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What You Cannot Learn From Studying Charlie Munger
When asked for the “trick” to get rich, Charlie Munger used to tell the following anecdote:
It reminds me of the young guy who went up to Mozart and said, ‘I’d like to write symphonies.’ When Mozart said, ‘You’re too young,’ the young man replied, ‘But you were young when you started.’ Mozart pointed out, ‘Yes, but I wasn’t asking anyone else for advice on how to do it.’
To invest like Munger you would need his intellect, his temperament, likely even his personal history and acquaintances, the historic environment when he set out to get rich, and, finally, his investment strategy. What we can learn from him is only this last one – although, clearly, it suited him and his personal temperament. It might not suit you.
Keeping these limitations in mind, studying Munger (or Mozart, if you are a musician) is still of enormous use: Ideally, Munger will become your mentor, will shape your own thinking and discipline, and can help you remain just as patient as decisive through all sorts of market frenzy.
I believe there is not a single investor in this world who would not benefit from studying Munger’s investment theory. Such a study should be part of every investor’s Preparation, which is Munger’s first guiding principle and the basis of his fundamental philosophy of life.
Preparation
Without the method of learning, you’re like a one-legged man in an ass-kicking contest. (Source)
You need to read and learn voraciously. Contrary to the usual preparation in the financial sector (which Munger did not think very highly of), this includes a multi-disciplinary approach and “worldly wisdom”.
The importance of the latter cannot be understated. It is such an essential part of Munger’s preparation because he truly aims for an omni comprehensive understanding of the world. Everything is connected, everything is in flux, as Heraclitus says. Therefore, to understand risk, you need to be prepared to understand second and third order effects as well.
For example, his investment in Alibaba (NYSE:BABA) clearly has a geopolitical dimension. You cannot invest in China without the idea that, despite all the posturing and chest beating, the two most powerful nations on Earth will find a way to get along peacefully. Sooner or later they will understand that they have no other choice.
(Certainly not part of his thesis is the speculation that Alibaba, since its price chart hit resistance at x and formed an inverse head-and-shoulder pattern, might zoom higher within one week or two months at the latest. Gut feelings also have no part in his strategy.)
Hence, investing requires some sort of polymath: someone who always asks “why, why, why”, who always “inverts, inverts, inverts”, looking at things through many different lenses, thanks to a multi-disciplinary preparation.
Discipline
It goes without saying that his strategy requires an iron discipline, which is Munger’s second guiding principle. And this discipline does not only refer to learning, reading annual reports, researching peer groups etc. – it also includes how you deal with your own pitfalls:
Never fool yourself, and remember you are the easiest person to fool.
Hence, the necessity to follow a detailed checklist (you can find Munger’s own investing and decision making checklist in “Poor Charlie’s Almanack” or here), to resist the craving for false precision and false certainties, to continually challenge and willingly amend your best-loved ideas, to recognize reality especially when you don’t like it.
– Does this sound too tough a game to you? – Well, “investing is simple, but not easy”, as Munger put it. Getting rich is hard.
Patience
Another thing you have to do, of course, is to have a lot of assiduity. I like that word because it means: sit down on your ass until you do it. (Source)
Patience is the third guiding principle and means not only to be able to wait for the best occasions (and then bet big), but also to simply let compounding do its magic once you have invested. Action for the sake of acting is not an option.
There is only one way to be able to maintain such rigorous patience: if you enjoy the process. Everything is connected. Those that have not prepared sufficiently, those with little discipline, those that want to get rich fast will not be patient enough. They will invest in mediocre opportunities or sell out too early.
– But how can you “enjoy the process” of just sitting there and doing nothing? – Well, that’s not the process. Read again about the second guiding principle: While you wait, you learn, you challenge your own assumptions, dig deeper for your personal pitfalls, avoid fooling yourself etc. Everything is in flux, you observe, study, understand. This is what you enjoy and this gives you patience.
Basically, getting rich is only a side effect of the process. Mozart didn’t have a passion for becoming rich and famous, but for writing great music – he became famous because of his great music. Investors get rich because of their process, not because they want to get rich.
Decisiveness
Opportunity meeting the prepared mind: that’s the game. (“Poor Charlie’s Almanack”)
If you love the process of thinking and inverting and disciplining yourself, most probably you are a bit of an introvert. You love just sitting there, reading, improving your understanding of the world, just like Schopenhauer: “Life is a difficult question; I have decided to spend my life in thinking about it.”
This is not what investors do. They act decisively when opportunity presents itself.
No question: This might be the toughest thing to do for someone who loves to learn and think so much. One might have been “sitting on his ass” literally for years without finding anything worthwhile to act on, then, suddenly, he should bet heavily.
Munger doesn’t think highly of diversification. People who (because of preparation and discipline) know they have an edge, should act accordingly and bet big. In the portfolio he managed for the Daily Journal (DJCO) he always held only around five stocks, ultimately around 75% of the portfolio was in two stocks, and these two even belonged to the same sector: Bank of America (BAC) and Wells Fargo (WFC). Personally, almost his entire wealth was concentrated in only two stocks: Berkshire Hathaway (BRK.A) (BRK.B) and Costco (COST).
Such concentration challenges conventional wisdom. But conventions are exactly the thing Munger wanted to challenge. Conventions can be pretty asinine:
“Any time you go to a football game or a function there’s a huge line outside the women’s bathroom. Who doesn’t know that they pee in a different way than the men?” Munger told The Wall Street Journal in 2019. “What kind of idiot would make the men’s bathroom and the women’s bathroom the same size? The answer is, a normal architect!
The only thing that ultimately counts is your independent analysis and whether it is correct or not. “To hell” with all those who disagree with you. Which means loneliness should not frighten you. Warren Buffett summed it up nicely: “You pay a very high price in the stock market for a cheery consensus.”
What You Can Do
After reading this article, you will probably see that simply piggybacking on Munger’s stock ideas is the wrong approach. Sure, you can put 75% of your portfolio into two banks or you can buy (or hold) Alibaba just like he did. But you are probably not as prepared, as disciplined, and therefore not as patient and not as decisive as Munger would have been. So it would simply be the wrong thing to do.
Therefore, since sadly you cannot just sit there anymore and wait for the next holding report being filed with the SEC and maybe act on it, the thing to do for you now is to use a Munger-like approach to your investment: Challenge your assumptions, question your preparedness.
– Is the stock down for a reason or is the market plain wrong? There probably is some reason, but is it enough to justify the deep sell-off? What is the short thesis? According to Munger, you should be able to explain the short thesis better than any short seller before going long.
– Have you considered the geopolitical situation and its manifold second- and third-order effects? What if Munger was willing to wait many years before his thesis played out? What is your own timeframe? Would you remain patient for many years?
– What needs to happen in order to change your mind? You need to have some sort of limit. If you don’t, you have “fallen in love” with your stock and the stock doesn’t love you back. It doesn’t care if you own it or not.
– Which is the exact conventional wisdom you are challenging by owning BABA stock. You probably know H.C. Andersen’s fairy tale about the emperor, his invisible clothes and the little girl that, alone among the blindsided crowd, shouts out the truth. You have to recognize that there are two crowds in this game: bulls and bears. Who is blindsided? Are the shorts naked, is Alibaba naked, are you yourself the one who is naked?
Unfortunately, as Munger put it, “only in fairy tales are emperors told they are naked.”
So you have to find it out on your own.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
