Charlie Munger has a knack for delivering witty common-sense advice like this:
I’m a very blocking and tackling kind of thinker. I just try and avoid being stupid.
He shared some of his witticisms in an interview last month. Three of the more interesting highlights are below.
The first is Munger’s answer to the question: what traits are needed to be a great investor?
What makes a great investor?
I think great investors to some extent are like great chess players. They’re almost born to be investors…
Obviously you have to know a lot. But partly it’s temperament. Partly it’s deferred gratification. You got to be willing to wait. Good investing requires a weird combination of patience and aggression. And not many people have it. It requires a big amount of self-awareness and how much you know and how much you don’t know. You have to know the edge of your own competency. And a lot of brilliant people are no good at knowing the edge of their own competency. They think they’re way smarter than they are. And of course, that’s dangerous and it causes trouble…
Obviously, it helps to know the basic math of Fermat and Pascal. But everybody with any sense knows that stuff. But having the temperament where Fermat and Pascal are as much a part of you as your ear and nose, that’s a different kind of a person. I think it’s hard to teach that…
Everything Munger says is on the money. Temperament, patience, a willingness to wait, and knowing what you don’t know are important. He should know.
But the only way anybody finds out if they’re a good investor is by doing it. Reading a few books help.
But a book won’t tell you how you’ll feel amidst a 30% drawdown over the course of two weeks or during a euphoric bull market. It definitely won’t tell you how you’ll feel after your strategy falls short of its benchmark for the third year in a row. Nor will it tell you how you’ll react to it.
The only way anybody finds out how they handle gains, losses, and every other obstacle the market tosses at us is to open an account, deposit some money, and invest it. It won’t happen overnight. It might take a lifetime but experiencing real gains and losses is the only way to find out.
The two sides of tech innovation.
My first investment with my pitiful savings of a venturesome sort, I invested in a company right in Pasadena. And it was called William Miller Instruments. And I damn near lost all my money. It was hell on earth. We just barely squeaked out with a
But what did us in was the oscillograph that we’d invented, and we were so proud of, and we thought it was going to knock the world flat. Somebody invented magnetic tape without telling me and by the time we got the oscillograph ready to go to market, we
sold three. Three total, in the whole country. So technology is a killer as well as an opportunity. And my first experience had damn near killed me…
What that did for a long time was keep me out of venture capital on the edge of technology. I tried to avoid it.
Two lessons come out of Munger’s story. The first is this. The outcome of your first investment can make a big impression on how you view similar investment opportunities that follow it. Gains and losses can have a psychological impact on future investment decisions.
William Miller Instruments lasted all of four years and two months as a company. How much different would Munger’s investment history be if oscillographs had not been disrupted by other technology?
This brings us to the second lesson. New technology is often an innovation away from being disrupted itself. Which can be swift and costly for investors.
The life cycle of a business.
Over the long-term, big companies of America behave more like biology than they do anything else. In biology, all the individuals die and so do all the species. It’s just a question of time. And that’s pretty well what happens in the economy too. All the things that were really great when I was young have receded enormously. And new things have come up and some of them started to die. And that is what the long-term investment climate is and it does make it very interesting.
Look at what’s died — all of the department stores, all the newspapers, U.S. Steel. John D Rockefeller’s Standard Oil is a pale shadow of its former self. It’s just like biology. They have their little time and then they get clobbered.
This is probably the best way to think about the life cycle of businesses, in general. Most companies aren’t built to last forever. Unfortunately, companies don’t come with expiration dates either.
But the market adds a twist to this that creates opportunities for investors. Sometimes the market incorrectly prices a company’s stock as if it will last forever or as if it’s on its last breath.
The mispricing creates opportunities for investors once the market realizes it was wrong.