomases who thought Charlie had lost his touch acknowledged his brilliance.
In the same way, there has been a huge brouhaha over cryptocurrencies and Bitcoin. Those could not understand the market invested heavily and suffered major losses. Don’t dive headlong into anything that is beyond your understanding, just because others are doing the same!
3. “People are trying to be smart – all I am trying to do is not be idiotic, but it’s harder than most people think.”
Invest in a company whose stocks are underpriced as compared to the long-term economics. But be careful about the errors of omission, such as not acting when there is a good investment or buying too little if it.
4. “Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand – you must learn to handle mistakes and new facts that change the odds.”
1980 -> Berkshire brought shares in Freddie Mac, a well-run, conservative, profitable firm dealing with the mortgage business.
As time passed, Freddie’s management branched out into a new line of business where they aggressively borrowed short-term money to lend it out long-term.
1999 -> Realizing the changing attitudes of the management, Berkshire sold its shares of Freddie Mac at a profit.
2008 -> Freddie Mac was bankrupt, the old management had been fired, and its stocks were worth way less than when Berkshire sold its shares.
What does this mean? You need to let go off investments that are no longer viable and would harm your portfolio in the long-term.
5. “My idea of shooting a fish in a barrel is draining the barrel first.”
A shortsighted stock market offers an investment opportunity that is hard to resist. This happens when there is a stock market panic and investors flee even those which have solid underlying economic fundamentals. Once stock prices drop, the barrel drains and you can view the good businesses that are underpriced.
6. “This worshipping at the altar of diversification, I think that is really crazy.
Most financial advisors suggest to diversify your portfolio in order to minimize your losses. However, is having a too broad portfolio, say of 50 or more different stocks, useful?
What happens in such a situation?
Your winning stocks get cancelled out by the losing ones.
Charlie Munger advises that one should invest in a few companies that have great economics working in their long-term favor. That way, it will be easy to minimize the losses if one of them goes down. For example, it is better to invest and keep a track of 10 companies instead of maintaining an entire zoo.