I was fortunate enough to read a couple of books on Charlie Munger recently that provided some interesting insights.
Charlie Munger is Warren Buffett’s partner in crime at Berkshire Hathaway. Munger himself is a man of great investing pedigree. While he had significant success running his own investment partnership in the early days, he’s probably most famously known for reshaping Buffets thinking around investing in higher quality investments for which he pays a higher price, rather than the low quality, distressed cigar butts that Buffett went after early in his career.
Buffett himself has said that without Mungers valuable influence he would likely be a whole lot poorer than what he is today.
I recently read two very influential books on Charlie Monger. These were Charlie Monger, The complete investor and Damn Right!.
Unsurprisingly Monger is a value investor at heart. What was most interesting to me reading both of these books on Munger was the fact that Mungers approach to value investing is integrally tied up into conducting risk assessments on a given business at a given point in time.
These risk assessments are largely focused around an assessment of probabilities that a given businesses earnings will be better or worse then the rates that seem to be implied by the market.
Approach to investing
Like Buffet, Munger is a strong proponent of a concentrated approach to investing. Taking it a more granular level Munger believes in finding only those businesses in which he can truly understand what’s going on.
If the business fundamentals are too difficult to properly analyze Monger promptly puts his business into the too hard box. The interesting observation from Mungers philosophies is that he advocates an individual investor only has to truly identify a handful of businesses that are capable of delivering long-term returns.
By being driven by some easy-to-understand long-term competitive advantages, avoiding making stupid mistakes and being laser focused on a few high conviction ideas, Munger argues that the average investor is in fact quite well-placed to make a lot of money.
Ultimately investing in a common stock in Mungers eyes is a risk-adjusted assessment that there is a fundamental miss pricing in terms of the upside of the business compared to the downside versus that implied by the market.
Retrain Your Mind
Munger’s approach to investing is focused as much on the psychological aspects of managing investing as well as the fundamentals of understanding and analyzing a business and its long term drivers.
When asked what accounted for his great success, Munger mentioned that the biggest factor in his success was that he was very rational. Additional references are found where, Munger also argues the need to be objective and dispassionate when considering new investment.
That’s typically the stuff that at a top level makes a lot of sense, but is much harder to execute in practice. It includes things like investing larger sums when valuations decrease and avoiding buying when valuations are up.
While this intuitively makes sense, its typically much harder for investors to do this in practice. Munger outlines a few key concepts for the average investor to master.
Patience and discipline
Like Buffett, Munger is a practitioner of an approach based on extreme patience. He suggests an approach based on general inaction, but taking decisive action when opportunities present themselves. Munger notes that sitting around and doing nothing does not come easily to those of us who are action oriented.
We have a tendency to want to make things happen. That can be counterproductive to successful investing, as it typically leads to far too many strikes in too many businesses which generate suboptimal returns.
Munger also notes an ability to be disciplined and not be carried away by random market movements, as well as having a strong stomach to take near term losses while one waits for their long term thesis to play out.
Acting decisively when required
Munger’s recipe for investing is pretty simple. You need a few pretty decent ideas, reasonably priced and have the courage of your convictions to go all in and ride the ups and downs. Market underpricing happens fairly rarely, but if it is found, it can create a bonanza and an opportunity to get very rich for an individual investor.This article was written by Financially Integrated. If you enjoyed this article, please consider subscribing to my feed.
