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Kindle Notes & Highlights
by
Tren Griffin
Started reading
September 16, 2019
Buffett acknowledged Munger’s contributions when he pointed out, “One plus one with Charlie and me certainly adds up to more than two.”1
no one can ever be Charlie Munger, just like no one can be Warren Buffett. The point is not to treat anyone like a hero, but rather to consider whether Munger, like his idol Benjamin Franklin, may have qualities, attributes, systems, or approaches to life that we might want to emulate, even in part. This same process explains why Munger has read hundreds of biographies. Learning from the success and failure of others is the fastest way to get smarter and wiser without a lot of pain.
Life happens to Munger as it does to everyone, but unlike many people he thinks deeply about why things happen and works hard to learn from the experience.
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.
Charlie often says that most investors, no matter how smart, won’t succeed because they have “the wrong temperament.”
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. —CHARLIE MUNGER, WESCO ANNUAL MEETING, 2007
Part of the benefit of creating a checklist is the process of writing down your ideas. I have always loved the point Buffett made about the importance of making the effort to actually put your ideas in writing. In Buffett’s view, if you cannot write it down, you have not thought it through.
The 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.
Munger likes to say that a successful investor never stops being a “learning machine.” This need to learn and relearn means that an investor must read and think constantly. Munger has said he does not know a single successful investor who does not read voraciously. His own children describe him as a “book with legs sticking out.”
Warren Buffett says that investing is simple but not easy. When Graham value investors make mistakes, it is usually because they have done things that are hard for humans to avoid, like forgetting the inherent simplicity of the Graham value investing system, deviating from the fundamentals of the system, or making psychological or emotional mistakes related to implementation of the system.
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. It is perfectly natural for a person who follows the Graham system to acknowledge that fact and move on to other easy decisions.
Graham value investing is not about showboating or flouting one’s intelligence. Instead, it is about doing things that are not likely to result in a mistake.
The Graham value investing system is intentionally designed to underperform an index in a bull market;
Seth Klarman wrote in Margin of Safety: “Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”4
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. This is not a tragedy, since the Graham value investing system is not the only way to invest successfully.
It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, “It’s the strong swimmers who drown.”
By eliminating the stupid paths that one can take in life, a person can find the best way forward, even given inevitable risk, uncertainty, and ignorance.
Munger said it simply: “Knowing what you don’t know is more useful than being brilliant.”
use a baseball analogy, Munger knows there are no called strikes in investing, so there is no need to swing at every pitch. When you find an obvious bet with a big upside, Munger’s advice is simple: bet big!
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.
The Graham value investor’s job is to recognize mispriced assets when he or she sees them. This approach is hard for many people to accept.
As Buffett has often observed, value investing is not a concept that can be learned and applied gradually over time. It is either absorbed or adopted at once, or it is never truly learned.
the time of greatest activity for a Graham value investor is when the people who make up the market are fearful as evidenced by mispriced assets available for purchase. It is ironically because of downturns in markets that the Graham value investor finds his or her greatest source of profits.
Is it dangerous to tell a client that beating the market is possible even if you know that there is little chance that this person will actually do so?
It’s a very simple set of ideas and the reason that our ideas have not spread faster is they’re too simple. The professional classes can’t justify their existence if that’s all they have to say. —CHARLIE MUNGER, BBC INTERVIEW, 2009
Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund. —CHARLIE MUNGER, KIPLINGER INTERVIEW, 2005
“Emotions are absolutely your enemy. You want to be a certain kind of mutant who is just completely different in their orientation to what’s an attractive investment for the rest of the market.”10
As you read this book, think about whether you have the right stuff required to be a successful Graham value investor like Munger. Can you understand and implement the principles to make the required choices about value investing variables? It may well be that you find the whole investment process too boring to do it well enough to beat the market. You may conclude that you’re too easily distracted, are likely to panic at the wrong time, or will too often follow the crowd into poorly performing investments. If you cannot be an effective Graham value investor or don’t want to put in the effort
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Genuinely not sure if I have the temperament to do this...
What Munger meant is that outsourcing active investing to others, such as investment managers and brokers, is harder than doing it yourself.
First Principle: Treat a Share of Stock as a Proportional Ownership of a Business
Graham value investors are 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. Many supplemental variations on this process exist, but the fundamental core of the valuation process is the same for all Graham value investors.
What Munger looks for is a business that has a significant track record of generating high, sustained, and consistent financial returns.
Munger makes it quite clear that he does not have a way to value all companies, which is fine with him because he feels no need to do so. There are more than enough businesses that Munger can value using his valuation method to make him happy as an investor.
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.
There is a huge difference between what is interesting to learn about and what is useful in making an investment decision. For example, both Munger and Buffett are famously bullish on the U.S. economy in the long term, but that does not mean they make short-term predictions about the economy or incorporate them into investment decision making.
a speculator is trying to guess the price of the asset by predicting the behavior of others in the future. In other words, a speculator’s objective is to make predictions about the psychology of large masses of people, which if you are both smart and experienced is a sobering thought. How good are you at predicting what people will do once assembled into a mob?
“an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”3
If you’re an investor, you’re looking on what the asset is going to do; if you’re a speculator, you’re commonly focusing on what the price of the object is going to do, and that’s not our game. —WARREN BUFFETT,
Mark Twain’s saying, “A mine is a hole in the ground owned by a liar.”
A man piloting a hot-air balloon discovered he had travelled far off course. He took the balloon down to a lower altitude, where he saw that he was above an office building. A man outside the building saw the balloonist and waved. The balloonist shouted, “Excuse me, can you tell me where I am?” The man yelled back, “You’re in a hot-air balloon, about 150 feet above the headquarters of this investment bank.” The balloonist replied, “You must be a forecaster at the investment bank, then.” Obviously surprised, the man said, “Yes, I am! How did you know that?” “Well,” said the balloonist, “what
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No matter how wonderful [a business] is, it’s not worth an infinite price. We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life.
Ben Graham’s definition of a margin of safety is “a favorable difference between price on the one hand and indicated or appraised [intrinsic] value on the other.”
Intrinsic value is the present value of future cash flows. Margin of safety reflects the difference between the intrinsic value and the current market price.
The margin of safety principle is natural for a person like Munger, who is trying to succeed by avoiding what is hard (e.g., predicting the future in the short term).
A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.
If you could take the stock price and multiply it by the number of shares and get something that was one third or less of sellout value, [Ben Graham] would say that you’ve got a lot of edge going for you. Even with an elderly alcoholic running a stodgy business, this significant excess of real value per share working for you means that all kinds of good things can happen to you. You had a huge margin of safety—as he put it—by having this big excess value going for you.
Buffett wrote once: “When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And the same idea works in investing.”10
The first rule of investing is: do not make big financial mistakes. The second rule is the same as the first rule.
More of a life lesson: avoid wipeout risk, have safety nets, don't do anything stupid or take unnecessary risks.
