Charlie Munger investment lessons

Charlie Munger | Top 12 important Investment Lessons

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Charlie thinks about business economics and investment matters better than anyone I know, and I’ve learned a lot over the years by listening to him.

– Warren Buffett in his 2000 annual letter to investors

Charlie Munger was an American investor, businessman, and a philanthropist. He was the former vice chariman of Berkshire Hathaway, a conglomerate headed by Warren Buffett.  As Buffett’s right-hand man, he was instrumental in the growth of Berkshire Hathaway into a giant diversified holding company with a market capitalization of over $780B(Nov’23). Charlie Munger inspired generations of investors, including Warren Buffett.

Here are 12 most valuable lessons, an investor can learn from Charlie Munger:

Multidisciplinary Thinking

Charlie Munger was passionately interested in many areas of knowledge like science, history, philosophy, psychology, and mathematics, to name a few. He believed that all these fields carry important concepts that people should apply to all their endeavors, including investment decisions. For worldly wisdom, Munger believed that one must build a latticework of mental models that unites all big ideas of the world.

For Munger, knowledge in law, investment philosophy, and a passionate interest in a multitude of disciplines produced an investment philosophy that went a long way in shaping his investment journey.

Invert, always invert

Munger was a big advocate of applying the model of inversion to his decisions. Inversion involves looking at a problem from the inverted or opposite point of view. Rather than focusing on achieving success, inversion encourages one to consider avoiding failures. It involves figuring out potential reasons for failure and avoiding them.

Circle of competence

A circle of competence is an area where someone has knowledge, expertise, or an advantage over others. Humans cannot and are not supposed to learn everything to succeed. There might be areas where a person may not have the aptitude to succeed. It’s wise to avoid attempting to fit everywhere and focus on identifying and developing a circle of competence. In the circle of competence, which might be partly due to aptitude and rest developed over time by diligence and handwork, individuals have an advantage over their competitors and the probability of success is much higher. For investment decisions, one must focus on operating in their circle of competence and avoid venturing into businesses they are less familiar with.

Patience and Discipline

Investors must learn to appreciate the power of holding their stocks for longer periods and let the power of compounding work.

Investors should not always be in investing mode. They should wait for the opportunities, do the fundamental and other analysis, and be confident of the stocks in their portfolio.

Avoid cognitive biases

Investors must avoid cognitive biases like Overconfidence, Overreaction bias, loss aversion, mental accounting, myopic loss aversion, herd mentality, etc.

Learn from mistakes

Setbacks provide valuable insights and contribute to personal growth. Everyone makes mistakes. Wise people learn from their mistakes and derive valuable lessons to incorporate in their future judgments. Investments are based on the probability of profits, and no investment decision is foolproof. Apart from learning from one’s own mistakes, Munger also embraces the idea of learning vicariously from the mistakes of others. Learning from the experiences and missteps of those who have already committed the mistakes in the past, avoids the trouble of getting the first-hand experience of making the same mistakes. This avoids enduring the consequences of errors.

Emphasis on Rational Thinking

Charlie Munger was a proponent of rational decision-making and advised against letting emotions direct the outcome. By virtue of his knowledge of various disciplines, and his expertise in the application of mental models to various aspects of his life, Munger’s investment decisions were always backed by a strong understanding of fundamentals, moat, and the long-term potential of the business. Daily market fluctuations did not interest him.

Focus on Quality

Munger advocated investing in high-quality businesses with strong brands, competitive advantages, and strong management teams. One of Berkshire’s best investments of all time, See’s Candies, was inspired by this principle. It did not fit into the mold of Buffet’s emphasis on investing only in highly discounted stocks. Munger considered See’s Candies as a high-quality compounder and convinced Buffett to deviate from his approach of buying cheap. Barkshire Hathaway purchased See’s Candies for $25M. Over the years it generated over $2B in pre-tax earnings.

The success of See’s Candies inspired Buffett to later buy large stakes in Coca-Cola and Apple.

Latticework of mental models

Munger dedicated his life to reading and learning. He applied these mental models to understand anything and make informed decisions. He practiced, developed, and honed the skills in using these mental models by harnessing his knowledge in various disciplines.

Munger defined mental models as frameworks or cognitive tools that help in understanding and interpreting the world. His approach involves continuously expanding his mental toolkit by acquiring insights from various fields of knowledge.

He advised building a latticework of mental models derived from various disciplines to better understand the world and make more informed decisions. By integrating insights from different domains, one can develop a more comprehensive understanding of complex problems and make better decisions.

Continuous Learning

As discussed, Munger devoted is life to reading and learning. He extended his learning interests to various disciplines and developed a latticework of mental models that helped him better understand life and make more informed decisions.

Apart from one’s own experiences, Munger advocated the idea of learning from the mistakes of others. Munger was fond of analyzing the case studies of the failures of others to understand the reasons and pitfalls. To learn from the failures, he did not restrict himself only to investing but also gleaned lessons from the mistakes committed in other disciplines. 

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and, boy, does that help, particularly when you have a long run ahead of you”

Charlie Munger

Importance of a wide moat

Munger advised about investing in companies with a strong moat. This refers to the competitive advantages that set apart the business from its rivals and create barriers to entry. Investing in companies with durable moat ensures consistent returns over time.

The corporate executives in such a company must be dedicated to widening the moat. If a company is showing fabulous results, the executive must think about the reason, the moat, and should be relentless in the pursuit of further improving on that advantage.

Value of a trusted circle

Munger recognized the importance of surrounding oneself with talented and trustworthy individuals

His long-standing partnership with Warren Buffett is a testament to the power of collaboration and mutual respect. He advised the investors to seek out mentors, partners, and advisors who can provide valuable guidance and contribute diverse perspectives. Without Munger, Buffett would have never deviated from Benjamin Graham’s learnings to buy the stocks of See’s Candies, Coca-Cola, or Apple. These are now considered among the best investments of Berkshire Hathaway. In the first annual letter to Berkshire Hathaway’s shareholders after Munger’s death, Buffett credited him with being the architect of the conglomerate.

Similar trust they extended to the managers of their businesses. They hired outstanding managers to run their business and never micromanaged them.

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