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John Engle
John Engle
Articles (345) 

Charlie Munger on Intellectual Development and Common Sense

Warren Buffett’s business partner has some strong opinions on the intellectual underpinnings of investment success

June 07, 2019 | About:

Charles T. “Charlie” Munger has been a fixture of the business and investing world for more than five decades. As Warren Buffett (Trades, Portfolio)’s long-time business partner, Munger has helped build Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) into a business juggernaut. Along the way, he has picked up quite a lot of wisdom, which has been collected in a host of articles and books.

While Munger has opined on almost every investment and market-related topic under the sun on one occasion or another, there have been a few concepts and ideas that have clearly sparked his long-term attention. One of the most intriguing of these has been his life-long interest in how successful investors think.

What it means to be properly educated

Munger has advocated the importance of independent thinking to achieving lasting investment success for many years. Recently, he opined on what it means to truly become an educated person:

“My idea of being properly educated is being right when the professor is wrong. Anyone can just spit back what the professor is saying. It takes a really educated person to think for themselves.”

While refusing to challenge conventional wisdom or established authority may be easy and convenient, it is hardly a recipe for original thinking. Passively moving with the prevailing intellectual tide does not require much effort. Thinking for oneself does. That is a critical differentiator between true investors and dilettantes, just as it is in any other intellectual pursuit.

Contrarian thinking is essential if one hopes to find those opportunities that have been overlooked by the broader market. But being different does not mean one is necessarily right.

Common sense is far from common

Individuals must learn to develop – and trust – their own reasoning faculties if they hope to make wise investment decisions. Yet, as Munger recently reflected, the “common sense” necessary to inform good decision-making is actually far from common:

“Of course when people talk about common sense, they mean uncommon sense. Every time you hear that someone has common sense, it means that he has uncommon sense, and it’s much harder to have common sense than is generally thought.”

Truly, a wealth of common sense and intellectual curiosity is vital to building – and keeping – a wealth of investing returns. Success demands the application of a level of intellectual rigor far greater than what is comfortable for most individuals. That means thinking deeply and broadly, with an eye toward challenging positions and opinions that others might simply accept as given.

Temperament trumps intelligence

While intelligence is probably a necessary condition for achieving investment success, it is far from a sufficient one. Munger has seen this fact play out many times in practice:

"A lot of people with high IQs are terrible investors because they've got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success."

Intelligence, common sense, curiosity, energy and a host of other factors contribute to success in the market. But without the proper mental and emotional temperament, these laudable qualities may come to nothing. Munger cites the importance of discipline and patience. These are obviously qualities investors should strive to cultivate.

Emotional balance and serenity of mind are what allow investors to dispassionately and effectively adapt to shifting markets, especially when those shifts are to the investor’s (even temporary) detriment.

Verdict

Age has clearly managed neither to blunt Munger’s incisive mind, nor to dim his renowned wit, as he continues to drop pearls of wisdom on a regular basis. Though now a nonagenarian, the Oracle of Omaha’s right-hand man has still got it. That is a testament to his approach to life-long learning and commitment to understanding the world as it is, not necessarily how he (or anyone else) might want it to be.

Effective thinking comes from effective learning, and prudent action relies on prudent temperament. Munger understands these facts well. All value investors should heed them too.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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