Berkshire Hathaway chairman Warren Buffett may dominate the headlines, but his long-term business partner Charlie Munger has a lot of investing wisdom too.
Here are three Munger lessons I apply to my own investing strategy.
Wait for great!
Munger emphasises that he prefers to try and make a small number of great investments than many good ones, just like his partner does. He once said: “I didn’t get to the top where I am by going after mediocre opportunities.”
That might not be modest — but it is pretty insightful. Although the idea of only going for great opportunities makes sense, I reckon many investors do not actually follow it. They cannot sit on cash year after year without investing it. Instead, an itch for action leads them to invest in what they see as the best opportunity available at a given moment.
But just because an investment looks better than the other ones available does not mean it is a great opportunity. Having the patience to sit out mediocre investment ideas and wait for really great ones has been very rewarding for Charlie Munger.
Circle of competence
Charlie Munger is another investment guru known for only focusing on his circle of competence. In fact, Munger attaches huge importance to knowing exactly what one’s circle of competence is. He once said that “knowing what you don’t know is more useful than being brilliant”.
That is quite a statement. Munger is basically claiming that even an investor of average abilities can do better than a stock market genius, simply by recognising the limits of their own knowledge when making investment decisions.
That makes a lot of sense to me. If I do not understand a business then I have no way of assessing its future profit outlook and current share price valuation. Buying its shares would be closer to speculation than investment. Knowing what I do not know — and therefore avoiding it completely — can help keep me away from some very bad choices.
Charlie Munger on learning
But what if my circle of competence is small? One approach is to expand it, for example by reading up on business and how to invest. Munger is a very enthusiastic reader and learner.
As he put it: “Live within your income and save so you can invest. Learn what you need to learn.” That sounds like a simple, old-fashioned world view but I do not think it is any less valid for that.
Following Munger’s approach, I can save money to invest in my Stocks and Shares ISA. But to try and invest it well, I need to learn about the stock market and individual businesses. That can help me find the sorts of opportunities that are a good match for my own investing objectives. It has worked brilliantly for Charlie Munger – hopefully the same approach will help me too.