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“I observe what works and what doesn’t and why.”
after law school he proceeded to form with a few partners what would become one of the nation’s most prestigious law firms.
Munger, Tolles & Olson
The value investing system developed by Ben Graham and used by Munger is the single best way for an ordinary investor to outperform a market index.
This is why Warren Buffett likes to say that “investing is simple, but not easy.”2 Munger’s version of what Buffett said is: “Take a simple idea and take it seriously.”
framework composed of three elements: principles, the right stuff, and variables. This three-part framework is only one type of model that can be used to understand Munger’s ideas and methods about investing.
I’m a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.
four fundamental principles of value investing as created by Ben Graham are as follows:
1. Treat a share of stock as a proportional ownership of the business. 2. Buy at a significant discount to intrinsic value to create a margin of safety. 3. Make a bipolar Mr. Market your servant rather than your master. 4. Be rational, objective, and dispassionate.
worldly wisdom
psychology of human misjudgment,
[Ben Graham] was trying to invent a system anybody could use.
simple.
unnecessary complexity at the National Aeronautics and Space Administration
We have a passion for keeping things simple.
Seeking Wisdom: From Darwin to Munger
“Simplicity has a way of improving performance through enabling us to better understand what we are doing.”
“tuning out folly”
“so your mind isn’t cluttered with them … you’re better able to pick up a few sensible things to do,”
If something is too hard, we move on to something else. What could be simpler than that?
We have three baskets: in, out, and too tough. … We have to have a special insight, or we’ll put it in the “too tough” basket.
Not all companies can be accurately valued using a Graham value investing process.
Important Remark....
real knowledge is knowing the extent of one’s ignorance.
The survivors know.
Graham value investing
it is about doing things that are not likely to result in a mistake.
Seth Klarman wrote in Margin of Safety:
If you cannot accept investing underperformance in the short term in order to achieve long-term investment outperformance, then you are not a candidate for Graham value investing.
State of Mind
the goal of the Graham value investor is superior absolute performance,
trying to be consistently not stupid, instead of trying to be very intelligent.
many problems are best addressed backward.
“Knowing what you don’t know is more
useful than being brilliant.”
John Bogle, the founder of the nonprofit mutual fund provider Vanguard,
Only in Woebegone can people out-invest the market. The average performance of all investors has to be the average performance of all assets. It’s a zero-sum game if you judge it relative to the market. There are two sides to every trade. The best way to think about it is that every time you buy a stock, someone is selling … So you always have to ask the question, “Why am I on the right side of this trade?”
Successful Graham value investors spend most of their time reading and thinking, waiting for significant folly to inevitably raise its head.
Charlie Munger, Warren Buffett, Seth Klarman, Howard Marks, Bill Ruane, and other Graham value investors.
a know-nothing investor is someone who does not understand fundamentals of investing.
call these passive investors index investors.
exchange-traded funds (ETFs),
being a successful active investor requires massive amounts of time and work, plus the right emotional temperament.
Knowing the difference between gambling and investing is important.
Investing is an action that defers consumption in the present in the hope that you will be able to consume more in the future. An investor has an expectation of a positive real rate of return, even though it is possible that this will not happen (especially in the short term). In other words, an investment is a net present value–positive activity (the likelihood of the net present value of the potential benefits minus the likelihood net present value of the potential losses is positive).
Gambling is a form of present-moment consumption, and the net present long-term value of the activity is negative. Many people who think th...
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First Principle: Treat a Share of
Stock as a Proportional Ownership of a Business
focused on the present value of the cash that will flow from the business during its lifetime and whether the business generates high, sustained, and consistent returns on capital.
What Munger looks for is a business that has a significant track record of generating high, sustained, and consistent financial returns.
A Graham value investor puts short-term predictions about mass psychology in the too hard pile and focuses on what he or she can do successfully with far greater ease.
Graham value investors do not spend time with top-down factors like monetary policy, consumer confidence, durable goods orders, and market sentiment in doing a business valuation or investing.
intrinsic
