Charlie Munger might not get quite as much attention as his business partner Warren Buffett. But the 96-year-old billionaire has given his fair share of brilliant advice to investors over his career. Here’s a selection of tips I think those beginning their stock market journey should take on board.
Don’t sweat the numbers (too much)
As a private investor up against paid professionals, it’s easy to assume you must perform a huge array of financial calculations to match their performance. Munger thinks otherwise. In his view, “people calculate too much and think too little.“
For Munger, finding a great business is as much about looking at it from a qualitative perspective as it is about the numbers. Why might the company rise above the competition? What’s the CEO’s plan to grow the company over the next five years? What are its biggest threats?
Taking a holistic approach will allow you to see things ratio-obsessed analysts might miss.
Dump the rubbish
Successful investing takes time and energy. We’ve finite amounts of both. Knowing this, Munger advocates being ruthless when looking for opportunities. “We have three baskets for investing: yes, no, and too tough to understand,” he’s said.
Linking in with Buffett’s idea of finding your circle of competence and staying there, Munger is quick to disregard weak businesses, or those whose models are overly complex.
On an anecdotal note, this is why I tend to give banking stocks a wide berth. For me, the potential profits aren’t worth the hassle of wadding through convoluted financial statements. Put, say, a video game developer in front of me, however, and I’m more interested. Here, the business model and financial statements are relatively easy to comprehend.
Many of the UK’s best fund managers use a similar strategy to Munger. Despite the many thousands of stocks available to him, Terry Smith says his investable universe is restricted to around 80 stocks. Even then, only 30 or so make it into the highly successful Fundsmith Equity Fund. Buy the best, discard the rest.
Be patient
One of the key tenets of Munger’s philosophy is only investing in things you can commit to for the long term. For him, “the big money is not in the buying and the selling, but in the waiting.“
Unfortunately, this is easier said than done. Thanks to online share-dealing, we’re able to pick up and jettison stocks on a whim, sometimes paying no commission. Add in a significant global event like the coronavirus pandemic and looking beyond the next few months is even tougher.
Learn to master your desire for immediate results and reap the rewards later down the line.
Question everything
It’s remarkably easy to fall in love with a stock, especially when it’s one that’s already making you money. Take a look at the excitement surrounding market darling Tesla, for example.
Munger, however, suggests investors remain vigilant and continually question their holdings. “You must force yourself to consider opposing arguments. Especially when they challenge your best-loved ideas.”
Fail to do as Munger advises and you open yourself up to confirmation bias — only searching for evidence that supports your thesis.
There’s nothing wrong with being confident in your stock picks, of course. Just be willing to change your mind — and your portfolio — if the facts change.
