Charlie Munger: The Complete Investor (Columbia Business School Publishing)

by Tren Griffin

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.

Warren Buffett says that investing is simple but not easy.

If something is too hard, we move on to something else. What could be simpler than that? —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 2006

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. —CHARLIE MUNGER, WESCO ANNUAL MEETING, 2002

the Graham value investing system tends to shine most brightly during a flat or falling stock market.

The underperformance of the Graham value investing system during a bull market is an essential part of this style of investing. By giving up some of the upside in a bull market, the Graham value investor is able to outperform when the market is flat or down.

“Most investors are primarily oriented toward return, how much they can make and pay little attention to risk, how much they can lose.”4 He added, “The payoff from a risk-averse, long-term orientation is—just that—long term.”

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.” —CHARLIE MUNGER, WESCO ANNUAL REPORT, 1989

investors will do better financially simply by being less stupid.

One core idea Munger has borrowed from algebra is that many problems are best addressed backward.

Once, in an interview with Jason Zweig, Munger said it simply: “Knowing what you don’t know is more useful than being brilliant.”

The point Munger makes immediately above about investing as a less-than-zero sum game after fees and expenses is mathematically irrefutable.

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.

It’s not possible for investors to consistently outperform the market. Therefore you’re best served investing in a diversified portfolio of low-cost index funds [or exchange-traded funds].

think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.” —CHARLIE MUNGER, USC BUSINESS SCHOOL, 1994

Here is a simple suggestion from Seth Klarman for no-nothing investors: “If you can’t beat the market, be the market.”8

“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 Can you be the mutant that Professor

I think you’ll at least make fewer mistakes than people who think they can do anything, no matter how complex, by just hiring somebody with a credible label. You don’t have to hire out your thinking if you keep it simple. —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 1994

The number one idea is to view a stock as an ownership of the business. —CHARLIE MUNGER, HARVARD LAW BULLETIN, 2001

Understanding how to be a good investor makes you a better business manager and vice versa. —CHARLIE MUNGER, KIPLINGER, 2005

Jason Zweig of the Wall Street Journal, who is a hero to Graham value investors, wrote that “a stock is not just a ticker symbol or an electronic blip; it’s an ownership interest in an actual business, with an underlying value that does not depend on its share price.”

If you focus on the value of the business, you have no need to predict short-term changes in the economy because that takes care of itself. When stocks are a bargain, people are fearful; when stocks are expensive, people are greedy.

Mimicking the herd invites regression to the mean (merely average performance). —CHARLIE MUNGER, POOR CHARLIE’S ALMANACK, 2005

John Maynard Keynes defined speculation as “the activity of forecasting the psychology of the market.”

It’s not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees. —JOHN MAYNARD KEYNES, GENERAL THEORY, 1936

Like Marks in making investment decisions, Munger is focused on what is happening in a given business right now. Projections about the future are scrupulously avoided. Buffett put it this way: “I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections but we care very much about, and look very deeply, at track records. If a company has a lousy track record but a very bright future, we will miss the opportunity.”

[Projections] are put together by people who have an interest in a particular outcome, have a subconscious bias, and its apparent precision makes it fallacious. They remind me of Mark Twain’s saying, “A mine is a hole in the ground owned by a liar.” Projections in America are often a lie, although not an intentional one, but the worst kind because the forecaster often believes them himself. —CHARLIE MUNGER, BUFFETT SPEAKS, 2007

There is a riddle about people who make short-term forecasts that I have heard many times: Charlie Munger, the Easter Bunny, Superman, and a successful forecaster of an investment bank find themselves in their own corner of a large square-shaped trading floor. In the center of the room is a large stack of $100 bills. If each of them starts racing toward the center of the floor at the same time, who gets the money? The answer is Munger, because the other three don’t exist!

“what you told me is technically correct, but it is of no use to anyone.”

Confronted with a challenge to distill the secret of sound investment into three words, we venture the following motto, MARGIN OF SAFETY. —BEN GRAHAM, THE INTELLIGENT INVESTOR, 1949

Seth Klarman described the Graham value investing system simply: buy at a bargain defined by a margin of safety and wait. However, as the Tom Petty and the Heartbreakers lyric says, “The waiting is the hardest part.”

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.

Put simply: when a Graham value investor can buy a dollar for a few dimes less than actual value, he or she can make significant mistakes and still make a profit.

Market is unpredictably bipolar in the short term; for that reason, when the market is depressed, it will sometimes sell you an asset at a bargain price. Other times, because it is euphoric, the market will pay you more than the asset is worth. Knowing the difference between these two emotional states is of critical importance to the successful use of the Graham value investing system.

One might say that Munger believes in a mostly efficient hypothesis. He believes that the difference between mostly and always efficient is a huge opportunity for a Graham value investor.

Graham value investors price stocks rather than time markets.

Buffet says, “Be fearful when others are greedy, and be greedy when others are fearful.”14 This is easy to say but hard to do, because it requires courage at the hardest possible time.

The best Graham value investors understand that if you think things through from the simplest building blocks in a step-by-step process and employ techniques like checklists, which reinforce the Graham value investing system, you can avoid making most mistakes—or at least making new mistakes.

What are the models? Well, the first rule is that you’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models. —CHARLIE MUNGER, USC BUSINESS SCHOOL, 1994

Robert Hagstrom wrote a wonderful book on worldly wisdom entitled Investing: The Last Liberal Art, in which he states that “each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom.”

What Munger has done is created a system—worldly wisdom—that allows him to generate the same chemical rewards in an activity that has a positive net present value. When you learn something new, your brain gives itself a chemical reward, which motivates you to do the work necessary to be a successful investor.

You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. —CHARLIE MUNGER, USC BUSINESS SCHOOL, 1994

a business that raises the price of its product and yet sells more of that product. This would appear to violate the rule of supply and demand as taught in economics. However, if one thinks about the discipline of psychology, one might conclude that the product is a Geffen good, which people desire more of at higher prices. Or one could conclude that low prices signal poor quality to buyers and that raising prices will result in more sales.

The theory of modern education is that you need a general education before you specialize. And I think to some extent, before you’re going to be a great stock picker, you need some general education. —CHARLIE MUNGER, USC BUSINESS SCHOOL, 1994

In the language of Wharton Professor Philip Tetlock, Munger is a “fox” (who knows a little about a lot) rather than a “hedgehog” (who knows a lot about very little).2 Among the foxes one may encounter in life, Munger is truly special. He knows a lot about a lot, and he knows a little about nearly everything.

Researchers published a study in 2014 that revealed that approximately a quarter of women and two-thirds of men chose electric shocks over spending time alone with their own thoughts.

You may say, “My God, this is already getting way too tough.” But, fortunately, it isn’t that tough—because eighty or ninety important models will carry about 90 percent of the freight in making you a worldly wise person. And, of those, only a mere handful really carry very heavy freight. —CHARLIE MUNGER, USC BUSINESS SCHOOL, 1994