Lessons from Charlie Munger
Taking Stock on Wednesday 29th November 2023
Lessons from Charlie Munger
Charlie Munger was the vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett described Munger as his closest partner and right-hand man.
What I like about this partnership is that they both are extremely talented investors. Together they become a genius partnership. Warren made Charlie a better investor and Charlie made Warren a better investor.
Before Charlie came along, Warren used Benjamin Graham's model for investing, which was investing in cigar butt stocks value at less than book, hoping to get book value for them before they became insolvent.
Then Charlie suggested they start looking at good businesses, maybe priced above book value. Such a company was See's Candy.
And it was because if this investment that they invested in Coca-Cola, American Express & Apple.
And Warren came out with the quote:
“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Peter Kaufman has put together some of the best lessons on how to invest wisely into a fantastic book.
It's called "Poor Charlie's Almanack," and it's a collection of speeches and talks given by Charlie Munger.
1. Risk
All investment evaluations should begin by measuring risk, especially reputational.
- Before you invest in something, consider how risky it is.
- Make sure you're being safe with your investments.
- Be careful when dealing with people of questionable integrity.
- Ask for a fair reward if you're taking a risk.
- Keep an eye on the impact of inflation and interest rates.
- Avoid significant mistakes that could result in permanent financial loss.
2. Independence of thought
“Only in fairy tales are emperors told they are naked.”
- Objectivity and rationality require independence of thought.
- Sometimes, going along with the crowd doesn't lead to the best results.
- What matters most is whether your thinking is right, not whether everyone agrees with you.
3. Continuous preparation
“The only way to win is to work, work, work, and hope to have a few insights.”
- Keep learning throughout your life by reading and staying curious.
- Being ready is often more important than wanting to win.
- Understand and use mental models (more of these are listed at the end).
- Always ask "why" to understand things better.
4. Intellectual humility
Acknowledging what you don’t know is the dawning of wisdom.
- Being wise starts with knowing what you don't know.
- Stick to what you understand well.
- Look for information that goes against what you believe.
- Don't pretend to be certain when you're not.
- Remember, it's easy to fool yourself.
5. Analytical rigour
Use of the scientific method and effective checklists minimises errors and omissions.
- Use a careful method and checklists to avoid mistakes.
- Tell the difference between what something is worth and what it costs.
- Focus on analysing businesses, not just markets or numbers.
- Think about all the risks and effects.
- Try looking at problems from different angles.
6. Capital allocation
Proper allocation of capital is an investor’s number one job.
- Deciding where to put your money is the most important part of investing.
- Always compare your best option with the next best one (opportunity cost).
- Good ideas are rare—when the odds are greatly in your favour, bet (allocate) heavily.
- Don't get too attached to one investment; be flexible.
7. Patience
Resist the natural human bias to act.
- Fight the urge to make quick decisions.
- Let your investments grow over time; don't interrupt compounding.
- Avoid unnecessary taxes and costs - or taking action for the sake of it.
- Be ready for opportunities that come unexpectedly.
- Enjoy the process as much as the results.
8. Decisiveness
When proper circumstances present themselves, act with decisiveness and conviction.
- Be fearful when others are greedy, and greedy when others are fearful.
- When the right opportunity comes, make a decision with confidence.
- Grab opportunities when they appear because they don't last long.
- Success often happens when you're ready for it.
9. Embracing change
Live with change and accept unremovable complexity.
- Accept that the world changes, and adapt to it.
- Be willing to rethink your beliefs.
- Face reality even when it's not what you want.
10. Focus and simplicity
Keep things simple and remember what you set out to do.
- Keep your investment strategy simple and stick to your goals.
- Your reputation and honesty are important and can be lost quickly.
- Watch out for overconfidence and boredom.
- Don't get lost in details, and cut out unnecessary information.
- Deal with big problems instead of ignoring them.
Companies Mentioned in today's "Taking Stock"
11:00 & 19:08 Ocado #OCDO
11:10 JD Sports Fashion #JD.
13:05 Empire Metals #EEE
14:00 Metals One #MET1
15:05 & 18:43 Silver Bullet Data Services #SBDS
16:40 Ethernity #ENET
17:30 Tintra #TNT
17:55 Real Good Food #RGD
19:30 Mosman Oil & Gas #MSMN
19:45 Equals #EQLS
21:05 & 35:00 Halfords #HFD
22:54 Motorpoint #MOTR
28:50 Verditek #VDTK
31:30 LifeSafe Holdings #LIFS
34:14 Distribution Finance #DFCH
37:50 Greatland Gold #GGP
38:50 Pan African Resources #PAF
39:24 Kodal Minerals #KOD
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