Charlie Munger
The wild swings in the stock market may have you stressed about your investments.
Yet if you took a page from self-made billionaire Warren Buffett, you shouldn't be too concerned about daily market moves.
"You've got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it, as long as you're comfortable with the holding," the Berkshire Hathaway CEO said during the company's 2020 annual shareholders meeting.
When Buffett looks at the stock market he sees companies instead of stocks.
"We ignore 99.9% of what we see, although we run our eyes over them. And then every now and then we see something that looks like it's attractively priced to us as a business," Buffett said at Berkshire Hathaway's 2008 meeting.
If you want to take a page from Warren Buffett, here are some of his key principles you can integrate into your investing practice.
Think long term
When Buffett buys stocks, he's in it for the long haul.
"If there is one quality that you need in order to invest like Warren Buffett it is patience," said Berkshire Hathaway shareholder Robert Johnson, professor of finance at Creighton University's Heider College of Business in Omaha, Nebraska, Buffett's hometown.
Investors need to have the "ability to correctly evaluate selected businesses," he wrote in his 1996 annual shareholders' letter.
Focus on good companies
Buffett likes to focus on companies that have a good business model that is sustainable over a very long period of time, Johnson said.
It has to be at the right price. Buffett is well known as a value investor, which is someone who chooses equities that seem to be trading for less than their intrinsic value.
https://www.suredividend.com/warren-buffett-quotes/
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“I’m always aware of [inflation], but it doesn’t stop me from operating," Munger said. "I’m 98½ years of age, and I’ve seen a lot of inflation. I intend to live through inflation. I’ve lived through a lot of it already in my long life. It doesn’t discourage.”
Ignoring macroeconomic trends has been a forbearance of Berkshire’s strategy since Buffett took control of the company in 1965.
"I don’t pay much attention to macroeconomic trends. Like the weather, I just ignore the weather. I just try to invest whatever capital I have as best I can and take the results as they fall. I just seize whatever opportunities I can and I hope I get my share."
Munger Tip #1: Buy Stocks That Are Easy To Value
The first of Munger's investing gems that we will look at today is:
YOU’RE LOOKING FOR A MISPRICED GAMBLE. THAT’S WHAT INVESTING IS. AND YOU HAVE TO KNOW ENOUGH TO KNOW WHETHER THE GAMBLE IS MISPRICED. THAT’S VALUE INVESTING.
Essentially what this boils down to is finding a stock where the risk-reward is asymmetrically in favor of whatever position you are looking to take in it. To be able to do this repeatedly and successfully, the stock needs to be easy to value.
This all comes down to the circle of competence that Warren Buffett loves to talk about. While some investors have in-depth insight into certain complicated sectors like semiconductors (NVDA) or biotechnology (PFE), for the average retail investor without unique insight into technical fields, it is best to stick with very easy to understand investment theses.
For us, defensive businesses that generate very stable cash flows and grow within a very predictable range year after year and then pass on the majority of their cash flow to shareholders via dividends and/or buybacks are the easiest to value because the variables are much fewer and estimates of future cash flows are much easier to arrive at. Some of our favorite industries to mine for these opportunities include REITs (VNQ) like W. P. Carey (WPC), midstream energy (AMLP) companies like Enbridge (ENB), utilities (XLU) like Algonquin Power & Utilities (AQN), and BDCs (BIZD) like Ares Capital (ARCC). Even some high quality asset managers like Blackstone (BX) fit this bill as well.
Munger Tip #2: Buy High Quality Businesses
Munger tip number two is:
A GREAT BUSINESS AT A FAIR PRICE IS SUPERIOR TO A FAIR BUSINESS AT A GREAT PRICE.
Great businesses make superior investments to fair businesses for two big reasons:
(1) Great businesses by definition have superior competitive advantages, which makes applying Munger Tip #1 easier as there is less uncertainty about its future earnings stream.
(2) Great businesses often surprise to the upside because they have an established track record of building a great corporate culture and employee team that can innovate to overcome unforeseen challenges and create new exciting growth opportunities. This what has helped to drive the superior long-term results of companies like Amazon (AMZN) and Apple (AAPL), and literally given new life time and again to companies like Tesla (TSLA).
Munger Tip #3: Buy Businesses That Play The Long Game
Munger tip number three is:
TODAY, IT SEEMS TO BE REGARDED AS THE DUTY OF CEOS TO MAKE THE STOCK GO UP. THIS LEADS TO ALL SORTS OF FOOLISH BEHAVIOR. WE WANT TO TELL IT LIKE IT IS.
While many management teams become enamored with financial engineering techniques to appease Wall Street analysts in the short term, true value is created by investing in the long-term wellbeing of the company. Two tragic examples of this are International Business Machines (IBM) and AT&T (T). Both of these companies repurchased shares hand-over-fist at elevated valuations in order to excite shareholders and appease analysts at the expense of making aggressive and necessary investments in their future. As a result, both businesses fell into stagnant growth and underwhelming performance. As a result, shareholder value was destroyed.
https://fs.blog/avoiding-stupidity/
https://fs.blog/amateurs-professionals/
https://fs.blog/circle-of-competence/
https://fs.blog/charlie-munger-wisdom/
https://valueinvestasia.com/9-important-pieces-of-investing-advice-from-charlie-munger/
https://fs.blog/intellectual-giants/charlie-munger/
In periods of market volatility, one thing we as investors have to keep an eye on more than anything else is the tendency for psychological biases to creep into our decision-making process.
A large body of research shows that humans are far more susceptible to pain and losses than anything else. This is especially important for investors. Losing money can be far more painful psychologically than making money. This psychological pain can drive us to make irrational decisions, which we may not necessarily have made in rising markets.
There are plenty of psychological biases and tendencies that can influence decisions as a result of this underlying pain factor, and one of them is the tendency for investors to freeze and double down on losing positions.
Don't let the market influence decisions
One of the most misunderstood pieces of advice in fiance is Warren Buffett (Trades, Portfolio)'s statement that during market drawdowns, the best strategy for investors is to do nothing, but this is only part of the story. Buffett has also said there are only two reasons why he would sell a stock, to raise money for other investments or if something has changed.
Considering the current macroeconomic outlook, I would say the outlook for many companies has changed dramatically over the past couple of months. Therefore, it may make sense for investors to review their ideas in some cases. If nothing has changed, then holding on will be the best course of action.
https://grow.acorns.com/amp/charlie-munger-tips-for-investors/
https://mypf.my/2022/06/18/billionaire-charlie-mungers-advice-for-investing-in-the-current-era/
https://www.berkshirehathaway.com/letters/1996.html
‘Investing isn’t too complicated, but know what you’re investing in’
“Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
‘Ignore all market forecasting’
“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie [Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
https://indexcfd.com/warren-buffett-bankruptcy/
https://www.quora.com/How-did-Warren-Buffett-get-Goldman-Sachs-to-pay-him-15-per-second
On the occasion of the 99th birthday of Charlie Munger let us check out some of his famous quotes from his life journey
1. One person told me, “I have a list of 300 potentially attractive stocks & I constantly track them, waiting for just one of them to get cheap enough to buy.” Well, that’s a reasonable thing to do. But how many people have that kind of discipline? Not one in 100
2. People calculate too much and think too little. Thinking is a surprisingly underrated activity in investing. People who cannot be alone with their thoughts for a long time are terrible candidates to become successful investors.
3. We don’t care about quarterly earnings and are unwilling to manipulate them in any way to make some quarters look better.
4. To get what you want, you have to deserve what you want. The world is not yet a crazy enough place to reward a whole bunch of undeserving people.
5. Investing is where you find a few great companies and then sit on your ass.
6.The big money is not in buying or selling, but in the waiting.
7. Assume life will be really tough, and then ask if you can handle it. If the answer is yes, you’ve won.
8. If investing wasn’t hard, everyone would be rich.
9. You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.
10. A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.
11. A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage
12. One of the greatest ways to avoid trouble is to keep it simple… the system often goes out of control.
13. Forgetting your mistakes is a terrible error if you’re trying to improve your cognition. Reality doesn’t remind you. Why not celebrate stupidities in both categories?
14. You need patience, discipline, and agility to take losses and adversity without going crazy.
15. Everywhere there is a large commission, there is a high probability of a rip-off.
16. It takes character to sit with all that cash and to do nothing. I didn’t get to the top where I am by going after mediocre opportunities.
17. We both (Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.
18. Another thing, of course, is that life will have terrible blows in it, horrible blows, unfair blows. It doesn’t matter. And some people recover and others don’t.
19. In my whole life, I have known no wise people who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads -at how much I read. They think I’m a book with a couple of legs sticking out.
20. Remember that reputation and integrity are your most valuable assets and can be lost in a heartbeat.
