Introduction
Charlie Munger was known for his advice to young investors in addition to his business acumen. Munger followed an extreme buy-and-hold approach, choosing only companies that he believed were safe bets and holding them for years. He believed it was better to find “great companies at fair prices,” resulting in an extremely undiversified portfolio consisting only of a few companies at any given time. One of Munger’s methods was to eliminate bad or mediocre opportunities only. He believed that great investment opportunities would come only a few times in an investor’s life.
Lesson 1: “Big money isn’t in the buying and selling, but in the waiting”
Munger and Buffett were firm believers that investment opportunities with real potential are few and far between and worth the wait. “The whole secret to investing is to figure out places where it’s safe and wise not to diversify,” Munger said. From a portfolio management perspective, this meant that Munger was not active in daily buying and selling. Instead, he worked hard to identify positions that he believed were very close to sure things and held them, often for years.
Buffett, known for holding some positions in his portfolio for decades, shares this philosophy. At the time of his death, reports indicated that Munger held shares in only three companies in his personal investment portfolio: Berkshire Hathaway, Costco, and the Daily Journal Corporation.
Lesson 2: “Buy great companies at fair prices”
A core part of Munger’s investment approach was his belief in the power of value investing philosophy. He once said, “Forget about buying fair companies at wonderful prices. Instead, buy wonderful companies at fair prices.” Munger rejected stocks that other investors might choose simply because they looked like a good deal. Instead, he chose to invest in companies that he believed were strong companies first.
Buying these companies and then planning to hold them for the long term would give time for the market to reflect their true value over the years.
Lesson 3: “Great opportunities are rare”
Munger chose to make investment decisions based on the belief that “life doesn’t offer unlimited opportunities.” Based on this perspective, he aimed to eliminate mediocre or poor investment ideas as much as possible. Only those ideas that passed stringent scrutiny would be considered.
Another aspect of Munger’s investment approach is to take significant steps in those rare moments when a tremendous opportunity presents itself. Munger liked to quote his grandfather, who said, “When you get a huge opportunity, for God’s sake, don’t hesitate like a shy rabbit.”
This stringent selection of ideas – alongside his tendency to buy in large quantities when he invests in a new opportunity – led to an extremely low-diversified portfolio by modern standards.
Lesson 4: “Good companies are ethical companies”
One of Munger’s favorite principles was that “good companies are ethical companies” and conversely that “a business model based on deception is doomed to fail.”
Munger and Buffett developed a reputation for analyzing the operations of the companies they were considering investing in, looking for companies with outstanding growth potential and those that they believed had fair, balanced, and ethical models.
Munger liked to say that investors should look for companies that any fool could run, with the idea being that if you hold a stock long enough, the leadership in that company will eventually make some foolish decisions.
Sources
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Article sources:
– NASDAQ.com. “Charlie Munger’s ‘Buy And Hold’ Thesis May Seem Tame, But It Worked For Berkshire Hathaway.”
– CNBC. “Why Warren Buffett wouldn’t have become the greatest investor ever without Charlie Munger.”
– Motley Fool. “How to Invest Like Charlie Munger.”
– Medium. “Charlie Munger—The Lifelong Learning Investor.”
Source: https://www.investopedia.com/4-investment-lessons-to-learn-from-charlie-munger-8409680
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