Warren Buffett and Charlie Munger are arguably the two most successful investors of the modern era. Between them, they turned a small textiles firm called Berkshire Hathaway into a vast conglomerate with a market capitalisation of more than $770 billion.
Munger died on 28th November, just a few weeks short of his 100th birthday. Like Buffett, he is always very generous in imparting advice about investing to other people.
Here are six key lessons he taught us.
1. Know what you don’t know
Charlie Munger viewed humility as a crucial character trait for investors. Arrogance leads to overconfidence, which in turn leads to mistakes. Humility, on the other hand, makes for better decision-making.
"It is astonishing how much long-term advantage people like (Warren Buffett and I) have gotten by trying consistently not to be arrogant,” he once said.
The key, he argued, is to know what you don’t know. Recognise your limitations and never stray beyond your circle of competence. “We have three baskets for investing,” he explained. “Yes, no and too tough to understand.”
2. Choose simplicity over complexity
A common misconception about investing is that successful strategies, almost by definition, must be complex.
For Munger the very opposite was true. “We have a passion for keeping things simple,” he said. ‘If something is too hard, we move on to something else. What could be more simple than that?”
For Buffett and Munger, risk comes from not knowing what you’re doing. ”If you’re not a little confused about what’s going on,” said Munger, “you don’t understand it.”
3. Ignore economic forecasts
Charlie Munger had little time for market forecasters. “The trouble with making all these pronouncements,” he said, “is people gradually begin to think they know something. It’s much better to think you’re ignorant ... If people weren’t so often wrong, we wouldn’t be so rich.”
Munger said that forecasting the markets is as hit-and-miss as forecasting the weather, and you should carry on investing regardless.
“I don’t pay much attention to macroeconomic trends,” he told the Australian Financial Review in July 2022. (1) “I just try to invest whatever capital I have as best I can and take the results as they fall. I just seize whatever opportunities I can and I hope I get my share.”
4. Beware of sharks and charlatans
Charlie Munger was never afraid to criticise what he viewed as unethical behaviour in the investing industry.
Although he wasn’t the strident advocate for low-cost index funds that Buffett is, he was deeply distrustful of asset managers, consultants and advisers selling complex active strategies.
“If I had to name one factor that dominates human bad decisions,” he said in February this year, “it would be what I call denial… Take the world of investment management. How many managers are going to beat the indexes? All costs considered, I would say maybe 5%… Everybody else is living in a state of extreme denial.
“They’re used to charging big fees for stuff that isn’t doing their clients any good. It’s a deep moral depravity.” (2)
3. Focus on the long term
For Munger, another vital character trait for successful investors is patience. “The big money is not in the buying and selling,” he said, “but in the waiting.”
Again, it has to be said that, despite his disdain for most of the active fund management industry, Munger was an active investor himself.
But instead of regularly trading, he believed in buying and holding them for the long term, allowing plenty of time for the market to reflect their intrinsic worth.
He and Buffett would avoid impulsive decisions and would only buy or sell a stock after careful research, and only if they felt the time was right.
4. Keep your head when others are losing theirs
One of the simplest ways for investors to outperform their peers, Munger argued, is to stay calm and rational when others are acting on emotions.
Stock market crashes are part and parcel of investing, and, very occasionally, markets will halve in value. Investors, he said, should stay the course.
"If you're not willing to react with equanimity to a market price decline of 50% two or three times a century,” Munger declared, “you’re not fit to be a common shareholder and you deserve the mediocre result you're going to get.”
You shouldn’t try to be brilliant, he said, but simply avoid stupid mistakes. “You have to be aversive to the standard stupidities,” he said in 2016. If you can keep them out, you’ll get a good result.” (3)
This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products.
Robin Powell is a journalist, author and editor of The Evidence-Based Investor.