Much has been written on the passing of Charlie Munger one month shy of his 100th birthday. He had served as Warren Buffett’s ‘side-kick’ since 1978. Munger was famous for his one-liners. When asked for a comment by Buffett at annual Berkshire Hathaway shareholder meetings, he would invariably retort, “I have nothing to add.”
Warren Buffett often sought to pick up “cigar butts on the street” and get the last puff. By contrast, Munger taught Buffett that “a great business at a fair price is superior to a fair business at a great price.” He went on to say, “We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing!”
Here is a summary of some investing principles taken from “Poor Charlie’s Almanac”:
- Risk: Avoid dealing with people of questionable character; insist upon proper compensation for risk assumed; always be aware of inflation and interest rate exposures; avoid big mistakes.
- Independence: “Only in fairy tales are emperors told they are naked”; remember that just because other people agree or disagree with you doesn’t make you right or wrong; mimicking the herd invites regression to the mean (merely average performance).
- Preparation: If you want to get smart, the question you must keep asking is, “Why, why, why?”
- Intellectual humility: Acknowledging what you don’t know is the dawning of wisdom; stay within a well-defined circle of competence.
- Analytic rigor: Determine value apart from price; progress apart from activity; wealth apart from size; be a business analyst, not a market, macroeconomic, or security analyst; think forwards and backwards – invert, always invert.
- Allocation: Proper allocation of capital is an investor’s number one job; good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily; don’t ‘fall in love’ with an investment.
- Patience: Resist the natural human bias to act; “compound interest is the eighth wonder of the world,” never interrupt it unnecessarily; avoid unnecessary transactional taxes and frictional costs; be alert for the arrival of luck.
- Decisiveness: When proper circumstances present themselves, act with decisiveness and conviction; be fearful when others are greedy, and greedy when others are fearful; opportunity meeting the prepared mind: that’s the game.
- Change: Continually challenge and willingly amend your “best-loved ideas”; recognize reality even or especially when you don’t like it.
- Focus: Keep things simple and remember what you set out to do; remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat; guard against the effects of hubris and boredom; don’t overlook the obvious by drowning in minutiae; face your big troubles and don’t sweep them under the rug.
He was famous for not mixing his words. “If you stay rational yourself, the stupidity of the world helps you.” He has described Bitcoin as “scum ball activity” and “rat poison.” Finally, when asked what he might want for an epitaph, his succinct response was, “I tried to be useful.”