What Is The Secret To Charlie Munger ’s Success?Rupert Hargreaves
What is the secret to Charlie Munger’s success? There’s no easy answer to this question but Li Lu, writing in the foreword to the Chinese version of Poor Charlie’s Almanack, concludes that Charlie (and the roots of his success) has a lot in common with the Traditional Chinese Literati, the scholar-officials of Imperial China.
“The value system of the Literati” Lu writes, “was presented as one of self-improvement, the process of surpassing one’s self.” As Confucius wrote in The Higher Education:
“When the heart is right, the personal life is cultivated. When personal lives are cultivated, families becomes harmonious. When families are harmonious, government becomes orderly. And when government is orderly, there will be peace in the world.”
Literati pursued a journey of personal cultivation, increasing their knowledge and value. Lu believes that Munger follows a similar path. While Charlie is, at his core, a businessman he also “reads widely, is knowledgeable over a broad range of topics, is truly concerned about his own moral cultivation, and is ultimately concerned about society.”
You might be reading this wondering what it has to do with you, as the average investor who’s never going to rise to the same heights as Charlie Munger and, therefore, is never going to be able to influence society to the same degree.
Munger’s interest in the world around him and endless journey to improving his knowledge and self-understanding has helped him achieve his success. As Lu notes, Munger’s success has come from investing, which in itself has come from self-cultivation and learning. Without a broad understanding of the investing world and detailed knowledge of several industries, which form his circle of competence, Munger never would have been able to achieve the investing record that he has done. His desire for self-improvement is entirely at odds with the “power-for-money deals and ‘unwritten law’ transactions” that are rife on Wall Street and in China today.
Like many of the world’s wealthiest people, Munger lives an unexceptional life. Lu writes that he “lives life like a monk” and is still living in the same ordinary house he bought decades ago, only flies on economy trips and always arrives 45 minutes early for meetings. His chief pleasure is information, not money and this is why he has always been so keen to learn, better himself and try to educate others around him.
The average investor can learn from Munger’s way of approaching life, and replicate his strategy by following the Charlie Munger checklist featured in “Poor Charlie’s Almanack.” Here’s a condensed version:
“All investment evaluation should begin by measuring risk, especially reputational.”
Unlike Munger, who is a massive public figure, managing reputational risk is not crucial for the everyday investor. However, managing investment risk is. The key to being a successful investor ever the long-term is to limit losses and let winners run, investing only in those opportunities where the risk of permanent capital impairment is low. All risk should be measured and the risk/reward carefully considered.
To be successful in life, and successful as an investor, you need to form your own opinions and act on those opinions. Every individual has different strengths and weaknesses so, you are not going to be successful copying others. What may work for one person will not necessarily work for someone else. Do your own research, draw your own conclusions and build a life on your strengths not someone else’s.
“The only way to win is to work, work, work, and hope to have a few insights.”
There’s no easy way to be a successful investor or a thoughtful individual. You have to put in the work. Hopefully, over the long term, this will pay off.
Have intellectual humility
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”
Even the best and brightest acknowledge that they can’t know everything, but it’s their desire to learn more that keeps them ahead of the competition. It pays to have a modest or low view of one’s importance as this helps drive continual learning.
Warren Buffett is famous for his detailed and rigorous analysis of companies, which is one of the reasons why he has been able to avoid any significant failures over his career. Many other investors have not been so lucky because they have overlooked vital details. This should be avoided.
Allocate assets wisely
“Proper allocation of capital is an investor’s number one job”
If you want to generate the best return on your investment, it is essential that you have a sensible asset allocation, based on your situation and what you know understand about the financial world.
“Resist the natural human bias to act”
Investing is a marathon, not a sprint. Be patient, ignore day-to-day market moves and let the power of compounding do the heavy lifting over the long term.
“When proper circumstances present themselves, act with decisiveness and conviction”
If you are allocating assets sensibly and doing your research making decisive investment bets is a risk-free proposition. It should also lead to higher returns over time.
Be ready for change
You cannot predict the future, so do not try to. Be forceful and decisive in your ideas, but also accept that you must be willing to change if the investment case unfolds unfavorably.
Stay focused on what you set out to do. Investing is a marathon, not a sprint. Never underestimate the power of compounding on your wealth and knowledge.