I have spent a large part of my career as an investment writer writing about the careers and investments of Warren Buffett (Trades, Portfolio) and his business partner Charlie Munger (Trades, Portfolio). Over this time I have absorbed a lot of their advice.
If I am perfectly honest, I have not learned enough and probably never will. That being said, as I am writing about these investment gurus almost every day, I am continually being reminded of their advice.
The learning process is a continual one. I know only a fraction of the knowledge contained in the heads of Buffett and Munger. I am well-aware of my limitations and in no way think I know everything there is to know about the world of investing. Yet, after 10 years of covering Munger and Buffett on an almost daily basis, I think I have learned enough to put together a sort of framework of how to think like Charlie Munger (Trades, Portfolio).
This is by no means a comprehensive list, and it is certainly not complete as I'm sure over the next 10 years my own circle of competence will vastly expand.
The art of being inactive
"If you buy a business just because it’s undervalued then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies then you can sit on your ass … that’s a good thing."
The first part of this "thinking like Charlie Munger (Trades, Portfolio)" framework is the art of being inactive. This should not in any way be confused with being lazy.
When it comes to investing, Munger has perfected the art of being inactive. He will only make an investment when he is entirely satisfied that it is the right time to do so, and he is prepared to wait years for the right time.
But this doesn't mean that he is not looking at investments. Just like Buffett, Munger is always reading, researching and studying literature of all types, including company annual reports, to build his knowledge.
The difference between Munger and other investors is that he's perfectly happy to have this knowledge and not act on it. This is where the art of being inactive comes into its own. Even though has enough money to invest in every single opportunity that comes his way, Munger rarely acts. He is happy to sit and wait.
The way I see it, there are two primary drivers behind this art of being inactive. First, Munger has never been in a hurry to get rich, and second, he knows why investors lose money.
A deep understanding of investor psychology
"We recognized early on that very smart people do very dumb things, and we wanted to know why and who, so that we could avoid them."
Of all the famous investors, Charlie Munger (Trades, Portfolio) is the most experienced when it comes to understanding human psychology and how this affects investors on a day-to-day basis. His knowledge of human psychological limitations and the limitations of his own mind act as a sort of speed bump in the decision-making process. This partially explains why he is happy to sit on the sidelines and wait for the perfect opportunity.
He knows our minds can trick us into making bad investment decisions and wants to stop that.
Circle of competence
"We all know people who’ve flunked, and they try and memorize and they try and spout back. It just doesn’t work. The brain doesn’t work that way. You’ve got to array facts on the theory structures answering the question ‘Why?’ If you don’t do that, you just cannot handle the world."
Munger's understanding of psychology blends into his desire to always be developing and building his circle of competence and knowledge of the world. He is an avid reader, reading on all topics to enhance his understanding and grow his circle of competence. This is a continual process and one that requires a significant degree of dedication. But, it is essential if you want to keep up with the rest of the world.
As I said at the beginning, this is by no means a comprehensive guide as to how Charlie Munger (Trades, Portfolio) thinks. It is just a framework of the main principles, the principles that I believe are the foundations of his mind.
Furthermore, I believe that by incorporating this framework into my own life, I can improve my standing as an investor.
Disclosure: The author owns shares in Berkshire Hathaway.
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