Charlie Munger (Trades, Portfolio)'s unofficial autobiography, "Poor Charlie's Almanack," presents a 10-step checklist the investor has used to help improve his investment outcomes in life.
The checklist is a list of ideas that can help anyone improve their investment process, although it's not a detailed how-to guide for uncovering undervalued equities.
Indeed, the checklist should be only part of an investment process. Some of the points are easy to follow and implement, but others are a bit more difficult.
In this article, we'll take a look at the point from the checklist that all investors need to be aware of given the contiuous advancement of technology: be ready for change.
Be ready for change
One of the hardest things for any investor to do is admit that they made a mistake. Accepting you made an error, learning your lessons and moving on is essential to becoming a good investor in the long run.
The world is always changing and growing. That's something investors have to accept. Unfortunately, this also means that companies that might have looked like good investments a few years ago are no longer attractive investment opportunities. This is always going to be a problem.
The only real way to get around this issue is to know and understand your investments in granular detail. There's no shortcut for this process. It requires time and effort to appreciate every business you own, but once you understand the company, it can be straightforward to see how changes will impact underlining operations.
Munger and his business partner, Warren Buffett (Trades, Portfolio), have been open to change for decades. Looking back at their lengthy investment careers, it's clear that while they have always pursued a value-based investment strategy, they have been open to buying companies in new sectors if the outlook for these sectors changes. Airlines and tech are two examples.
Commenting on the industry changes behind Buffett's decision to buy airline stocks at the 2019 Daily Journal annual meeting, Munger said:
"So the vicious competition is continuing, including people doing it – governments own these airlines and do it to show how strong they are. So, I don't regard it as a perfect model and I don't think it's the greatest idea we ever had. It's just something, considering how pounded they were and how the world has changed a little, we thought, as I say, we had a little advantage by that particular gamble. It's not that we… It's not a cinch."
Based on this quote, it would appear that Munger and Buffett both realized that something had changed in the market. They also realized that it wasn't the most excellent idea they'd ever had. That proved to be important earlier this year, when the outlook for the sector changed and Buffett did not waste any time selling his holdings.
This is one of Buffett's most underappreciated qualities: his ability to sell a holding if the underlying investment thesis changes. In some cases, this has meant incurring significant losses on losing positions, but this short term hit has usually prevented longer-term losses. He understands what he knows and what he doesn't. If something changes that he does not understand, Buffett is happy to sell.
That's really the main takeaway from Munger's advice. The world is always changing, and there's nothing we can do about it. All we can do is try to understand how these changes impact our investments. If that's impossible, it might not be worth hanging around to see what happens next. We must acknowledge that the world changes and be ready to change with it.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Charlie Munger: Always Allocate Your Assets Wisely
- Charlie Munger: Always Be Prepared and Think Ahead
- A Deeper Look at Berkshire Hathaway's Competitive Advantage in Insurance
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