Charlie Munger, who died recently at the age of 99, always had a colorful turn of phrase. But entertaining as he was, his comments were also invariably full of wisdom. Taken together, in fact, Munger’s ideas offered investors a masterclass in investing. Here are some highlights:
Choosing an investment strategy. Munger, along with his partner, Warren Buffett, often commented on the limits of his knowledge. But this wasn’t false modesty. What Munger was saying was that the universe of investments is too broad for any individual to fully master. That’s why he suggested investors limit themselves to a “circle of competence.” This is how he put it: “Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.”
“The easiest way to avoid mistakes is to avoid anything you really don’t understand,” Munger cautioned investors. And though Munger and Buffett were for many years able to beat the market with their stock picks, they went out of their way to communicate to everyday investors that they shouldn’t try to do the same. Munger knew his playbook was one that wasn’t easily copied. At the same time, he was quick to offer investors an alternative: If stock-picking isn’t your expertise, “you’re best served investing in a diversified portfolio of low-cost index funds or exchange-traded funds.”
Avoiding potholes. While Munger acknowledged that there was more than one way to make money, he was quick to criticize things he believed were truly harmful. At the top of that list in recent years was bitcoin. Munger addressed the topic in a number of interviews, including this particularly entertaining one.
“I regard the whole business as antisocial, stupid, and immoral,” he said. That was for two reasons: He didn’t accept bitcoin as a valid investment because it lacked tangible value. And he didn’t see it being useful as a currency because of its volatility. “Nobody in his right mind would want a payment system where the very thing you were using went up and down by 20% in a day.”
For these reasons, Munger called bitcoin “rat poison.” And he didn’t change his mind even when its price jumped higher. To Munger, those gains didn’t prove anything. “It’s just more expensive rat poison,” he said. While entertaining, Munger’s steadfast public opposition to cryptocurrency offers an invaluable lesson: When an investment craze gets going—and when others appear to be making easy money—it’s awfully hard to avoid joining the herd. But that’s precisely when it’s most important to remain grounded.
Warren Buffett once explained this principle by contrasting investment bubbles to the Cinderella story. While Cinderella knew the party would end at midnight, in the investment world, “there are no clocks on the wall.” You don’t know when the bubble will end, prices will drop and everything will turn “to pumpkins and mice.”
Sidestepping sales pitches. Munger observed that smart people are no less prone to crooked behavior than anyone else. That poses a problem for everyday investors, because if someone sounds intelligent—and indeed, is intelligent—it’s easier to fall prey to that person’s sales pitch. That’s why Munger cautioned that “very-high-IQ people can be completely useless. And many of them are.” On a related note, Munger advised that, “the world is full of loons who will lead you in completely the wrong direction.”
How can you avoid crooks and loons? This comes back to Munger’s idea of a circle of competence. If you don’t want to devote your days to investment research, then the easiest alternative is to stick with diversified index funds. That approach would have helped investors steer clear of everyone from Charles Ponzi to Bernard Madoff to Marcos Tamayo.
Forecasting. Though Munger was an active investment manager, he didn’t base his decisions on forecasts about the future. He simply looked to buy good businesses with honest managers at attractive prices. That was the extent of the time he spent on predictions. And that’s why Munger compared today’s Wall Street forecasters to the oracles of ancient times: “People have always had this craving to have someone tell them the future,” he said. “Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts.”
Asset allocation. Munger recognized that psychology accounted for a large part—if not the largest part—of success as an investor. That’s why he had this advice: “If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder.”
Here’s how I might translate that into a prescription for individual investors: If you can’t afford periodic declines of 50% in your portfolio—because, for example, you’re in retirement and taking regular withdrawals—then you’ll want to have part of your portfolio safely outside of stocks. That way, you’ll never be forced to sell under duress when the market drops, as it invariably does.
Another of Munger’s key mottos was to “invert, always invert.” What he meant was to stress test every situation. “Turn a situation or problem upside down. What happens if all our plans go wrong? Instead of looking for success, make a list of how to fail instead.” This advice is equally applicable for individual investors. In building a financial plan, consider stress test scenarios even if they seem unlikely.
Mindset. Munger was a lifelong learner. “My children laugh at me,” he said. “They think I’m a book with a couple of legs sticking out.” But for him, maintaining an open mind was his north star. “Avoid intense ideologies. Always consider the other side as carefully as your own,” Munger said. If the facts change or you see things differently, don’t hesitate to change your mind. “Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire.” This is good advice in general, but it certainly applies to the world of personal finance, where things change frequently.
The most important thing. In the past, I’ve talked about investors like Ronald Read and Grace Groner—folks with modest incomes who each nonetheless managed to amass nearly $10 million. How did they do it? To be sure, they were diligent savers and good investors. But they also had the advantage of time. Read lived to 92 and Groner to 100, giving their investments decades to compound. Munger, who made it to nearly age 100 himself, often talked about the importance of time. “The big money is not in the buying or the selling,” he said, “but in the waiting.”