Charlie Munger: Sage Advice from a True Great!

They say behind every great man is a great woman. Well sometimes behind a great man is an equally great man. In the investment world, such is the case with Warren Buffett and his business partner Charlie Munger, Chairman and Vice-Chairman of Berkshire Hathaway Corporation respectively.

There is no doubt that Buffett is the more well-known of the two, bestowed the title “Oracle of Omaha” for Berkshire’s unrivalled track record in outperforming the S&P 500 Index. (Over the period of 1965 to 2014, the compound annual gain was 21.6% versus 9.9% on the S&P 500.) However, the influence of Munger was integral to the shaping of Buffet’s investment strategy and the success of their investment company Berkshire Hathaway.

In the early days, Warren Buffett employed a deep value approach to investing, buying “mediocre companies that traded at bargain prices”. This style was inherited from his mentor Benjamin Graham, the man known as the father of value investing.  Buffett now calls it his cigar-butt investment approach, likening the purchase of stocks trading at discounts to their book value as “picking up a discarded cigar butt that had one puff remaining in it. Though the stub might be ugly and soggy, the puff would be free”.

While this approach worked well in the early days for Buffett, it was not a scalable investment strategy for managing large sums of money. The issue with cigar-butt investing was that ‘”once that momentary pleasure was enjoyed, however, no more could be expected”. Buffet credits Munger for breaking his cigar-butt habits and for the architectural design of today’s Berkshire Hathaway – “It took Charlie Munger to break my cigar-butt habits and set the course for building a business that could combine huge size with satisfactory profits”.

Charlie Munger did not share Warren Buffett’s obsession with Benjamin Graham’s philosophy of buying deep value stocks, believing instead in the purchase of high quality businesses at fair prices. Buffett sums up the influence of Munger on his investment style: “The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

Below are some nuggets of gold from Charlie Munger, now 91 years of age, which resonate with my own thinking on these matters. His sage wisdom not only helps navigate prudent long term investors through the daily, weekly, yearly noise in financial markets, but can be applied to all walks of life.

Intellectual humility

“Have intellectual humility: Acknowledging what you don’t know is the dawning of wisdom. Stay within a well-defined circle of competence & identify and reconcile disconfirming evidence.”

Objectivity and independence of thought

“Objectivity and rationality require independence of thought. Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment.”

On learning and asking why?

“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day. If you want to get smart, the question you have to keep asking is “why, why, why?””

Munger summed it up recently “I think it’s dishonorable to stay stupider than you have to”.

Adapting to your environment

“Recognise and adapt to the true nature of the world around you; don’t expect it to adapt to you. Recognise reality even when you don’t like it – especially when you don’t like it.”

Recognising that good things take time

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait, If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”

On holding cash:

“There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash — and I don’t want to go back.”