Warren Buffett, the greatest investor is said to be highly influenced by this one man other than Benjamin Graham and Philip Fisher:
This man is none other than his partner, Charlie Munger.
In the book, Poor Charlie’s Almanack, the investing principles are highlighted. We would like to share it with you below:
1. Risk – All investment evaluations should begin by measuring risk, especially reputational.
- Incorporate an appropriate margin of safety
- Avoid dealing with people of questionable character
- Insist upon proper compensation for risk assumed
- Always beware of inflation and interest rate exposures
- Avoid big mistakes; shun permanent capital loss
2. Independence – “Only in fairy tales are emperors told they are naked.”
- Objectivity and rationality require independence of thought
- Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
- Mimicking the herd invites regression to the mean (merely average performance)
3. Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights.”
- Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
- More important than the will to win is the will to prepare
- Develop fluency in mental models from the major academic disciplines
- If you want to get smart, the question you have to keep asking is “why, why, why?”
4. Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom.
- Stay within a well-defined circle of competence
- Identify and reconcile disconfirming evidence
- Resist the craving for false precision, false certainties, etc.
- Above all, never fool yourself, and remember that you are the easiest person to fool
- “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”
5. Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions.
- Determine value apart from price; progress apart from activity; wealth apart from size
- It is better to remember the obvious than to grasp the esoteric
- Be a business analyst, not a market, macroeconomic, or security analyst
- Consider totality of risk and effect; look always at potential second order and higher level impacts
- Think forwards and backwards – Invert, always invert
6. Allocation – Proper allocation of capital is an investor’s number one job.
- Remember that highest and best use is always measured by the next best use (opportunity cost)
- Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
- Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven
7. Patience – Resist the natural human bias to act.
- “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
- Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
- Be alert for the arrival of luck
- Enjoy the process along with the proceeds, because the process is where you live
8. Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction.
- Be fearful when others are greedy, and greedy when others are fearful
- Opportunity doesn’t come often, so seize it when it comes
- Opportunity meeting the prepared mind; that’s the game
9. Change – Live with change and accept unremovable complexity.
- Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
- Continually challenge and willingly amend your “best-loved ideas”
- Recognize reality even when you don’t like it – especially when you don’t like it
10. Focus – Keep things simple and remember what you set out to do.
- Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
- Guard against the effects of hubris (arrogance) and boredom
- Don’t overlook the obvious by drowning in minutiae (the small details)
- Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
- Face your big troubles; don’t sweep them under the rug
In the end, it comes down to Munger’s most basic guiding principles, his fundamental philosophy of life:Preparation. Discipline. Patience. Decisiveness.
Are these principles already embedded into your investments?
To your dreams,
Mind Kinesis Research Team