Charlie Munger's Ten Rules For Investment Success

Author's Avatar
Jul 24, 2015

Charlie Munger (Trades, Portfolio), vice chairman of Berkshire Hathaway (BRK.A)(BRK.B), is a legendary investor who few value investors follow like Warren Buffett (Trades, Portfolio). Buffett has a cult following in the investment world. There are numorous articles written about him and his investing philosophy, yet very little is written about Munger, despite the fact Buffett has said Munger had a massive effect on him to move away from Graham classic value investing into a hybrid value and growth investing. As Buffett has inspired us through his simple investment philosophy, Charlie is the man who changed the investment method of the Oracle of Omaha. Munger is the inventor of modern day value investing that looks for franchise companies selling at fair value and growing at above average levels. Mr. Munger has always been a independent thinker who didn't think twice on rethinking Graham's net net investment strategy. He doesn't think twice to pay up for a wonderful company with a franchise.

Charlie Munger (Trades, Portfolio) Investment Philosophy:

Mr. Munger clearly has no attachment of Benjamin Graham and his net net style of investing. He's looking for companies with above average return on equity and investment capital selling a fair value. Mr. Munger has no problem to pay a 30% premium for quality then pay a 30% discount to tangible asset value.

“I don’t love Ben Graham and his ideas the way Warren does. You have to understand, to Warren -- who discovered him at such a young age and then went to work for him -- Ben Graham’s insights changed his whole life, and he spent much of his early years worshiping the master at close range. But I have to say, Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.

I think Ben Graham wasn’t nearly as good an investor as Warren Buffett (Trades, Portfolio) is or even as good as I am. Buying those cheap, cigar-butt stocks was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can’t do it with billions of dollars or even many millions of dollars. But he was a very good writer and a very good teacher and a brilliant man, one of the only intellectuals -- probably the only intellectual -- in the investing business at the time.” -- Charlie Munger The Wall Street Journal, September 2014.Â

Ă‚

The best example paying up for quality is Berkshire Hathaway's acquisition of See's Candy. Munger encouraged Warren buy pay up for See's Candy to the point that Berkshire Hathaway paid 3.2x tangible asset value for See's Candy. Buffett paid 3x tangible asset value for See's Candy and it worked out wonderfully for Berkshire Hathaway.

Charlies Munger's 10 Rules For Successful Investing:

  1. Live Below Your Means - Munger notes that its very important to spend less than your income, especially when you are starting your career. Invest the excess funds wisely. Munger said that the hard thing to do is to accumulate your first $100,000 and the first million is the next big hurdle.
  2. Understand Your Risk Tolerance - Every Investor needs to know the level of risk that they can take. Losses are ineviable and investors must follow an investment strategy that fits their risk tolerance.
  3. Research Opportunities - Investors must be able to process the vast amount of information and learn how to evaluate the risk and rewards of potential investments.
  4. Invest For The Long-Term - Volatility has never been a big concern to Munger,Ă‚ instead it should be welcome by long-term investors, since it creates the opportunity to increase your investments at lower prices in the short-term. Invest for the long-term and compounding will do the rest.
  5. Funds Are No Substitute - Investors are oversold on the benefits they receive from money managers. Total return from Wall Street money managers are eaten up by transaction costs, taxes, and fees.
  6. Patience, Coupled With Decisive Action - Excellent investment opportunities are few and far in between. Investors must continually search and evaluate investment opportunities. You have patience when looking for investment opportunities since you will reject 99 out of 100 opportunities that cross your desk. When a great opportunity crosses your desk, act decisively, and don't waste time overthinking it.
  7. Tax Planning - Taxes and tax planning play a major role in wealth accumunation.
  8. Love The Process - You must love the evaluation and investment process since it requires a lot of work.
  9. Pay A Reasonable Price - While value is important, investors should buy good businesses that are in sectors that exhibits favorable economic conditions. Good businesses will grow in value over time.
  10. Choose Good Partners - Every investor relies on advice from others when making investment decisions whether they are investment advisors, brokers, newsletters, friends, or business partners.