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CHARLIE MUNGER, WHO died recently at age 99, always had a colorful turn of phrase. But entertaining as he was, his comments were also invariably full of wisdom.
In fact, taken together, Munger’s ideas offered investors a masterclass in investing. Here are some highlights:
Choosing an investment strategy. Munger, along with his partner, Warren Buffett, often commented on the limits of his knowledge. But this wasn’t false modesty. What Munger was saying was that the universe of investments is too broad for any individual to fully master. That’s why he suggested investors limit themselves to a “circle of competence.” This is how he put it: “Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.”
Munger cautioned investors: “The easiest way to avoid mistakes is to avoid anything you really don’t understand.” And though Munger and Buffett were for many years able to beat the market with their stock picks, they went out of their way to communicate to everyday investors that they shouldn’t try to do the same. Munger knew his playbook was one that wasn’t easily copied. At the same time, he offered investors an alternative: If stock-picking isn’t your expertise, “you’re best served investing in a diversified portfolio of low-cost index funds or exchange-traded funds.”
Avoiding potholes. While Munger acknowledged that there was more than one way to make money, he was quick to criticize things he believed were truly harmful. At the top of that list in recent years was bitcoin. Munger addressed the topic in a number of interviews, including this particularly entertaining one.
“I regard the whole business as antisocial, stupid and immoral,” he said. That was for two reasons: He didn’t accept bitcoin as a valid investment because it lacked tangible value, and he didn’t see it being useful as a currency because of its volatility. “Nobody in his right mind would want a payment system where the very thing you were using went up and down by 20% in a day.”
For these reasons, Munger called bitcoin “rat poison.” And he didn’t change his mind even when its price jumped higher. To Munger, those gains didn’t prove anything. “It’s just more expensive rat poison,” he said. While entertaining, Munger’s steadfast public opposition to cryptocurrency offers an invaluable lesson: When an investment craze gets going—and when others appear to be making easy money—it’s awfully hard to avoid joining the herd. But that’s precisely when it’s most important to remain grounded.
Buffett once explained this principle by contrasting investment bubbles to the Cinderella story. While Cinderella knew the party would end at midnight, in the investment world, “there are no clocks on the wall.” You don’t know when the bubble will end, prices will drop and everything will turn “to pumpkins and mice.”
Sidestepping sales pitches. Munger observed that smart people are no less prone to crooked behavior than anyone else. That poses a problem for everyday investors, because if someone sounds intelligent—and, indeed, is intelligent—it’s easier to fall prey to that person’s sales pitch. That’s why Munger cautioned that “very-high-IQ people can be completely useless. And many of them are.” On a related note, Munger advised that, “The world is full of loons who will lead you in completely the wrong direction.”
How can you avoid crooks and loons? This comes back to Munger’s idea of a circle of competence. If you don’t want to devote your days to investment research, the easiest alternative is to stick with diversified index funds. That approach would have helped investors steer clear of everyone from Charles Ponzi to Bernard Madoff to Marcos Tamayo.
Forecasting. Though Munger was an active investment manager, he didn’t base his decisions on forecasts. He simply looked to buy good businesses with honest managers at attractive prices. That was the extent of the time he spent on predictions.
That’s why Munger compared today’s Wall Street forecasters to the oracles of ancient times. “People have always had this craving to have someone tell them the future,” he said. “Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts.”
Asset allocation. Munger recognized that psychology accounted for a large part—if not the largest part—of success as an investor. That’s why he had this advice: “If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder.”
Here’s how I might translate that into a prescription for individual investors: If you can’t afford periodic declines of 50% in your portfolio—because, for example, you’re in retirement and taking regular withdrawals—then you’ll want to have part of your portfolio safely outside of stocks. That way, you’ll never be forced to sell under duress when the market drops, as it invariably does.
Another of Munger’s key mottos was to “invert, always invert.” What he meant was to stress test every situation. “Turn a situation or problem upside down. What happens if all our plans go wrong? Instead of looking for success, make a list of how to fail instead.” This advice is equally applicable for individual investors. In building a financial plan, consider stress-test scenarios, even if those scenarios seem unlikely.
Mindset. Munger was a lifelong learner. “My children laugh at me,” he said. “They think I’m a book with a couple of legs sticking out.” But for him, maintaining an open mind was his north star. “Avoid intense ideologies,” he said. “Always consider the other side as carefully as your own.”
If the facts change or you see things differently, don’t hesitate to change your mind. “Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire.” This is good advice in general, but it certainly applies to the world of personal finance, where things change frequently.
The most important thing. In the past, I’ve talked about investors like Ronald Read and Grace Groner—folks with modest incomes who nonetheless managed to amass nearly $10 million. How did they do it? To be sure, they were diligent savers and good investors. But they also had the advantage of time. Read lived to 92 and Groner to 100, giving their investments decades to compound. Munger, who made it to nearly age 100 himself, often talked about the importance of time. “The big money is not in the buying or the selling,” he said, “but in the waiting.”
If you’d like to learn more about Munger, you might enjoy the commencement speech he gave at the University of Southern California in 2007, or this compilation of more colorful highlights.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X (Twitter) @AdamMGrossman and check out his earlier articles.
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From the BRK Ann Mtg of 5/02/11: [[ changes may have impacted these]]
· On Gold: “There’s something peculiar about an asset that will only go up if the world goes to hell.” — C.M.
· On Taxes: “The hedge fund managers of America are getting lower tax rates than physics professors or cab drivers. That is demented.” — C.M.
· On PIGS’ Problems: “I think Europe has a hell of a problem… its strategy is like putting band aids on cancer.” — C.M.
· On Management Style: a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to marry someone with the intent of changing their behavior.” C.M.
—– and do I dare add (well-armored): On Donald Trump: “Obviously, I think he’s a jerk.” — C.M.
If only Munger would have taken his own advice to stay within his own “circle of competence” he could have avoided creating “Dormzilla,” his college dorm design which was evaluated as having “significant safety risks that are predictable enough, probable enough, and consequential enough that it would be unwise for UCSB to proceed without significant modification to the design.” Was Munger even an architect? Nope, just a billionaire that would withhold $200 million in funding if people didn’t follow his crazy ideas.
I worked in the investment business and had the good fortune to Meet Mr. Munger some years ago through my work. His advice is as good today as it has ever been – especially in regards to time. Anyone who has ever owned individual stocks has made a mistake at some point (mine was Lehman Bros.), but the saving grace of our mistakes is time. If we live and remain invested long enough (OK, let’s add in the caveats of diversification and having a reasonable asset allocation), your mistakes will likely be forgiven. Even better, the growing effect of compounding over time will generate increased returns with little or no increased risk.
“the growing effect of compounding over time will generate increased returns with little or no increased risk.”
If you believe in time diversification, increased time not only means increased return, but also decreased risk. As has been said by others, time may be the greatest asset in investing.
This is a nice summary of many “Mungerisms”. Here is one of my favorites: “Don’t do anything stupid”. He had a knack for packing a lot of wisdom into one or a few lines.
Love this, thanks so much for your wisdom and eloquence Adam.
Adam, your articles are truly educational and interesting. Munger’s comments can be applied to much more than just finance.