We can look to Charlie Munger (Trades, Portfolio) for some advice on how to survive and prosper in the current market environment. Munger has been investing his own and others' money for around six decades, so he knows a thing or two about investing. Working alongside Warren Buffett (Trades, Portfolio) means he also has unrivaled insight into the minds of one of the greatest investors of all time.
Munger spends far more time thinking about investing than he does buying and selling assets. He's quite happy to do this. In fact, he's named his style of investing "sit on your a**" investing.
Munger's goal in life is to avoid doing anything stupid. One of his most famous quotes is, "I want to know where I'm going to die, so I don't go there." Put simply, he wants to avoid making any serious mistakes at all costs.
His entire investment strategy is modeled around this approach. Munger only owns a few investments personally and trades rarely. He will only make a trade when he is 100% sure that he wants to own the asset forever. That's why he trades so infrequently. There are only a handful of assets that have ever made it over this high bar.
In his must-read book, Poor Charlie's Almanac, Munger puts forth a 10-step checklist he's used when analyzing potential opportunities. I believe the following three are the most important in the bear market, as they can help guide us through these turbulent times.
Measure risk
If there's one thing that links all the great investors, it is their desire to minimize risk at all costs.
Munger knows all too well that the vast majority of companies fail to generate a positive return for their investors over the long run. Some create a below-average performance, while others go bankrupt.
He wants to avoid both types of failures. That's why Munger starts his research process by assessing and measuring all the risks involved with a particular investment.
These include risks such as a permanent capital impairment, valuation risk, inflation risk and more. Understanding each risk, and how to measure it, should be a crucial part of any investment process. When you have a process in place, it's easier to go back and look at how the business has evolved, and if the risk has increased at a later date.
Be independent
It is vital that you believe what you are doing is the right course of action. Making investments just because someone else has decided to do the same thing can generate good returns, but it can also produce significant losses.
If you don't understand why you made the investment in the first place, you cannot accurately assess all the risks and threats to the business. That may push you to make bad decisions in the long run.
The only way to avoid this is to be independent and make your own decisions based on your own research and information. If you don't understand an opportunity or investment, ignore it. You might miss out on some profits, but you will also avoid significant losses as well.
Prepare ahead
As the saying goes, if you fail to prepare, you should prepare to fail. This principle is intertwined with the two above. Being prepared is all part of being independent and measuring risk. If you are prepared to measure risk, it is easier to understand what you are looking for.
At the same time, when you make an investment decision independently, understanding all the strengths, weaknesses, opportunities and threats the company faces prepares you for future changes in the business outlook.
When combined, these three investment rules could help any investor improve their process.
Disclosure: The author owns no share mentioned.
Read more here:
- The Looming Threat to Berkshire Hathaway's Survivial
- How to Identify Good Businesses, According to Warren Buffett
- 3 Deep-Value Stocks for the Bear Market
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