- I like Munger much better than Buffet. Munger will insult you, but you’ll be a better person after the fact.
- It’s funny how investing principles can be summarized and simplified in a few quotes. The problem is that nobody, or maybe just a few, will actually listen and apply them.
- We don’t need more than what Berkshire has done in the past 50+ years as a confirmation of how important this is to our investing lives.
Charlie Munger is Warren Buffett’s partner in crime, but he’s usually not nearly as exposed to all the media attention.
The difference between the two is that Warren really wants you to like him, while Munger really doesn’t give a f*** about what you think of him. Therefore, if you want the truth and you want to learn as much as possible about investing beyond the classic things Buffett says, you should listen to Munger.
In today’s article, I’ll discuss 40 interesting investing quotes shared by Munger. Many will surprise you and certainly give food for thought, so enjoy.
(NOTE: The sources used are various, from interviews, conference transcripts, letters to shareholders, books, online sources, WESCO shareholder meetings, etc., that I have combined while doing my research).
General Investing Wisdom
“If you have competence, you pretty much know its boundaries already. To ask the question is to answer it.”
Know the edge of your circle of competence.
In investing, if you aren’t extremely lucky, as soon you venture out from your circle of competence, you’ll probably lose money.
We are all attracted by investments that have the potential to surge or have high yields, but that we know nothing about. From my personal experience, it takes a few years of continual learning and analysis to really understand a sector, and that’s as a professional.
Therefore, do-it-yourself investors should really stick to what they know. It might be a small field, the field you work in, but it sure can be enough to make sustainable and satisfying long term returns. You only need to have the following trait to be successful.
“Rationality… requires developing systems of thought that improve your batting average over time.”
The most difficult thing to do is to behave rationally in an irrational environment. However, it’s the only way to achieve sustainable investment success.
“Graham didn’t want to ever talk to management.”
You’ll find many surprising things when analyzing Munger, and one of them is that you shouldn’t really talk or listen to the management of the company before making an investment decision.
What you should do is look at the facts because that’s the only way to avoid being misled. As I listen to many conference calls, I must agree with this because the nature of the managements’ job is to be optimistic. Looking at the facts, sector environment, long term trends, etc., should be the most important factors in making investment decisions.
“What the whole enterprise would sell for if it were available.”
Look at what the value is of the whole business to a potential buyer. Businesses get taken over all the time and if you’re invested, you can expect that many of your holdings will be taken over at some point in time. Looking at what the value is of a business for private owners can easily determine whether a business is overvalued or undervalued.
“For a security to be mis-priced someone has to be a fool, it might be a bad day for the world but a good day for Berkshire.”
This quote clearly illustrates that Munger sees the market as irrational. The quote also points out how patience can lead to amazing investing opportunities. Also, to be greedy when others are fearful, as always.
“The idea of a margin of safety, a Graham precept, will never be obsolete. The idea of making the market your servant will never be obsolete. The idea of being objective and dispassionate will never be obsolete. So, Graham had a lot of wonderful ideas. Warren worshiped Graham. He got rich, starting essentially from zero, following in the footsteps of Graham.”
When you determine the value of a business to a potential private owner, wait until the discount is about 70% and then buy. If you can’t find such stocks in your circle of competence, simply do nothing until new opportunities emerge.
It’s funny how very often we are confronted with investing opportunities that trade with a total margin of safety.
“They kept changing the definition (bargain) so that they could keep doing what they’d always done. And it still worked pretty well.”
A bargain today isn’t equal to what a bargain might have been 50 years ago. Graham and Buffett are famous for their cigar-butt investments in the 1930s and 1950s respectively, but Munger and Buffett switched to buying wonderful businesses in the last few decades. The story might change again in the next few decades, so be prepared to learn something new.
“I think Ben Graham wasn’t nearly as good an investor as Warren is or even as good as I am. Buying those cheap, cigar-butt stocks was a snare and a delusion, and it would never work with the kinds of sums of money we have.”
Another surprising quote from Munger but it is truth.
Many praise Benjamin Graham, but his abnormal returns came from just one investment, GEICO. All the other cigar-butt purchases didn’t really beat the market.
This shows how it’s really difficult to beat the market and a lot of work has to go into such an endeavor to make it sustainable over the long term.
“The great bulk of the money has come from the great businesses.”
A few great decisions will make the difference in your investing life. Buying a great business when it’s extremely cheap is what counts in life. Therefore, when such an opportunity knocks, be sure to have the cash available to take advantage and take a big swing.
“It’s not the bad ideas that do you in. It’s the good ideas that get you. You can’t ignore it and it’s easy to overdo it.”
I read a lot of investment analyses and usually find a very optimistic one and a bearish one at the same time for every stock.
What should be done is to attach probabilities to the possible outcomes, negative and positive, and see about the difference. When it’s extremely positive, it is the time to invest. Don’t fall in love with an investing idea, be picky and don’t trust anyone.
“Look for high returns of capital over long periods of time.”
Back to great businesses. A way to find such companies is to look at their internal return on capital.
By doing this, you aren’t as concerned by the stock price as in the long term, your return will come close to the return on capital a company has no matter the price you paid.
On Risk & Investment Attitude
“Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return.”
Risk isn’t as volatile as academia or most of the investing community likes to think.
Before investing, always ask yourself how much you can lose if everything goes wrong. Additionally, intelligent investors take advantage of volatility to buy more of the asset in question when prices fall. Secondly, risk and returns have to be assessed separately, higher risk doesn’t increase the return.
“Using [a stock’s] volatility as a measure of risk is nuts.”
This is why I love Munger. He practically tells 95% of the investing community and academia that they are nuts.
It all looks nice to academics with pretty mathematical models, but it simply doesn’t work in practice. Even the Nobel prize winner Eugen Fama, the world’s most prominent efficient market theorist, succumbed to facts and found that value and size lead to abnormal returns.
“Volatility is an overworked concept. You shouldn’t be imprisoned by volatility.”
“Some great businesses have very volatile returns – for example, See’s usually loses money in two quarters of each year – and some terrible businesses can have steady results.”
I’ve seen that businesses that have volatile earnings or revenues are always trading at a discount. Thus, if you want higher longer-term returns, look for volatile businesses because the investing community prefers stability.
A perfect example of such a field are commodities and related sectors.
“We don’t give a damn about lumpy results. Everyone else is trying to please Wall Street. This is not a small advantage.”
As I am in the asset management business and building a track record, I must say that when I talk to clients and potential clients, they all expect stability. Therefore, it’s difficult to detach from trying to create constant stable earnings but if you can do it, you really have an advantage over all others.
“A lot of judgment, a lot of discipline and an absence of hyperactivity… I think most intelligent people can take a lot of risk out of life.”
Going back to being rational and taking a stable perspective on life, running after hot stocks or investments has proved costly so many times in the past but people still do it.
“Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable, and some losses are inevitable, you might be wise to utilize a very conservative pattern of investment and saving all your life. So, you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.”
“If we’d used the leverage that some others did, Berkshire would have been much bigger… But we would have been sweating at night. It’s crazy to sweat at night.”
In the end, it’s all about you. You know yourself best and any strategy should fit your own preferences. Imagine Berkshire taking on debt to buy more of Coca Cola or other companies, it would be 10 times bigger than it is now or bust.
“This is an amazingly sound place. We are more disaster-resistant than most other places. We haven’t pushed it as hard as other people would have pushed it. I don’t want to go back to Go. I’ve been to Go. A lot of our shareholders have a majority of their net worth in Berkshire, and they don’t want to go back to Go either.”
Another example of risk management. Never invest in something where you can lose everything you have.
“I wanted to get rich so I could be independent, and so I could do other things like give talks on the intersection of psychology and economics.”
The main difference between Munger and Buffett, Buffett wants to be the richest in the world, Munger wants to live his life.
“There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table.”
“Here’s one truth that perhaps your typical investment counselor would disagree with: if you’re comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what? Someone will always be getting richer faster than you. This is not a tragedy.”
Taking risk off the table, can you invest now in this environment? I must say that in 2017, many got richer faster than I did. Does that mean I have to change what I do?
Fortunately, I have 15 years of experience behind me which gives me enough confidence in what I do. Therefore, I stick finding investments with little risk and large upside.
“Intelligent people make decisions based on opportunity costs — in other words, it’s your alternatives that matter. That’s how we make all of our decisions…. Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other.”
Always compare each investment you make with all the other investments you have made or that you are looking at. Remember, you are looking for the best risk reward option, possibly for one with no risk and high upside.
How To Train Your Mind For Investing Success
“Think forwards and backwards — invert, always invert.”
When investing, always look at what created the current situation and what we can expect going forward. Remember, Buffett and Munger are never interested in turnaround situation.
“I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick. It’s not brilliance. It’s just avoiding stupidity.”
Buffett prefers when people praise him as a genius, but Munger is pretty straightforward. Avoiding stupidity is the best way for investing success.
“Having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control.”
All that I’ve written in this article sounds so simple and easily applicable. However, the majority of investors simply don’t do these things. That is the advantage the person who can remain rational while others are irrational has.
“People are really crazy about minor decrements down.”
Discussing loss aversion and how the biggest fear an investor has is losing money. It’s very important to be aware in the next bear market as a big chunk of market participants have never seen a bear market.
“If you want to be the best tennis player in the world, you may start out trying and soon find out that it is hopeless—that other people blow right by you. However, if you want to become the best plumbing contractor in Bemidji, that is probably all right by two-thirds of you.”
This is very applicable to investing. With a bit of will and patience, everybody can become a good investor. Just persevere. You don’t have to be the next Buffett, but if you beat 75% of other investors, your returns will be measured in millions or even billions over a lifetime.
“There are a lot of things we pass on. We have three baskets: in, out, and too tough.”
Again, simplicity at its highest. If something is too complicated, skip it, there will be other opportunities.
“There’s no way that you can live an adequate life without many mistakes.”
Many give up investing after the first mistake and then simply walk around saying stocks are too risky. Especially in the first bear market a beginning investor experiences, they will probably lose their shirt. However, by learning from that experience, the remainder of your life can be very profitable.
“Why not celebrate stupidities?”
“I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.”
Plain, blunt Munger. However, something we should all try and live by.
Psychology Of Investing
“A trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.”
There will be mistakes and the only important thing is how you handle them. I have learned that the more I do, the more I make mistakes but the aggregate benefit to my life is much higher.
“Most of Berkshire’s success grew from stupidity and failure that we learned from.”
Learning, learning, learning. What is life without learning?
“If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one legged man in an ass kicking contest.”
I see so many investors that are convinced on all of their investments. However, a probabilistic approach is what works best. It’s difficult to train yourself to think in probabilities, but it’s hugely rewarding.
“Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.”
We would love a life of stability where nothing changes, but embracing change is what really gives richness to our lives.
“You must force yourself to consider arguments on the other side.”
Sometimes we simply fall in love with an investment. As much as it’s difficult, it is essential to look for the flaws in it.
“The only way to win is to work, work, work, work, and hope to have a few insights.”
The more investments you analyze, the more you will learn and the more opportunities you will find.
Practical Investment Insight
“Proper allocation of capital is an investor’s number one job.”
Carefully allocating the capital you have in order to achieve the highest possible returns with the lowest risk is what will make you well-off.
“It’s obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn’t sell books, so there’s a lot of twaddle and fuzzy concepts that have been introduced that don’t add much.”
Investors tend to look at many metrics when analyzing a company. Now we know what Munger’s favorite metric is.
“In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities.”
Simple and to the point, and there’s not much to add here. There is no point in investing in the 10th best investment out there while there is something else that’s better.
“We’re guessing at our future opportunity cost. Warren is guessing that he’ll have the opportunity to put capital out at high rates of return, so he’s not willing to put it out at less than 10% now. But if we knew interest rates would stay at 1%, we’d change. Our hurdles reflect our estimate of future opportunity costs.”
Someone might read this and think that the current S&P 500 is a great investment. Don’t forget Berkshire has $100 billion sitting in cash, waiting for higher returns and higher interest rates.
“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.”
It all boils down to available free cash flow after all.
Bookmark this article and come back often to be reminded of Munger’s basic investing rules.
I’m sure it will increase your long term returns by a few percentage points and lower your risk. Good luck.