7 Pieces of Wisdom From Billio

Charlie Munger (Trade, Portfolio) is the vice president of Berkshire Hathaway (BRK.A, Financial)(BRK.B, financial) and an editor of the Daily Journal (DJCO, Financial). He worked as a real estate attorney until 1965 when he became a full-time investor on the recommendation of

Warren Buffett (Trade, Portfolio). Munger has given many interviews and tips over the years, and his fans have come to refer to his most famous tips as “Milking.”

In a previous article, I summarized some of Munger’s most outstanding and inspiring wisdom from a speech he gave at USC in 2007. Continuing where I left off, this article will look at some other tips from Munger’s 2007 speech. current today and I predict that they will continue to be valuable for decades to come. part two of a two-part post, let’s dive in.

Don’t overspend your income

Munger’s number one personal finance tip is not to overspend your income. In life, it’s very easy to succumb to lifestyle inflation where you tend to spend more as you earn more. This can be a dangerous cycle and can often cause suffering. Munger uses the story of Mozart, who was “the greatest composer of all time” but “utterly miserable” because he always spent too much of his income.

Use a checklist

Munger is a huge fan of using checklists to help in life. Pilots use a checklist before taking off and surgeons also use a checklist to avoid mistakes. Munger suggests mentally taking note of all the best routines and using them as a “mental checklist”.

When investing, Munger also has an extensive checklist. While this has not been formally released, we can speculate on a few points it might include from his interviews. For example, Munger often says that he is looking for “wonderful companies”. These are usually companies with a strong business proposition and high returns on capital above 15%. These companies should also have a solid “moat” or competitive advantage, consisting of elements such as network effects, brand pricing power, or operational scale.

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If a company passes the checklist, it can be considered from an evaluation point of view. This could be done through a price-to-earnings analysis relative to its competitors, or a discounted cash flow calculation can be used to understand the company’s cash flow potential. Munger says he doesn’t use complex algorithms, he uses simple logic and arithmetic to evaluate a business.

Understanding both sides of an idea

Munger uses an “iron subscription” to keep his mind clear and help him make good decisions. This implies “not having an opinion on a subject” unless he can present the arguments against his point of view of him.

In investing, this could be the understanding of the person with a bearish position on a stock or short selling thesis. Overall, this helps you become a better investor as you understand both sides and can therefore make a rational decision.

For example, if you were to invest in a stock like Tesla (TSLA, Financial) in 2019, you may first learn the bullish thesis, which includes Elon Musk technology, market trends, and big management. However, it would also make sense to read the hedge fund managers’ short seller reports. These reports highlighted the fact that Tesla relied heavily on incentives and that its vehicles had many quality issues.

Munger also calls this process of understanding both sides of an idea “routine of maintaining objectivity.” He seeks what Charles Darwin called “non-confirming evidence”.

Gain deep knowledge and wisdom

Munger calls itself a “continuous learning machine”. He believes that continuous learning is the key to life and to investing in success. If you are buying a stock and someone else is selling it, the goal is to know more than the other person, or at least have a unique insight or “advantage”. To get his investment edge, Munger devours more books a week and aims to develop in-depth, deep knowledge. He learns the “big ideas” across disciplines and then uses this information to build a framework for life and investment. Nowadays, many people have superficial knowledge, but it is not deep enough in certain areas.

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Munger tells the story of Max Planck, a Nobel laureate who was on tour in Germany and lectured on quantum physics. His driver had listened to the speech many times and then volunteered to give the speech in Munich, in the guise of the scientist. After the speech, a scientist in the audience asked a complicated question. The driver (pretending to be the scientist) said the question is so simple: “I’ll let my driver answer”, which was actually the real scientist.

Munger believes there are two types of knowledge: “Planck” knowledge, which is the knowledge possessed by people who really know what they are talking about and have the attitude, and then “driver knowledge”, which is what those who “learn to talk about” can speak. He says that many politicians have knowledge of the driver. The goal when investing is to try to really understand a topic or put the responsibility more in the hands of the people who have Planck’s knowledge.

Avoid negative associations

Munger believes it is a good idea to avoid associating with people who are not “high-ranking” in their thinking or character. She extends it to the goal of avoiding working under someone you don’t particularly admire or don’t want to be like. The way to do this is to identify those people you admire and then try to move towards them, without offending others. Buffett did this in his early years by identifying Value Investing father Benjamin Graham and offering to work for him for free multiple times.

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Do what interests you

Munger believes it is difficult to become an expert on something without an “intense interest” in the subject. So the goal is to aim to do something that interests you.

I personally like to fool my brain into thinking a boring subject is interesting to learn, and that’s how I got through college. Munger suggests having a lot of assiduity, which he jokingly says means “sit down until you do”. Buffett follows a similar philosophy and claims that he “tap dances to work” despite the need for a financial reward.

How to deal with failure

To be successful in life, you will likely have to face a series of failures. Not all stocks Munger has invested in have risen, especially in the early days. Munger believes it is best to identify problems early with an investment and then sell if fundamentals have changed. In life, Munger offers a reality check that we may sometimes take unfair blows. Quoting the wisdom of the ancient philosopher Epictetus, he says: “Every misfortune is an opportunity to behave well and learn something”.

The goal is not to wallow in self-pity. Munger believes we can learn from any situation, for better or for worse. When dealing with others, the highest form civilization can achieve is a “seamless web of well-deserved trust.”

Final thoughts

Charlie Munger (Trades, Portfolio) is an incredible person and a legendary investor who dispenses invaluable wisdom and wit about investing and life. Some of his best tips include not overspending your income, using checklists, keeping learning, associating with people you like, doing what interests you, and learning from failures.


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