Finance

Billionaire Charlie Munger’s five rules for investing

Charlie Munger

Charles Munger is an American billionaire investor and businessman who helped Warren Buffett make Berkshire Hathaway one of the best investment companies in history.

As vice chairman of Berkshire Hathaway, he is Warren Buffett’s closest partner and right-hand man in the business.

Munger was born in Buffett’s hometown, Omaha, Nebraska, and as a teenager, worked at Warren Buffett’s grandfather’s grocery store, Buffett & Son.

After school, he enrolled in the University of Michigan but dropped out to serve in the U.S. Army Air Corps.

Following his military service, Munger completed a Juris Doctor (J.D.) degree at Harvard Law School.

Munger loved playing cards as a young man, through which he learned an important lesson:

Fold early when the odds are against you, and if you have a big edge, back it heavily because you don’t get a big edge often.

After practising as a lawyer and building his own real estate attorney firm, he left the legal profession to concentrate on managing investments.

He ran an investment partnership from 1962 to 1975, which generated compound annual returns of 19.8%, outperforming the Dow’s 5.0% annual appreciation over the period.

Munger joined Warren Buffett at Berkshire Hathaway, where he became vice chairman in 1978, a position he still holds today.

Buffett said he knew Munger was the kind of guy he would like and learn from.

Charlie Munger’s Rules for Investing

Over the years, Munger has shared many ideas on investing and avoiding common pitfalls which can lose you money.

At the centre of his business philosophy is ethics. “Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail,” he said.

He also advised only investing in businesses you understand and those with a durable competitive advantage.

Other important factors include that a company’s management must have integrity and talent, and you must be able to get it at a fair price.

“A great business at a fair price is superior to a fair business at a great price,” Munger said.

Investing specialist Daniel Mnke published a summary of Munger’s rules for life and investing, listed below.

Charlie Munger’s Rules for Life and Investing

  1. Remembering isolated facts is useless. Focus on understanding underlying concepts and then attach the facts.
  2. No matter your intelligence, you’ll make silly mistakes. Learn as much about human misjudgement as possible.
  3. Learn to apply basic math in everyday situations.
  4. Avoid applying the same models to solve different problems. Have a repertoire of many different mental models.
  5. Avoid all feelings of envy, resentment, and greed.

Rules for Investing

  1. If the opportunity isn’t completely obvious, it’s not a great one.
  2. Managements are important. But, averaged out, betting on the quality of a business is better than betting on the quality of management.
  3. Successful investors or successful betters all have one thing in common. They bet very seldom.
  4. Investment success is not in the buying or selling but in the waiting.
  5. All long-term successful companies eventually experience advantages of scale.

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