We know that Charlie Munger (Trades, Portfolio), the right-hand man of Warren Buffett (Trades, Portfolio), is one of the world's greatest investors and thinkers. But trying to sum up his investment strategy in a succinct style is not that easy.
Indeed, even trying to sum up the investment style of Warren Buffett (Trades, Portfolio) is not that easy. We know he likes to invest in businesses with a moat but he has never precisely defined what this means.
The problem is that both of these investors have decades of experience under their belts, probably more experience than any other investor in the world, and this means that they can identify good companies at a glance. Without any direct guidance on what they believe is a great investment, the only conclusion that we can draw is that intuition plays a huge role in the selection of equities for Munger and Buffett.
Unfortunately, for the rest of us, we don't have access to the inside of Munger and Buffett's minds, so we can't learn much from their intuition.
Learning from Munger's way of thinking
I'm a firm believer that we should not seek to replicate the investment styles of these two billionaires. They have developed a method around their own preferences for investing with their own circle of confidence. As investors, we all have to create and build our own circles of competence in a way that we understand and can comprehend. If we follow others, we might stray into a zone we don't understand, which would be disastrous to returns.
This brings me to the subject of what we can learn from Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio). Rather than copying their styles, we should learn from their experience in the preparation of our own personal investment plans, as the quote below from Charlie explains:
“Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical things, will often dramatically improve the financial results of that lifetime.
A few major opportunities, clearly recognized as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables.
And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past."
This quote succinctly sums up in my view the reasons behind Buffett and Munger's success.
These two billionaires have always been fascinated with detail and this fascination for research. Also, being prepared has ensured that they are always in the right place at the right time to take advantage of the best investment opportunities. They are prepared to wait for decades for the right opportunity to arrive. But when the odds are heavily in their favor, preparedness means that they can act quickly without the fear of being incorrect. And when the odds are skewed heavily in their favor, neither Munger nor Buffett is afraid to bet big and with conviction.
Building your strategy on Munger
Put simply, while the investment strategy of Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) might not be suitable for every investor, every investor should memorize their investing philosophy. Being prepared and spending your time researching every opportunity, so you're not caught off guard is vital. It is also important to act with conviction when the odds are heavily skewed in your favor. It is the only way to generate positive returns over the long-term and even come close to beating the market.
If you don't have the time to do the extra research or are not comfortable taking large positions, a simple index might be the best alternative for your portfolio rather than possibly making lots of small bets on companies you don't understand.
Disclosure: The author owns no share mentioned.
