Charlie Munger: 'Learning Machines' Have a Huge Advantage

The investment world continually evolves. For example, technology is always changing and creating opportunities, and threats, for a wide range of industries. Meanwhile, investor trends continually change. For instance, environmental, social and governance (ESG) investing has become increasingly popular over recent years. This could affect the prospects of a wide range of businesses.

As such, it is imperative for all investors to never stop learning. Certainly, it is natural for any investor to stick with a specific strategy once they have found a method that works for them. For example, maintaining a value investing strategy over the long run can be a means of capitalizing on the most favorable risk/reward opportunities.

However, within a constant overall strategy, adapting to a changing investment environment could be just as important as other traits such as taking a long-term view and being disciplined. Investors who fail to adjust could find it more difficult to apportion capital efficiently.

Munger’s ‘learning machines’

Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) Vice Chairman Charlie Munger (Trades, Portfolio) has previously discussed the importance of ongoing learning for all investors. As he once said:

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are ‘learning machines’. They go to bed every night a little wiser than when they got up and boy does that help—particularly when you have a long run ahead of you.”

Of course, it can be difficult to find the time to continually increase your knowledge of specific sectors, trends and changes in technology. Indeed, even maintaining knowledge of events within a specific sector takes a substantial amount of effort.

Therefore, it may be sensible to focus on a manageable number of sectors given other work/life commitments. This could ensure you remain alert to evolving threats and opportunities that may affect the prospects for companies within them.

Risk/reward considerations

Clearly, focusing on a limited number of sectors can lead to a lack of diversification within a portfolio. After all, no investor, including Munger himself, can have detailed knowledge of all industries and keep abreast of changes within them. Therefore, it may be prudent to hold index funds that seek to track the returns of the stock market alongside individual shares from industries within your sphere of knowledge.

This strategy may reduce risk within a portfolio, while also allowing you to capitalize on mispriced stocks within specific sectors. Over time, and as your knowledge builds, it may be possible to use individual stocks to a greater extent and decrease holdings of index tracker funds.

As alluded to by Munger, this process of gradually gaining knowledge can take time. However, just as the impact of compounding benefits an investment portfolio’s returns, building knowledge can have an increasingly positive impact on investment returns over time.

Moreover, it may produce surprisingly strong results even for investors who currently feel they lack the required knowledge or experience to unearth the stock market’s most compelling buying opportunities.