The world mourns a great loss this month, as investing sage Charlie Munger passed away just a few weeks short of his 100th birthday. Munger, well known as the right-hand man of Warren Buffett and chairman at Berkshire Hathaway, was also incredibly generous in sharing the wisdom he collected through his long and successful life. Between his talks at the annual Berkshire meeting and collection of speeches in “Poor Charlie’s Almanac,” among others, he leaves behind one of the greatest bodies of knowledge in the last century.
As a brilliant and wealthy man, Charlie Munger could have easily led a quiet life outside of the public view. Instead he chose to share what he learned.
“The best thing a human being can do is to help another human being know more.”
His principles on life include much more than just writing investing strategies. Charlie was keen on building what he called ‘mental models,’ which gave him broad and practical heuristics to address business and investing problems, as well as general life advice.
Munger rejected most of the conventional investing information available in textbooks and instead sought out multi-disciplinary approaches, building his models through studies of history, philosophy, engineering, and science.
Munger wasn’t just brutally intelligent either, he was also the king of zing and probably the funniest fellow in the industry. His dry and deeply truthful humor always leaves me laughing and learning, so I hope to embody even a small percentage of that entertainment in this short write-up.
The valuable information Charlie offers could fill multiple volumes; here, I will address just five messages I think he would impart to nearly everyone.
Although he achieved epic success, life wasn’t always kind to Charlie. At just 29 years old, he was recently divorced, lost his home, and had a child sick with leukemia. His son Teddy had been diagnosed at just eight years old, and because health insurance didn’t exist at the time, Charlie paid for his treatment out of pocket.
Charlie would visit his son every day at the hospital and then walk the streets crying. Teddy would go on to die at just nine years old. Although he had every excuse to wallow in misery, this tragedy wouldn’t stop him from pursuing his goal of success and financial independence.
Munger would also be the first person to tell you he is not infallible. "There is no way you can live an adequate life without making mistakes." He took numerous missteps while managing money and experienced investment drawdowns like any other market participant.
Drawdowns in your portfolio are just the cost of business in investing. Munger noted that all investors will, at some point, experience a drawdown of 50% in their lifetime and probably more than once. If you enjoy the privilege of being an owner of assets, there will be periods of discomfort. But that is the point of having an investment process, one which you can rely on, especially during downturns.
“Life will have terrible blows, horrible blows, unfair blows, it doesn’t matter. Some people recover and others don’t. Every mischance in life was an opportunity to learn something and that your duty was not to be immersed in self-pity, but to utilize the terrible blow in a constructive fashion.”
Continued . . .
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2) Investing with a Margin of Safety
“No matter how wonderful [a business] is, it’s not worth an infinite price. We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life.”
Margin of safety was a concept Munger learned from Benjamin Graham, a famous value investor and Warren Buffett’s mentor. It can be utilized by purchasing a stock only when it trades below its intrinsic value and is the central thesis of value investing.
Buying a stock with a wide margin of safety ensures that an investor can truly understand the downside risk of an investment.
Munger likened it to an engineering project; building a bridge requires a huge margin of safety since risk in engineering puts human life at stake. He believed Wall Street didn’t value risk management in this way when they really should.
The absolute worst-case scenario should be considered when purchasing a security, and if you know what your maximum loss is, then you can adequately measure your risk. On the flip side, if you can accurately measure your risk, you can confidently enter an investment if you believe returns are skewed to the upside.
3) Find Great Companies and Invest for the Long-Term
"A great business at a fair price is superior to a fair business at a great price."
Charlie shared this concept with Warren Buffett early on in Buffett’s career, and it would go on to mark a pivotal shift in his approach to markets.
Buffett had long been purchasing $1 for $0.50, which he called cigar butt investing. He was buying distressed companies below their intrinsic value and selling them when they traded back up to fair value. This was akin to picking up a cigar butt on the street and getting one last puff for free.
But because of Warren’s immense success, his pot of money was growing rapidly while these opportunities were shrinking. Charlie’s advice was extremely timely.
Charlie and Warren would go on to use this strategy to buy shares in American Express, Apple, and others, which have remained in the portfolio for years to decades.
They used momentary downturns in the stock price to become owners in the business, rather than seeking trading opportunities. Instead of paying $0.50 for $1, the strategy became paying $1 for something that would grow to $5.
4) Uncommon Sense
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Instead of common sense, Charlie called it uncommon sense, because he noted how rare it was for people to utilize this line of thinking.
“It is so simple; spend less than you earn, invest shrewdly, never stop learning and avoid toxic people.”
5) Live Your Truth
Munger was respected not only because of his wisdom, wit, and humility, but because he spoke so freely, and with such genuine authenticity. It didn’t mean he was always correct, although he often was, but rather he wasn’t being influenced by anything other than seeking the truth.
This is what gave Munger such a remarkable and almost monk-like aura. Although he was a curmudgeon, there was a certain clarity with which he went through life. He had vision, was incorruptible and conducted business in a virtuous and morally responsible manner.
Interestingly enough, I think it was financial independence that encouraged him to live his life so freely. “Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris — I wanted the independence. I desperately wanted it.”
Because he got to the point where he didn’t rely on anyone else and didn’t have any hidden agendas, he was free to say the things many refused to say out loud. Or rather he was able to observe and share what he learned as somebody that was completely free.
Charlie’s candor, and willingness to speak his mind shows what an edge living life according to your truth can offer.
Along with inspiration from investing legends like Charlie Munger, it’s important to have resources and timely information to act upon.
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