The investing rules of Charlie Munger are easy & straightforward to understand but very difficult to apply.
Charlie Munger is a right-hand man of Warren Buffett. He is the vice president of BERKSHIRE HATHAWAY INC.
His net worth is $2 billion dollars. Charlie Munger’s age is 96 years old (born on 1st January 1924).
He had a great influence on Warren Buffett by inspiring his investing strategy from buying low-quality stocks at cheap prices to good quality companies at a fair price.
Charlie in his own rights is also a great investor. He ran a partnership fund from 1962 to 1975 which achieved a CAGR of 19.8%.
Mr. Munger is a Harvard Law School Graduate. He has not attended any finance or business formal course.
5 Investing rules of Charlie Munger.
1.Few bets, big bets & infrequent bets.
It means buy a stock when you have a strong conviction about the fundamentals of a company. An investor doesn’t need to buy 20 to 30 stocks in a year 1 or 2 stocks are enough.
Which means investor should buy only when you have a high chance of winning the bet. The waiting period in his style of investing can be too long.
In the meanwhile study, as much as possible about everything that comes on the way. This learning will help to identify the big opportunities.
“Opportunity comes to the prepared mind”– Charlie Munger.
2.Be prepared for a market crash.
When Charlie Munger was asked, “How worried are you by the decline in the share price of BERKSHIRE HATHAWAY INC.”
“Zero this is the third time that Warren & I have seen our holdings in BERKSHIRE go down atop tick to bottom tick by 50%”
“It’s in the nature of stock to go down” (By say 50% or more).
Don’t think of selling at this time instead use the learning & pile up the best securities available in the marketplace.
3.Follow a simple checklist.
- Deal only in things you can understand.
- Companies should have a durable competitive advantage.
- Management should have integrity & talent.
- Buy at a price below intrinsic value.
Charlie Munger on his ideas on investing.
“It is a very simple set of ideas & the reason why our ideas have not spread faster is that they are too simple. The professional classes cannot justify their existence if that is all they have to say. If it is all so obvious & so simple, what would they have to do with the rest of the semester?”
The above checklist is the most comprehensive investment rule for any investor to achieve a good return over a long period of time.
Diversification means dividing up your money among different classes, or types, of investments. Charlie Munger is not a big fan of diversification.
Once he was asked ‘Are you comfortable with a non-diversified portfolio?’
“Am I comfortable with a non-diversified portfolio? Of course, I am comfortable. If you take the Mungers, I care about the Mungers. The Munger Family only owns a few stocks, the rest is dribs & drabs. So am I comfortable with a few stocks? Am I securely rich? You’re damn right I am”– Mr. Munger replied.
The ups and downs in this type of portfolio will be big because of the less diversification.
Patience is the key to investing success.
Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”-Paul Samuelson
Munger on patience.
“I read Barron’s for 50 years in 50 years I found one investment opportunity in Barron’s other which I made about 80 million dollars with almost no risk. I took the 80 million dollars & gave it to Lilu, who turned it into 400-500 million”.
“So I made 400-500 million dollars from 50 years of reading Barron’s & following my idea”.-Charlie Munger
Sitting on the sidelines & learning about different industries, businesses, etc can be a great help in finding great investments.
As I mentioned at the beginning of the article, the Investing rules of Charlie Munger are too simple but very difficult to implement.
The most difficult part of the implementation is our psychological biases. Which forces us to take irrational actions. Overcoming these biases can be a huge edge to achieve investing success.
Also, Read Peter Lynch-6 types of stock categories.
Disclaimer: This is my learning from Charlie Munger’s investing rules from various speeches, interviews, etc.