Charlie Munger, the late vice-chairman of the multinational conglomerate, Berkshire Hathaway and a close friend of Warren Buffett left behind a legacy of immensely profound investment wisdom.
His ideals, philosophies and vision compiled in the book ‘Poor Charlie’s Almananck’ continue to guide professionals and aspirational investors throughout the globe. This book was first published in 2005. This book has been edited and compiled by Peter D. Kaufman.
Even Warren Buffett has applauded this book stating that, “This book is something of a publishing miracle, never advertised, yet year after year selling many thousands of copies from its internet site.”
This write-up is hence dedicated towards discussing seven enduring lessons from Charlie Munger’s teachings that still remain invaluable for everyone who aspires to learn and build a career in investing.
Embrace multidisciplinary thinking, build analytical skills
Munger conquered the use of a ‘latticework of mental models’ thus elaborating on the idea of building knowledge and analytical skills across several disciplines such as psychology, economics, engineering etc. Such an approach can go a long way to help investors make informed decisions.
This also helps individuals in understanding complex issues and systems and avoid narrow thinking. The basic idea in simple terms is to read and build as much knowledge as possible in various distinct subjects. So that this knowledge can be used later on to make correct investing, wealth creation and life decisions.
Understanding and expanding your circle of competence
Recognising one’s limitations is extremely important, Munger advises aspirational investors to follow and respect the invisible rules of investing and operate within their ‘circle of competence.’ This simply means that one should focus on areas that they understand well, whereas continuously aim at expanding this circle through learning, reading and calm knowledge building.
Understand what to avoid rather than what to do
Munger believed in the idea of inverting problems and then solving them diligently. The basic idea elaborated here is to focus on what to avoid rather than what to do before taking action. This unique method helps in identifying potential problems and pitfalls and results in better investment decisions.
Be calm, hold your ground and think long term
Calmness and patience is a virtue in investing. Munger was of the opinion that substantial profits are generated from holding investments over the long run. He was also not a fan of short term trading. This principle aligns with his strategic value investing thesis.
Focus on selecting quality businesses
Focusing on investing in quality businesses that have a solid management team, past performance history, robust profit margins, dominant peer position, strong fundamentals and ethical practices. Following this simple strategy was a cornerstone of Munger’s investing thesis. He preferred ‘wonderful businesses at fair prices’ over mediocre ones available at less lucrative valuations.
Clearly understand the power of compounding
Munger and Buffett both have always been keen admirers of compounding of wealth. The same point has been elaborated by Munger in this timeless book. He has highlighted the exponential benefits of compounding returns over time. That is why starting early and holding your ground can immensely boost the impact of compounding and foster epic wealth creation in your investing journey.
Overcome and avoid psychological biases
Understanding human behaviour and psychology along with its associated biases is crucial. Munger identified several cognitive biases that can impact and impair one’s judgement thus urging investors to be aware of these to make fair and rational decisions.
Conclusion
Hence, these timeless principles and words of wisdom from Poor Charlie’s Almanack offer invaluable guidance for investors aiming to build considerable wealth through calm and disciplined investing supported by knowledge based decision making.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Please consult a qualified financial advisor before making any investment decisions.
