Investor Warren Buffett has been an inspiration to legions of investors. His strong investment performance is one reason. But another secret to Buffett’s enduring appeal is the way in which he lays out his investing philosophy clearly for other investors to understand. Yet Buffett owes a lot of his own investing wisdom to his right hand man at Berkshire Hathaway, Charlie Munger.
As Buffett told an interviewer: “Charlie, he’s given me a lot of good advice over time.”
With that in mind, here are three key principles of Charlie Munger’s investment philosophy. They’re easy to understand and I think they’re worth applying in my own stock market investing.
Only invest in great companies – not good ones
Charlie Munger points out that it’s easy to diversify a portfolio, or to index investments so that they match the broad market. That will provide returns in line with the market, which is already better than many investors achieve. But he says there’s no point to that. Instead, he cautions people to invest only when they know that something is better than average. That’s reflected in the market-beating returns achieved over decades by Berkshire Hathaway.
If that means only making a few investments over several years, that’s fine by Munger. For him, the reward will be greater when waiting for a few great investment choices he can approach with confidence, rather than plumping for more regular investments that promise good-but-not-great returns.
Charlie Munger believes inactivity can be lucrative
The lure of the stock market ticker means a lot of investors trade frequently, moving in and out of shares often. But trying to time the market can be fraught with the risk of misjudgement. Munger suggests that usually the best thing anyone can do as an investor is to sit still and wait.
That makes sense to me. As Munger believes in choosing only a few very-high-quality investments and holding them for a long time, there’s no reason to keep ducking and diving in the stock market. His is a buy-and-hold investment philosophy that requires little monitoring usually. If a share does well enough over the long run, buying it a little cheaper by picking the lowest entry point is less important. High-quality shares reward their owners in spades over the years. This reduces the temptation to buy them only when they fall to low prices. In the end, Munger is confident quality will out.
Successful investors tend to read a lot
He’s also known as a voracious reader. In fact, he’s been quoted as saying that all of the smart people he has ever known have been heavy readers. As investors, reading can help inform us about specific investment companies. But it also helps us get a better understanding of the trends and frameworks that affect everything from consumer demand to crowd mentality.
Sometimes I wonder why I didn’t catch a successful investing trend when it was still in its infancy. Charlie Munger knows. Anything from cloud computing to the last property crash were hiding in plain sight, in my opinion. But it was necessary to read widely to have the necessary knowledge to fit the pieces together.