Charlie Munger (Trades, Portfolio), the right-hand man of Warren Buffett (Trades, Portfolio) and former chairman of the Daily Journal Corp. (DJCO, Financial), is known for his wisdom and powerful insights on life and investing. In a 2011 interview at the Ross School of Business, the guru discussed economics, Wall Street, life principles and success. To follow are some highlights.
Macroeconomic predictions
Munger noted he and Buffett do not use macroeconomic predictions as the main thesis for an investing case. Rather, they are “bottom-up investors, " which means they analyze individual companies. The duo “swim as confidently as” they can, whether or not the tide is with them. Munger said he does not try and “predict the tides” as they tend to hold stocks through a variety of conditions. Since there are “good tides and bad tides,” investors must make adjustments to both.
He also highlighted the poem "If" by Rudyard Kipling. It states, “If you can keep your head when everyone else is losing theirs...you’ll be a man." Munger believes this is great advice for all investors, especially during a stock market crash. Given the recent recession and depressed market conditions in 2022, this advice is particularly useful.
Invest in stocks or gold?
Munger believes the stock market is still the best place be invested. He is not a fan of gold since “it doesn’t produce anything.” Buffett has indicated he shares these opinions in the past and said farmland is a much better investment as people will always need to eat.
When investing in stocks, Munger said he believes investors should think about their own “opportunity cost” and if they may need the money in the short term. I personally believe at least a five-year time horizon is necessary for most value investments. If you need the money in one year, you may reluctantly sell at the bottom. Munger predicted more “booms and busts” ahead, so it makes sense to remember the goal is to buy low and sell high, not the other way around.
How to get what you want
The guru is great at dispensing advice and believes the best way to get what you want “is to deserve” what you want. If you keep doing the right thing, then you are improving the odds of success.
Munger also quoted Kipling again, saying “treat success and failure the same” and keep “plugging away.” As the old saying goes, persistence is what enables drops of water to cut through rock and create a river over thousands of years.
Two things to never do
Throughout Munger's long life, he has highlighted two things never to do. The first is “feeling sorry for yourself” as that will not help you no matter how bad the situation. In an extreme case, he said that even if your child is dying of cancer, feeling sorry for yourself will not help the situation.
The second thing you should avoid doing is being envious as this is also not helpful to your life. The reason humans can feel jealous is that it acts as a motivator for use to achieve more resources or improve our relationships. But in today’s modern world, especially with social media, envy is common, but is usually against a false narrative.
Munger humorously added that “envy is the only sin you can’t have any fun with.”
Embrace mistakes
Since it is only human nature, Munger also believes investors will always make mistakes. The goal is to just “make fewer mistakes than most” and being rational helps with this. This goes for both making psychological and investing mistakes. As the old saying goes, “failure is feedback” and just an opportunity to learn.
Should you do impact investing?
Impact investing involves investing with the idea to produce both financial and social returns. An example is ESG (environmental, social and governance) funds, which have become immensely popular in recent years. There has also been a lot of criticism of “greenwashing,” which is when companies talk green without the action to back it up.
Munger personally prefers to separate the financial and social issues. He believes it is better to first focus on generating financial returns and then give to charity separately. Bill Gates (Trades, Portfolio) has followed this model through his outstanding success with Microsoft (MSFT, Financial) as well as the Bill and Melinda Gates Foundation.
Wall Street antics
Wall Street attracts “competitive people” and when combined with “easy money,” Munger said it can have disastrous consequences. For example, through the sale of “shoddy mortgages” during the financial crisis. He added, “Power corrupts and absolute power corrupts absolutely.”
Munger believes many accountants have “overdosed on mathematics” and many do not look at the big picture. The accountant needs to be like the “referee in soccer” as a system is “perverse when good people go bad.” That is when you need make changes to the system.
People follow incentives
Munger believes people follow incentives. Thus, if you know the incentives, you will know the outcome. This could be management bonuses for taking risky behavior, as we saw in the financial crisis. If there is a “big whirlpool,” you want to avoid it with a large margin of safety. The guru used that analogy to explain negative cultures and how best to avoid them.
In careers or when running businesses, the investor advised that you should find the people you admire and offer to work for them. Buffett followed this same tactic in his early years by reaching out to Benjamin Graham, the father of value investing.
Global warming and renewable energy
At the time of the interview, Munger believed “global warming was not the main problem.” Rather, he believed the main problem was “using up the hydrocarbons too quick” as population growth will require more oil to fuel the economy.
However, he did see vast potential in solar energy and improving battery technology.
The baton is passed
Munger's “iron rule of life” is that any country in a leadership position will eventually “pass on the baton.” For example, Athens will not be the leader of civilization again, neither will Rome or London. According to Munger, the next country the baton will likely be passed to is China. For investors, China is a tempting place to invest due to the large population and growing middle class. However, its government tends to be heavily involved with companies and, therefore, is a risk to investors.
Final thoughts
Despite being 98 years old, Munger continues to share his valuable wisdom with the masses. Investing is a game that is difficult in the short term, but with a long-term mindset and the right habits, true wealth awaits.
