5 Insights From The Late, Great Charlie Munger

"I know you will agree with me, because you are smart and I am right."

Charlie Munger: "I know you will agree with me, because you are smart and I am right."

He was funny. Frequently brutally direct, especially on subjects he felt strongly about. And always full of insight.

At times, listening to Charlie or reading his insights felt repetitive. He hammered the same points, over and over. That’s not because he was getting old and losing the sharpness of his mind. Instead, it was because he had used the near-century of his life to polish insights down to the important kernel of truth, diamonds inside of the ideas that he was examining.

Here are 5 ideas that are as brilliant as they are timeless, be it in investing or in life:

1. Always Invert

“You don't think of what you want, you think about what you want to avoid and invert.”

Here is an example. Instead of looking for the stock that will do the best, figure out the characteristics of a stock where you have a high likelihood of losing a lot of money. Then avoid any of those attributes like the plague, and you can’t help but do better.

If you were looking for a chance to lose a lot of money in a stock, you might search for the following characteristics:

• High financial leverage

• Incompetent or unscrupulous management

• Weak business that is easily susceptible to adverse change in its economics

• High expectations about the future embedded in the stock price

Now invert. If you insist on having none of the above attributes in the stocks that you decide to invest in, you can’t help but significantly improve your odds of success.

2. Being Rational Is More Important Than Being Clever

“A lot of other people are trying to be brilliant and we are just trying to stay rational. And it's a big advantage.”

This might sound easy, but it’s not. Staying rational while others are going crazy isn’t just no fun. It can cost you the approval of your peers, your bonus, your job, and your clients. There is safety in numbers, and who can blame you for doing what many other respectable folks in your field have done?

The only problem is that it’s not the best path to success. The reason bubbles form is that people can’t withstand the mental pressure and join the crowd, regardless of what it’s doing. How else do you think otherwise perfectly sensible businesspeople levered up on margin debt in the 1920s to load up on expensive stocks?

Some people are wired to have the right temperament for investing. Most are not. If you have it and can act not under the influence of what others are doing but based on logic derived from first principles, you have a huge advantage.

3. All Businesses Get Worse And Fail Eventually, Even The Best Ones

“Practically every business that Disney is in has gotten tougher than it used to be. Again, welcome to human life. Think about Disney – it once owned the world. Lion King was running a long run in the theater district of New York. They went from triumph to triumph, marching, marching, marching. All of a sudden, on practically every front it's more difficult. This is what happens. Imagine Kodak, which totally dominated photography and the world, and they invented this new technology. Kodak wiped out its common shareholders.”

I have lost a lot of money buying yesterday’s winners. For a long time, their stocks would be too expensive for my approach to investing. Finally, the expectations would come down and I would pile into some company that used to enjoy a massive competitive advantage. Only by that point the advantage had greatly diminished and the future was far less bright than the past.

Dell is a perfect example. I admired that company for a long time. Then finally, the stock got to a very reasonable set of implied expectations for growth. I bought it. Except that the company’s cost advantage has been whittled away by that point. Growth was mostly in the past. And then the company’s founder decided to take it private at a price advantageous to him at the expense of minority shareholders who trusted him to do the right thing for everyone. Oops.

4. Try To Prove Yourself Wrong

 “Being able to recognize when you are wrong is a godsend. I actually work at trying to discard beliefs.”

We are all victims of many behavioral biases. That’s just a fact. The question is what are we going to do about it?

Putting in place systems to seek out the many times that we are going to be wrong is crucial for minimizing errors in judgement. Our minds want to anchor on our initial conclusion. We seek evidence that confirms what we already believe and discard that which challenges our beliefs. And that’s just the beginning of the flaws affecting our decision-making process.

You can hope that you are exempt from these behavioral biases. But that would be just another way that these biases manifest themselves in your mind. Instead, you are better off assuming that you are just as flawed as anyone else and then trying to minimize the impact of those flaws on your decisions through implementing a rigorous system of checks and balances.

5. Stay Within Your Circle Of Competence

“It is really important to stay within your circle of competence. If you are not sure what the boundaries of that circle are for you, then you do not have real mastery of your field.”

Admitting that you don’t know something isn’t a sign of ignorance so much as it’s a sign of mastery of the field. You don’t have to be an expert on every company or industry. Not even on most of them.

What you do have to be is aware of what you don’t know, and to stay away from that. Incidentally, what you feel is outside of your circle of competence might very well be inside someone else’s. For example, I have decided that banks are not an industry that I am comfortable investing in. Several of my friends decided that it is. That’s OK. It’s only important that you are comfortable with the universe of companies that you choose to analyze.

These aren’t the only worthwhile insights that Charlie Munger had. There were many more. These were just the ones that stuck with me the most during my 22+ years of studying his wisdom. While I could make the list much longer, I have learned from Charlie that sometimes less is more. So I am going to end with the words that are so familiar to many of you:

“I have nothing to add.”

If you liked this article, please “like” and share this article. If you are interested in learning more about the investment process at Silver Ring Value Partners, you can request an Owner’s Manual here.

About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.