Learnings from a Master – key learnings from the legendary investor ‘Charlie Munger’

Silent night, holy night
All is calm, all is bright
‘Round yon virgin Mother and Child
Holy infant so tender and mild
Sleep in heavenly peace
Sleep in heavenly peace

To sleep with peace in the world of equity investments is difficult to imagine. But what if there is a demonstrated predictable process with a proven outcome and track record?

In addition to sound processes for investment which enable one to navigate the rough terrain of investments and permit one to sleep peacefully, it is important to have a solid emotional base and understanding of what is happening in the immediate surroundings as well as understanding what happened historically if one wants to be a successful investor or for that matter successful at navigating life.

Without the base or the processes, biases can creep in, impacting life and investment decisions. We all construct our own processes and understanding but it is always useful to look at inputs from others who have been successful in navigating the world of investments and life situations.
Success in life situations can be described as those who have learned to effectively navigate the ups and downs of life and not be bogged down.
One of the role models many investors looked at was Charlie Munger for his wisdom in investments and in other areas of life. He navigated his life after losing his spouse and child at an early age as well as losing one of his eyes.

Some of the important takeaways from him are:
Reading and having mental models are important for living and investing and the legendary investor Charlie Munger, espouses it very well. He was a voracious reader and his readings included psychology, finance, letters from well-known investors, philosophy, and other subjects.

In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time—none. Zero. You’d be amazed at how much Warren reads—and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” – Charlie Munger

He was not a value investor in the conventional sense i.e., buying stocks at a discount to the fair value. He believed in investing in good companies at fair prices and expecting these companies to generate handsome compounded returns over the long term.

There are scores of such companies in the Indian context too from consumer companies to banks that have compounded in the past and are poised to compound in the future. These compounding benefits really accrue if the investors remain invested for a long- a crucial aspect that many ignore and fall prey to short-term speculation or trading.

In addition to investment advice, one of his favourite advice was to invert any situation and look at the problem in reverse.

He also spoke of motivations caused by incentives and keenly looked at incentive structures to study what motivated the CEO or board to undertake certain business decisions.

Since he studied psychology, he understood well the foundations of good decision-making. He invested in areas he understood well and avoided those that he did not.

This is always such a powerful lesson to investors. For instance, many investors in the last few years lost to Bitcoins without any clue on how it works.

It had become popular, and many stories floated around leading naïve investors to invest and lose. Following Charlie Munger’s advice would have saved many.

Losing money is losing capital and is worse when it is lost in ventures that are not well understood. Moreover, the loss of capital lowers the benefits from compounding.

Staying the course was another important lesson, He did make mistakes but that did not stop him from investing further. He took the lessons from those investments and then moved on. E.g., he acknowledged that it was a mistake to have invested in Ali Baba.

In his personal life also, after losing his wife and son at a young age, he continued with his work diligently despite being devastated.

Knowledge from multiple areas, a discipline to follow and implement what he learned, and following the age-old principles of honesty and hard work, led him to live a fairly rich life, not only in terms of wealth but in other areas of life as well.

He was an investor, philanthropist, writer, businessman, and vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett; Buffett described Munger as his closest partner and right-hand man.

For those interested he has also recommended many interesting books from diverse fields. Some of the interesting ones include Influence: The Psychology of Persuasion, Guns, Germs and Steel: The Fates of Human Societies, and Fiasco: The Inside Story of a Wall Street Trader.

(The author is Managing Director and Group Head – Equities in Quantum Advisors Private Limited)

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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)