In Charlie Munger (Trades, Portfolio)'s unofficial autobiography, "Poor Charlie's Almanack," the billionaire investor presents a 10-step checklist from which even the most experienced investor can learn a thing or two.
This checklist is not a detailed guide of how to find undervalued stocks or be a successful investor. What it does do, however, is present a list of ideas that will help any investor improve their process.
Reading a checklist should be just the beginning of a long process of development and learning. Some of the points on Munger's list are relatively easy to implement, while others require significant emotional intelligence, as well as the ability to critique and learn from mistakes.
In this article, we'll take a look at the point from the checklisht that seems the most relevant in the current market and economic climate: prepare ahead.
Prepare ahead
Munger's desire to improve his understanding of the world and develop his mental models is unrelenting. He's always working to understand new processes and learn more about the world in which we live. Both he and his business partner, Warren Buffett (Trades, Portfolio), spend thousands of hours each year reading books and annual reports.
Munger isn't trying to find the latest hot stock tip when he reads. He's trying to prepare ahead. He advocates a constant curiosity for nearly everything in life and is always asking "why" something happens or has happened.
This continuous curiosity has helped him develop one of the most revered minds in the business world. His constant interest also means he is prepared for almost everything.
Always be prepared
It is impossible to tell what the future holds the global economy and stock prices. There are thousands of different scenarios that could unfold over the next 10 years, and these could have hundreds of thousands of different effects on individual equities.
The only way to try and gain some understanding of how a particular event might impact the economy or individual companies is to look for past examples. There's no shortcut to this process. It requires a curious mind and lots of time and effort.
Building a portfolio based on uncertainty is another way to prepare for any eventuality. What does it mean to build a portfolio based on uncertainty? Buffett and Munger have given some insights into this in the past.
For example, both of these billionaire investors will only own companies that are likely to be around in 10 or 20 years from now. These are companies that have a durable competitive advantage and a reliable reputation. With these qualities, they should be able to perform well in all different market and economic environments. To put it another way, they are prepared for uncertainty.
Another factor to consider in the construction of a portfolio for uncertain times is to avoid companies with lots of debt. Borrowing a lot of money can help companies grow rapidly in the boom times, but the unpredictable nature of the world means it is impossible to time the market correctly and eliminate all debt before the next downturn arrives.
The best way to circumvent this kind of uncertainty is the prepare ahead by avoiding companies with lots of borrowing.
Prepare for uncertainty
No one knows what the future holds for the global economy. We could be facing the prospect of a worldwide economic depression - or not.
Preparing ahead for both of these scenarios is the best way to make sure you don't get caught out. Finding high-quality companies with a definite competitive advantage and little borrowing may be by far the most straightforward way to do that.
Read more here:
- A Deeper Look at Berkshire Hathaway's Competitive Advantage in Insurance
- Marty Whitman: The King of Distressed Investing on Buying Bankrupt Stocks
- Warren Buffett: Avoid Companies That Consume Cash
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