One of our favorite investors here at The Acquirer’s Multiple is Charles Munger. Over the years Munger has provided us with a number of investing gems and one of the best sources of Munger’s quotes can be found in the book – Poor Charlie’s Almanack. While there are hundreds of Mungerisms in the book I picked out twenty five timeless investing lessons, many of which happened to also be in the best investment newsletter I’ve ever had the pleasure of being a part of.
Here’s an except from the book:
1. There are two kinds of businesses: The first earns twelve percent, and you can take the profits out at the end of the year. The second earns twelve percent, but all the excess cash must be reinvested-there’s never any cash. It reminds me of the guy who sells construction equipment-he looks at his used machines, taken in as customers bought new ones, and says, “There’s all of my profit, rusting in my yard.” We hate that kind of business.
2. If mutual fund directors are independent, then I’m the lead character in the Bolshoi Ballet.
3. If you take the best text in economics by Mankiw, he says intelligent people make decisions based on opportunity costs-in other words, it’s your alternatives that matter. That’s how we make all of our decisions. The rest of the world has gone off on some kick-there’s even a cost of equity capital. A perfectly amazing mental malfunction.
4. If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles, and when opportunities came along, you pounced on them with vigor.
5. Our game is to recognize a big idea when it comes along, when one doesn’t come along very often. Opportunity comes to the prepared mind.
6. People who have loose accounting standards are just inviting perfectly horrible behavior in other people. And it’s a sin, it’s an absolute sin. If you carry bushel baskets full of money through the ghetto and made it easy to steal, that would be a considerable human sin because you’d be causing a lot of bad behavior, and the bad behavior would spread. Similarly, an institution that uses sloppy accounting commits a real human sin, and it’s also a dumb way to do business.
7. To say accounting for derivatives in America is a sewer is an insult to sewage.
8. One of the key elements to successful investing is having the right temperament-most people are too fretful; they worry too much. Success means being very patient, but aggressive when it’s time. And the more hard lessons you can learn vicariously rather than through your own hard experience, the better.
9. Our approach has worked for us. Look at the fun we, our managers, and our shareholders are having. More people should copy us. It’s not difficult, but it looks difficult because it’s unconventional – it isn’t the way things are normally done.
10. The idea that it is hard to find good investments, so concentrate in a few, seems to me to be an obviously good idea. But ninety-eight percent of the investment world doesn’t think this way. lt’s been good for us-and you-that we’ve done this.
11. There are two types of mistakes: 1) doing nothing, what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.
12. Lumpy results and being willing to write less insurance business if market conditions are unfavorable … that is one of our advantages as an insurer we don’t give a damn about lumpy results. Everyone else is trying to please Wall Street. This is not a small advantage.
13. If you’re going to be an investor, you’re going to make some investments where you don’t have all the experience you need. But if you keep trying to get a little better over time you’ll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work. and practice. It’s like playing golf-you have to work on it.
14. The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you are paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor. We just keep our head down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.
15. People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.
16. I think there’s something to be said for developing the disposition to own stocks without fretting. [But] temperament alone won’t do it. You need a lot of curiosity for a long, long time.
17. I think there’s some mythology in this idea that I’ve been this great enlightener of Warren. He hasn’t needed much enlightenment. But we know more now than five years ago.
18. I’m glad we have insurance, though it’s not a no-brainer, I’m warning you. We have to be smart to make this work.
19. How can professors spread this [nonsense that a stock’s volatility is a measure of risk]? I’ve been waiting for this craziness to end for decades. It’s been dented, but it’s still out there.
20. We believe there should be a huge area between everything you should do and everything you can do without getting into legal trouble. I don’t think you should come anywhere near that line. We don’t deserve much credit for this. It helps us make more money. I’d like to believe that we’d behave well even if it didn’t work. But more often, we’ve made extra money from doing the right thing.
21. You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have that cast of mind, you’re destined for failure even if you have a high l.Q.
22. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing.
23. It is occasionally possible for a tortoise, content to assimilate proven insights of his best predecessors, to outrun hares that seek originality or don’t wish to be left out of some crowd folly that ignores the best work of the past. This happens as the tortoise stumbles on some particularly effective way to apply the best previous work, or simply avoids standard calamities. We try more to profit from always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
24. If you have competence, you pretty much know its boundaries already. To ask the question [of whether you are past the boundary] is to answer it.
25. It’s hard to sit here at this annual meeting, surrounded by smart, honorable stockbrokers who do well for their clients, and criticize them. But stockbrokers, in toto, will do so poorly that the index fund will do better.
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