“The fishing tackle manufacturer I knew had all these flashy green and purple lures. I asked, ‘Do fish take these?’
‘Charlie’, he said, ‘I don’t sell these lures to fish.'”
–Charlie Munger
LESSONS AND LEARNING
Hello everyone.
For those who have followed this blog for a while, you know that one of my earliest posts was about the Berkshire Hathaway annual meeting featuring Warren Buffett and Charlie Munger. Both were members of the Forbes 400 richest people in the US at that time.
That annual meeting was unlike anything I had ever seen. Both men answered unscripted questions for six or seven hours. They cracked jokes. And they managed to explain complex financial ideas with great clarity. They did not try to hide their mistakes.
In other words, I got to see Charlie Munger in his heyday.
And, as most of you know, Charlie Munger died a few weeks ago at 99. It was the end of an era, and I will miss seeing him at the meeting.
This post is about Munger and some of the life and financial lessons I learned from him. I did not know him personally, but I admired him from some of the far seats in the stadium where the annual meeting was held. And I read his books and interviews and followed him avidly.
Some of these admissions about my initial lack of knowledge are embarrassing as I look back at them. But I would not have corrected my thinking without Munger as my unofficial teacher.
LESSON ONE: TRANSPARENCY AND OBJECTIVITY GO TOGETHER—DON’T ACCEPT ANYTHING LESS
I am a fan of openness and transparency–just as I observed at the annual meeting. The willingness to share, avoid excuses, and admit mistakes is a hallmark of people I admire. That is objectivity at its finest.
At one point, I believed a bit in the man-behind-the-curtain mysterious process for investing. Not anymore.
Charlie: “I spent a lifetime trying to avoid my own mental biases. A.) I rub my own nose into my own mistakes. B.) I try and keep it simple and fundamental as much as I can. And, I like the engineering concept of a margin of safety. I’m a very blocking and tackling kind of thinker. I just try to avoid being stupid.”
LESSON TWO: IF SOMETHING IS CHEAP, THAT DOES NOT AUTOMATICALLY MAKE IT GOOD
In my family, if you could get a 1958 Studebaker carburetor for cheap, you bought it. You just stored it in the garage for when you needed it.
With time, it might rust over. It might freeze up. Often, it would disintegrate after a few years.
But hey, you never knew when you were going to need one.
The price was cheap, so that made it ok.
Finally, I learned that a cheap price was not always a good deal.
Warren Buffett learned the same basic principle from Charlie. Before Charlie’s arrival, he would invest in “cigar butt” companies. They were inexpensive, and their stock price was less than their value. It was a bit like purchasing a cigar butt for a cheap price because there were still a few puffs on it. But the companies themselves did not have good prospects.
Charlie: “So when he (Buffett) started looking for investment values in great businesses that were temporarily under pressure, it changed everything for the better. Now we could scale up to the big time.”
LESSON THREE: MAKING MONEY IS NOT ALWAYS ABOUT TAKING CHANCES
Before hearing Charlie and Warren, I believed many successful people took a lot of risks to get rich. And sometimes that is true–but not always.
I had the crazy idea that if a venture had little risk, there was probably little profit, either. Or if something was down and out, I should invest in it because it was probably undervalued.
It was a blind devotion to finding cheap underdogs that were risky.
Munger was completely different. He was risk averse and wanted a sure thing and quality at a cheap price.
He was also a critic of pie-in-the-sky thinking.
Charlie: “When any guy offers you a chance to earn lots of money without risk, don’t listen to the rest of his sentence.”
LESSON FOUR: YOU DON’T HAVE TO KNOW ABOUT EVERYTHING; YOU HAVE TO KNOW WHAT YOUR LIMITS ARE
At one point in my life, I felt I had to prove myself. And, that need spurred me to many achievements, but also down many roads where the proving was more important than the results.
It was a scattered approach. At its worst, it was a little like picking fights with schoolyard bullies to prove you are tough.
Charlie was a big believer in achieving by proving yourself–but was more pragmatic and focused on achieving results. He did it by 1) staying within his circle of competence and 2) learning constantly.
Charlie: “We recognized early on that very smart people do very dumb things, and we wanted to know why and who, so that we could avoid them.”
“…knowing what you don’t know is more useful than being brilliant.”
“We have three baskets for investing: yes, no and too tough to understand.”
LESSON FIVE: BE CAREFUL OF FORTUNETELLERS
I have written at length about this subject. Many people use astrologers for financial advice. Even more are inclined to trust financial advisors with beards.
I wish I were making this up.
As one wag once put it, making predictions is difficult, especially about the future.
Charlie: “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.“
LESSON SIX: BASIC DOWN TO EARTH VALUES LIKE HONESTY AND RELIABILITY CAN BUILD WEALTH—THOSE HOMESPUN VALUES ARE OFTEN THE HALLMARKS OF THE SUCCESSFUL
Before listening to Charlie, I subscribed to the theory that those who accumulate great wealth probably committed fraud somewhere. And, of course, that is true sometimes.
But it is not always true. There are far more honest and common ways of doing well financially. And that is how most people make it.
I eventually realized the power of 1) compound interest, 2) being reliable and honest for a long time (helpful in staying employed), and avoiding mistakes, which were powerful wealth-building forces over a lifetime. Combining these three aspects can lead to excellent financial results. See here.
Charlie: “You don’t have a lot of envy, you don’t have a lot of resentment, you don’t overspend your income, you stay cheerful in spite of your troubles, you deal with reliable people and you do what you’re supposed to do. All these simple rules work so well to make your life better.”
CONCLUSION
Rest in peace, Charlie. And thanks for all of the lessons.
My life is better because of you.
Disclaimer: consult with a financial fiduciary before taking any steps outlined here. Not all advice may be suitable for your circumstances or investment style.
Image: Nick Webb
License: Wikimedia Commons (cropped)