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Reflections ahead of Berkshire Hathaway’s first annual meeting after Munger’s death.
I am still not sure how to feel about the passing of Charlie Munger late last year. It feels unfair to suggest we are missing out when he left behind so much. His ideas will live far into the future, and they are freely available to those who seek them. In fact, YouTube is a veritable Munger gold mine, and I highly recommend his book, Poor Charlie’s Almanack.
The book includes Munger’s famous 1986 Harvard School Commencement Speech. Instead of sharing a recipe for success in life during his speech, Munger instead provided graduates with advice for leading a life of misery. That advice included being unreliable, learning mostly from yourself, lacking resilience, and giving no thought as to what to avoid in life.
In a nod to Charlie Munger and that speech, here’s my prescription for financial misery—or, what not to do when investing:
Be impatient. Aim to get rich fast! Almost anyone can get rich slowly with hard work, disciplined investment, a balanced risk appetite, and the power of compounding. Einstein called the compounding “the eighth wonder of the world.” But in the words of Veruca Salt from Charlie and the Chocolate Factory, “I want it now.” Let that be your catch cry. Eschew patience for shortcuts, make concentrated bets, and lever up your investment. This will greatly raise your chances of future financial ruin, even if it works well for a while.
Build a “house of straw” portfolio. Quality, schmality! Relieve yourself of the need for prudence and underlying portfolio strength. Assume that, thanks to the magic of modern economic management, the days of major disruptions are in the past. And if something bad happens, assume the world’s central banks and governments will come to your rescue. In wishing the big bad wolf away, such optimism facilitates the construction of a “house of straw” portfolio to maximize your chance of wealth destruction in a bear market.
Warren Buffett on Charlie Munger, realistic investment expectations, and the stocks he won’t sell.
Words of wisdom from two of the world’s most successful investors.
Buffett’s partner at Berkshire Hathaway has died. Here are some excerpts from one of his final interviews.
Invest anywhere. No knowledge, no worries! Why stick to the quaint notion of a circle of competence when there’s a world of investment options at your fingertips? And don’t be dissuaded by complexity. Just because you don’t understand an investment doesn’t mean you should avoid it if ruin is your goal. “Stick to what you know” is an unnecessary limitation. Think of all you’d be missing out on.
Keep your own counsel. According to Mark Twain, “The man who doesn’t read good books has no advantage over the man who can’t read them.” Why learn from the mistakes of others when there’s plenty you can learn at your own expense? By formulating all of your investment ideas only from what’s in your head, you’ll be free of the need to learn from others and also free of the benefit that brings.
Don’t change your mind. Quoting John Maynard Keynes, “When the facts change, I change my mind. What do you do sir?” Thanks to modern technology, you can now build your own echo chamber and avoid any inconvenient facts. Read only the news you want: Social media can quickly help you to curate this with zero effort. You can also find groups of like-minded individuals to reinforce and calcify your existing views. These two moves take away the burdensome task of processing new ideas and information and also allow you to fully indulge your own cognitive biases. All you need to do now is wait for reality to nastily collide with your portfolio.
Follow the crowd. Market up? Be happy. Market down? You be, too. Listen to your taxi or Uber driver. Whether they’re optimistic or pessimistic, do the same. So too with backyard barbecue guests. Why let Mr. Market serve you when you can serve him? By closely watching price and volume trading information, you can have your finger on the pulse of the market and be ready to go with the crowd. This helps to sell low and buy high and goes a long way to countering the magical power of compound returns.
Trade often. Turn up the noise. Get engaged. Become a screen jockey. Allow colorful screens, flashing lights, and frequent noisy alerts to command your attention. Harness what Nobel Prize-winning economist Daniel Kahneman called “system one thinking,” the fast but often wrong ideas that quickly pop into our heads. Make snap judgments and act to give yourself the best chance of making costly mistakes. Online traders act fast and mostly lose. You can, too.
Time the market. You can thwart the power of compounding and turn the market into a casino simply by timing it. Move in and out of stocks—and the market as a whole—often. As Buffett has said, “if they think they can dance in and out [of the market] and buy and sell stocks, they ought to head for Las Vegas.” And as we know, Vegas is fun.
Avoid losses. Hold your losers when counter evidence is strong, and even if your investment thesis is broken. No one likes to admit defeat, and to realize a loss is an admission of being wrong. And once sold, any distant hope of a recovery goes, and so too the opportunity to double down. Avoid the inconvenience and save face by changing your thesis as required to hold your losers. And all you give up is the opportunity cost of future returns.
Sell your winners no matter what. So, you’ve found a diamond. A business investment that can compound at high rates for a long time. And you’re up on that investment. Your original thesis has “played out,” and the return you expected in three years has come much sooner. It’s time to sell, chalk it up as a win, and move on. You can always buy it back another time.
Returning to seriousness, investors should actually seek businesses with the ability to compound for decades and never sell. Finding these gems is the Holy Grail. Munger was a champion of this approach and persuaded Buffett of its benefits. He famously told Buffett in 1965, “Now that you have control of Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices.” Such an approach requires patience, discipline, and above all, inaction.
The strategy relies on thinking like an owner, focusing on quality, and demanding a margin of safety.
How these legendary investors have inspired the financial world and shaped the way we think at Morningstar.
Companies that make it into Berkshire Hathaway’s portfolio have some common threads in their genetic code.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
Mathew Hodge is director of equity research, Australia and New Zealand, for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc.
Hodge joined Morningstar equity research via the acquisition of Aspect Huntley and was previously a director on the team from 2019. He has approximately 20 years of experience, primarily covering the metals and mining sector. In addition, Hodge has sat on Morningstar’s economic moat committee since 2014. More recently, he led the refresh of our capital allocation methodology in 2020 and chairs the subsequently formed capital allocation committee. In 2001, Hodge joined Aspect Huntley, which was acquired by Morningstar in 2006.
Hodge studied mining engineering at the University of New South Wales and previously worked in mining, principally as a mining engineer in underground coal. He holds the Chartered Financial Analyst® designation.
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