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Learning from the success and failure of others is the fastest way to get smarter and wiser without a lot of pain.
if you cannot write it down, you have not thought it through.
“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk,
being smart is often best achieved by not being stupid.
When you find an obvious bet with a big upside, Munger’s advice is simple: bet big!
Investing is an action that defers consumption in the present in the hope that you will be able to consume more in the future.
Gambling is a form of present-moment consumption, and the net present long-term value of the activity is negative.
Understanding how to be a good investor makes you a better business manager and vice versa. —CHARLIE MUNGER, KIPLINGER, 2005 First Principle: Treat a Share of Stock as a Proportional Ownership of a Business
In buying a business, Munger believes the place to start is at the bottom, with business fundamentals, and work up.
Graham value investors like Munger stay away from making predictions about how cash flows will change in the future based on projections and forecasts. What Munger looks for is a business that has a significant track record of generating high, sustained, and consistent financial returns.
Be motivated when you’re buying and selling securities by reference to intrinsic value instead of price momentum.
Howard Marks advised that Graham value investors focus on what they know now and not where they are going because, rather obviously, your data about the present is extensive while your data about the future will always be zero.
By sticking to investing activities that are easy, avoiding questions that are hard, and making decisions based on data that actually exists now, the Graham value investor greatly increases his or her probability of success.
Second Principle: Buy at a Significant Discount to Intrinsic Value to Create a Margin of Safety
Simply put, your objective as a Graham value investor is to buy a share of stock at a sufficiently large bargain that you do not need to predict short-term price movements in the stock market.
Third Principle: Make “Mr. Market” Your Servant Rather Than Your Master
As long as the fundamentals of the business itself remain in place, a market’s short-term views on the price of the shares can be ignored and will be corrected in the long term.
There are essentially three steps in the process: analyze the business to determine intrinsic value, buy the assets at a significant bargain, and wait.
The higher the price you pay for an asset, the greater the risk that you will experience a loss of capital.
Rationality is not just something you do so that you can make more money; it’s a binding principle. Rationality is a really good idea. You must avoid the nonsense that is conventional in one’s own time. It requires developing systems of thought that improve your batting average over time.
people who think very broadly and understand many different models from many different disciplines make better decisions and are therefore better investors.
people who cannot be alone with their own thoughts are terrible candidates to become successful investors.
“Where you have complexity, by nature you can have fraud and mistakes.”8
a year in which you do not change your mind on some big idea that is important to you is a wasted year.
Envy is an emotion designed to motivate people to acquire attributes and possessions that increase evolutionary fitness. Now that there is less scarcity in the world, envy has lost much of its value. Instead of motivating people for emotional fitness, envy just makes people unhappy.
the desire to reciprocate often results in an unequal exchange of value.
We don’t like complexity and we distrust other systems and think it many times leads to false confidence. The harder you work, the more confidence you get. But you may be working hard on something that is false.
is so important. This book has made the point repeatedly that the most effective way to genuinely reduce risk is to know what you’re doing.
“One means we use to determine what is correct is to find out what other people think is correct. We view a behavior as more correct … to the degree we see others performing
Learning to ignore the crowd and think independently is a trained response.
It is not enough to be contrarian; you must also be sufficiently right in terms of the magnitude of the positive outcome that you outperform the markets.
Three things ruin people: drugs, liquor, and leverage. —CHARLIE MUNGER, WESCO ANNUAL MEETING, 2009
“When people are uncertain … they don’t look inside themselves for answers—all they see is ambiguity and their own lack of confidence. Instead, they look outside for sources of information that can reduce their uncertainty. The first thing they look to is authority.”16
In Munger’s view, people too often confuse twaddle and prattle with importance and value. Even worse, many people pay fees to consultants and advisors for twaddle and prattle. Of course, the hardest thing to spot is when you are telling yourself twaddle, because the easiest person to fool is always yourself.
Just because someone gives you a reason for doing something stupid does not make
Buffett’s “genius was largely a genius of character—of patience, discipline and rationality. … His talent sprang from his unrivaled independence of mind and ability to focus on his work and shut out the world.”
Buffett has said that the stock market is designed to transfer money “from the active to the patient.”1
At a fundamental level, investing is just one form of making a bet. It is essential, however, that the bet be made in a way that is investing (net present value positive) rather than gambling (net present value negative).
You need patience, discipline, and an ability to take losses and adversity without going crazy. —CHARLIE MUNGER, KIPLINGER, 2005
I think it’s possible for a great many people to live a life like that where there isn’t much risk of disaster and where they’re virtually sure to get ahead a reasonable amount. It takes a lot of judgment, a lot of discipline, and an absence of hyperactivity. By this method, I think most intelligent people can take a lot of risk out of life. —CHARLIE MUNGER, WESCO ANNUAL MEETING, 2002
“The difference between Warren Buffett and most investors has more to do with discipline than just about any other quality.”2
Speculators correlate activity with productivity or success, whereas Graham value investors correlate disciplined inactivity with success.
John Templeton put it this way: “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage but provides the greatest profit.”3
Thinking that your IQ is a bit lower than it actually is may actually improve your investing performance.
While it is overconfidence and not high IQ which results in poor investing results, high IQ may lead to overconfidence.
“How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.” It’s such a simple idea but it’s a correct idea.
You ought to have an internal compass. So there should be all kinds of things you won’t do even though they’re perfectly legal. That’s the way we try to operate.
When people in business together trust each other because they are honest, the efficiency that results from that trust improves the financial returns of the business.
aware of your own limitations, keeping important decisions inside your circle of competence, and avoiding decisions that are too hard, it is reasonable to feel more confident in your abilities. Genuine confidence is as valuable as false confidence is dangerous.
