Charlie Munger hated flimflam and self-promoters. He wasn’t shy about saying so.
The billionaire investor, who died this week a month short of his 100th birthday, called crypto “crappo,” declared he would “rather throw a viper down my shirtfront” than hire a compensation consultant and said most investment managers are little more than “fortune tellers or astrologers.”
Yet Mr. Munger was a lot more than just a tart-tongued demolisher of get-rich-quick schemes and pretentious airbags. He could also slice through confusion and put a tremendous amount of wisdom in just a few words.
Consider his advice about how to achieve success: “You spend less than you earn, invest shrewdly and avoid toxic people and toxic activities, and try to keep learning all your life.”
Or ponder his even pithier take on the same subject: “The safest way to try and get what you want is to try and deserve what you want.”
His attitudes meshed perfectly with those of his long-time business partner, Warren Buffett. The two met at a dinner party in their hometown of Omaha, Neb., in 1959 and quickly became the best of friends. Mr. Munger, then a lawyer in California, found Mr. Buffett fascinating and vice versa.
They talked constantly and soon began investing together. Their alliance was formalized in 1978 when Mr. Munger became vice-chairman of Mr. Buffett’s flagship, Berkshire Hathaway Inc. BRK-B-N Over the next four decades, the two men thrashed the S&P 500 together.
Mr. Munger owed a lot to Mr. Buffett. The opposite was also true.
Mr. Buffett credited his friend with shifting his approach to the market. Thanks to Mr. Munger, Mr. Buffett moved away from his roots as a bargain-hunting value investor who sought to buy fair companies at great prices. He began instead to focus on acquiring great companies at fair prices.
The Munger-inspired approach took Berkshire to new heights. “He was the architect and I was the general contractor,” Mr. Buffett said of the business they built together.
What can ordinary investors take away from Mr. Munger’s extraordinary career? Here are five lessons that stand out.
The cool head wins: Mr. Munger was a Harvard-trained lawyer with an exceptional aptitude for math, but he scoffed at the notion that brains alone can make a great investor. “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments,” he told Kiplinger magazine in 2005.
One challenge for investors is to remain sane when you are losing money. Another challenge is to remain sane when you are making lots of money. Either can turn you irrational or impatient – and that nearly always leads to problems.
Mr. Munger said he and Mr. Buffett largely ignored the market’s gyrations and focused instead on buying great businesses. This approach allowed them to navigate tough patches without panicking.
“If you’re not willing to react with equanimity to a market price decline of 50 per cent two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre results you’re going to get,” he said.
Always invert: One good way to boost your rationality is to turn difficult problems inside out. “Invert, always invert: Turn a situation or problem upside down. Look at it backward,” Mr. Munger said.
This approach can clarify murky situations. If you’re baffled about how to boost your portfolio returns, for instance, you might invert the problem and ask what are some surefire ways to drag down your portfolio returns. Several excellent answers pop to mind: Buy on impulse, chase winners, refuse to sell losers, pay too much in management fees.
Now ponder that inverted wisdom for a second. The easiest way to boost your portfolio returns may simply be to avoid doing all those things that will nearly certainly hurt your returns.
The same point applies more generally. “A lot of success in life and business comes from knowing what you want to avoid,” Mr. Munger said.
Look at the other side: Intense political ideology “cabbages up one’s mind,” Mr. Munger said in a memorable commencement address at the University of Southern California law school in 2007. He recommended what he called an “iron prescription” to keep sane: Tell yourself you’re not entitled to have an opinion on this subject unless you can state the arguments against your position better than your opponents can.
It’s easy to see how investors can apply the same technique. Before you buy or sell a stock, make sure you consider both pros and cons. Don’t assume that anything is a guaranteed winner or loser. If you can’t comfortably state both sides of the debate, you probably need to do more research.
Bet big on the best: Why do some businesses prosper and others don’t? It’s a fascinating question that Mr. Munger explored in a speech to the University of Southern California business school in 1994.
His overarching point was that there are many models for success. Sometimes businesses succeed because of their huge size and the economies of scale that flow from that size. Other times they win because of their precise focus on a microscopic market. Still other times their success has to do with brand-name recognition or technological innovation or inspired management.
An investor often has to dig deep to understand what type of edge – if any – a business possesses. It’s rare to find truly outstanding businesses with a durable edge at a price that is attractive. A typical investor may spot only a few such situations in a lifetime. But when an investor does recognize a tempting set-up, he or she should be prepared to bet heavily on the insight.
“How many insights do you need?” Mr. Munger said. “Well, I’d argue that you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top 10 account for most of it.”
Find a smart friend: Mr. Munger’s career was testament to the power of friendship.
He and Mr. Buffett agreed on core values but didn’t always see eye-to-eye on specifics. Yet they never argued – perhaps because the final decision was always Mr. Buffett’s, perhaps because Mr. Munger knew how to state his case.
As Mr. Buffett recalled, Mr. Munger would always end his objections with the same two sentences: “Warren, think more about it. You’re smart and I’m right.”
Most of us could benefit from cultivating more friends like that – people who are as smart or smarter than we are and who are prepared to challenge our thinking without turning the discussion into a contest of egos or insults.
Maybe the biggest benefit of discussing potential investments with a trusted but skeptical friend is that it forces you to state your assumptions and clarify your logic. Most of us don’t like doing that. But the right alter ego can make the process fun.
It certainly was for Mr. Munger and Mr. Buffett. The world will miss their banter at Berkshire Hathaway’s annual meeting, but their long friendship will continue to be an inspiration. It’s proof that you can not only get rich, but have a darn good time doing so.