Warren Buffett (Trades, Portfolio)'s right-hand man, Charlie Munger (Trades, Portfolio), is one of the greatest thinkers in the investment world. He's also an accomplished investor in his own right. Munger used to run his own investment partnership and still manages his own investments alongside those of the Daily Journal Corp. (DJCO, Financial).
Investors who comb through Munger's investing advice looking for tips on how to get rich quickly will be disappointed.
Much of the information and guidance the billionaire has provided is based is on the principle of becoming wealthy in a sustainable way. This can be seen in one of his best-known quotes on building wealth:
"The desire to get rich fast is pretty dangerous."
Munger is well aware that it takes time and effort to become rich. There are examples of investors and business owners who had become wealthy very quickly, but these are rare examples.
Concentrating on these factors also overlooks another significant issue: survivorship bias.
Survivorship bias
For every successful investor that makes the headlines, there is going to be at least one other investor that has failed spectacularly. In reality, the ratio may be significantly worse.
Research shows that most investors underperform the market over the long run, and around 70% of day traders lose money over the long run. If we take the latter figure, that's roughly three out of four day traders that fail.
This figure makes it clear that the odds are stacked against the average investor. That's OK as long as we are aware of the fact. That's what Munger has tried to get across so many times (admittedly not in as many words).
The odds are stacked against us as investors, and we have to tread carefully if we want to achieve success over the long term.
How do we do this? Well, there is no clear answer. If there was, it would be easy.
Nevertheless, reading through Munger and Buffett's lectures, interview transcripts and letters to investors makes it possible to build a framework. This framework won't guarantee success, but it will help avoid the biggest failures.
Building a framework
To start, both of these billionaires believe it is essential to avoid high-risk investments at all costs. This means avoiding businesses that have a high chance of failure. It also means avoiding any companies that are difficult to understand or fall outside of your circle of competence.
Following these guidelines should help any investor avoid significant losses from struggling companies or frauds.
Another piece of advice is not to overpay for companies. This is quite hard to define because there is no set framework for establishing the correct value of an enterprise. Having said that, if you don't understand how to value a business, then that is a pretty clear indication that it does not fall inside your circle of confidence, and thus, it might be better to avoid the firm.
Finally, investors shouldn't be in a rush to get rich. This might seem counterintuitive, but it makes a lot of sense. Investors who rush to get rich might take unnecessary risks that could be borrowing lots of money, buying stocks they don't understand or allocating capital to opportunities that seem too good to be true. All of these actions can lead to significant losses.
Therefore, the idea and principle of not being in a rush is a sort of speed bump that can help ensure you're not rushing into anything you don't understand or taking on too much risk. It's a very low-tech and straightforward way of trying to eliminate mistakes. By following this tip from Munger, along with the other two points above, an investor of any experience may be able to improve their process.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Charlie Munger on How to Think Like an Investor​
- Altria: A Good Investment for Uncertain Times?
- Warren Buffett's Advice on How to Find Good Business Managers
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
