In "Poor Charlie's Almanack," Charlie Munger (Trades, Portfolio)'s unofficial biography, there's a 10-step checklist Munger has used to improve his understanding of life, investing and the world around him.
This is not a detailed guide of how to find undervalued stocks or be a successful investor. Instead, it's a list of life principles that can help anyone. For investors, the list offers a loose guide to improving the investment process.
In this article, we'll take a look at the point from the checklist that seems the most relevant in the current market and economic climate: allocate assets wisely.
Allocate assets wisely
Any investor or analyst that has followed Munger or Warren Buffett (Trades, Portfolio) will know that neither of these two billionaires prioritizes asset allocation in the same way as the rest of Wall Street. They are not interested in 60/40 portfolios, risk parity portfolio construction, bond allocations, real estate allocations and cash allocations.
"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."
Instead, these two legendary investors let the market dictate their asset allocation strategy. If they think something looks cheap, they will buy it, even if it means they have 100% of assets under management in equities.
This has always been the case for these two investors, even when they managed their investment partnerships for individual investors in the 1960s and 70s. There is even evidence that Munger used to borrow considerable amounts of money to buy as much of a stock as possible if it looked cheap.
That's the essence of Munger's advice here. Rather than advocating a set asset allocation strategy based on arbitrary rules and complicated math, he's always followed the idea that the best way to allocate assets is by attractiveness.
If a stock looks really cheap and undervalued, more so than any other asset you own or can find, it makes sense to buy as much of it as possible. In other words, Munger believes that when you find an excellent investment, you shouldn't be afraid to buy as much as you can stomach.
Buffett also sticks to this view, advising investors to "Keep all your eggs in one basket, but watch that basket closely."
I should point out that this is not necessarily the best investment strategy for every investor. Munger not only has a great mathematical mind, but he's also incredibly patient. He is prepared to wait years for the perfect opportunity to come along. He only invests in a few opportunities and doesn't try too hard to be smart. The billionaire only buys what he knows and understands.
A strategy that fits your aims
Unfortunately, most other investors (including this author) lack the same sort of discipline and intelligence. Thus, it may be difficult for us to have success using the same strategy.
Nevertheless, that's not an acceptable reason to ignore Munger's advice entirely. It just requires a little extra time and effort to adapt the information to your situation and risk tolerance.
For example, an investor who knows and understands the lot about the banking sector may be better off staying with banking stocks rather than trying to invest in other companies they do not understand. Conversely, an investor with little to no experience in individual sectors or companies may be better off buying an index tracker fund.
Munger's advice to allocate assets wisely is helpful for every investor and saver. Allocating assets based on your circle of competence and risk tolerance is essential if you want to prevent mistakes over the long run.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Charlie Munger: Always Be Prepared and Think Ahead
- A Deeper Look at Berkshire Hathaway's Competitive Advantage in Insurance
- Marty Whitman: The King of Distressed Investing on Buying Bankrupt Stocks
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