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Rupert Hargreaves
Rupert Hargreaves
Articles (948)  | Author's Website |

Charlie Munger on Why It Does Not Pay to Complicate Investing

Keeping investing simple might be challenging, but it can really help improve your process

September 27, 2019 | About:

Over the past several decades, Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) have issued a stream of fantastic advice for investors to follow all around the world.

If you follow them, there are hours and hours of interviews and discussions to review, that's without including the Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meetings.

On top of this, we have Buffett and Munger's historical letters to investors for both their own investment partnerships and the businesses they have subsequently gone on to run.

Keep it simple

Buffett and Munger always have fascinating things to say, but, in my opinion, their most informative advice is the simple stuff. They are firm believers that investors don't need to overcomplicate ideas and introduce things like spreadsheets into investment analysis. Instead, they like to keep things simple, doing deals with a handshake and usually without a contract.

One of the reasons why these two investment geniuses like to keep things simple is because they have realized how uncertain the world is. They don't use spreadsheets because they know that trying to predict company earnings down to the last cent several years out is impossible. And trying to employ experts to do just that will also lead you down a dangerous path - experts will only tell you what you want to hear.

1994 meeting

Buffett and Munger were both advocating for this approach as far back as 1994.

At the 1994 Berkshire annual meeting, one shareholder asked the duo how they go about evaluating the long-term competitive advantage, business economics and consumer behavior of companies.

After giving a brief lecture on the power of brands, Buffett said:

"Some businesses are a lot easier to understand than others. And Charlie and I don't like difficult problems. I mean, we — if something is hard to figure, you know, we'd rather multiply by three than by pi. I mean, it's just easier for us."

Munger then joined in the conversation, adding:

"Well, that is such an obvious point. And yet so many people think if they just hire somebody with the appropriate labels, they can do something very difficult. That is one of the most dangerous ideas a human being can have. All kinds of things just intrinsically create problems.

The other day I was dealing with a problem and I said, this thing — it's a new building — and I said this thing has three things I've learned to fear: an architect, a contractor and a hill.

And — if you go at life like that, I think you, at least, make fewer mistakes than people who think they can do anything by just hiring somebody with a label."

Buffett's right-hand man went on to add, "You don't have to hire out your thinking if you keep it simple."

Not many people know that as well as his investment in Berkshire and managing the Daily Journal Corp. (NASDAQ:DJCO), Munger owns a number of real estate projects. This seems to be what he was referring to in the question-and-answer session.

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Working around the problem

The insight isn't particularly complicated, though I believe it is highly informative. Keeping a project simple is not intuitive.

As investors, we think we can gain an edge over the market by employing complicated analysis or lots of data. On some occasions, this might be true. But for the majority of the time, increasing complexity only increases the number of things that can go wrong.

Investors have to deal with a range of uncertainties and is it just not possible to establish the answer to some of these questions. As Munger explained, the best way to avoid having to deal with these issues is to avoid them altogether. Extremely straightforward advice from one of the world's most celebrated thinkers.

Disclosure: The author owns shares of Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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