Charlie Munger (Trades, Portfolio) is not only Warren Buffett (Trades, Portfolio)’s right-hand man, but an accomplished investor in his own right.
Even though he is often overlooked in favor of Buffett, who is more charismatic and has plenty of publicity, Munger’s investment advice is highly valuable for investors of all experiences.
To follow is some of his best investment advice.
Munger's best investment advice
“Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter out buying opportunities.”
Buffett and Munger are best known for their investment acumen and use of highly concentrated portfolios, a strategy built on the idea you should concentrate your capital on only your best ideas. This quote somewhat explains the logic behind this strategy. If you have two good ideas, why should you diversify if one is better than the other? The cost of diversifying is foregoing putting more capital to work in your best idea. Yes, it might pay off, but if you have done your research correctly, there is no need to hedge your bets. By doing so, you are only limiting potential returns.
”When any guy offers you a chance to earn lots of money without risk, don’t listen to the rest of his sentence. Follow this, and you’ll save yourself a lot of misery.”
This is not a true investing quote, but it is a useful tip for avoiding scams -- including stock scams. If something is too good to be true, it probably is. Everyone wants to get rich overnight, but it is not that easy. It takes time and effort to build wealth. Trying to take shortcuts will likely only end in disaster.
“Someone will always be getting richer faster than you. This is not a tragedy.”
Following the above, there will always be investment fads and trends out there, where people appear to make millions overnight. Sure, this can happen, but nine times out of 10, when everyone knows about the get-rich-quick scheme, all the easy money has been made. Munger and Buffett made billions by staying away from investment fads and fashion, investing on their own terms in unattractive industries. If you want to succeed, it might be best to do the same.
“Our ideas are so simple that people keep asking us for mysteries when all we have are the most elementary ideas.”
Munger and Buffett are great advocates of simple investing. Rather than trying to be smart and beat the market all the time, they are looking for simple, mispriced bets and trying to avoid the biggest pitfalls. With investing, simple is often best as there is less room for error. On that note:
“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart…”
Even though he is possibly one of the smartest investors out there, Munger understands his weaknesses, which is probably why he has achieved the record he has.
“You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.”
There are plenty of stocks out there that look cheap. However, finding stocks that are beaten down for no apparent reason is where value investors can excel. It is important to understand why the market does not like the company, only then can you work out if it is correct or not and if the stock is attractive or just a value trap.
“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
Time is almost certainly the investor's best friend. Unfortunately, most people just cannot stand to wait, so they try to stimulate returns by overtrading. Not only is this creating more work for yourself, but it is also increasing the chance you will find yourself dating a toad, costing you money through higher commissions and eliminating your best friend- time. It is better to sit back, relax and let time do the heavy lifting.
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