Charlie Munger died yesterday morning (November 28, 2023) at age 99. He’s the lesser-known half of the partnership team that built Berkshire Hathaway. Prior to that, he was a lawyer, before giving up law to run his own investment partnership.
He started the partnership of Wheeler, Munger & Company in 1962. It was wound up in 1975. Back-to-back 31% losses in 1973 and 1974 made investors squeamish and demanding their capital. Yet, despite the losses, Munger outperformed the market, earning a 19.8% annual return over the 14-year period (compared to 5% for the Dow).
Munger teamed up with Warren Buffett three years later (1978) as vice chairman of Berkshire. In his spare time, he chairs the Daily Journal, designs buildings, and plays the part of a walking, talking encyclopedia. He’s a learning machine who built his own system of mental models to reduce errors in this complex world. His unique view of uncommon sense, as he calls it, can be seen in how he invests.
Extreme concentration and inaction best describe Munger’s approach. He’s comfortable with only three or four wonderful businesses in his portfolio. That’s far short of the popular broad diversification strategies recommended today.
Except, extreme concentration is not for everyone. First, finding a handful of wonderful companies worth owning is never as easy as it sounds. Someone not skilled in the art is likely to find awful companies more often than wonderful ones.
Second, it takes a particular mindset to own a handful of stocks and do nothing because the byproduct of concentrated portfolios is higher volatility. Most people are driven to act when the market gets crazy. Munger, however, does nothing and accepts it.
The good news is that you don’t need to invest exactly like Munger to be successful. The best part of investing is the ability to learn how the greats did it. You can learn from their successes and failures, borrow their ideas, and make them your own.
However, it might be Munger’s multidisciplinary mindset that offers the greatest lesson. He dedicated his life to learning and improving one day at a time — compounding wisdom. And he generously shared so much of it over the years.
With Charlie’s passing, I thought this was worth expanding on and reposting. He was a teacher, above all else, for anyone open to learning.
On Traits of 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. (Source)
On His Investment Philosophy
Understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things. (Source)
***
Value investing, the way I conceive it, is always wanting to get more value than you pay for when you buy a stock and that approach will never go out of style… I think all good investing is value investing, and it’s just that some people look for values in strong companies and some look for values in weak companies, but every value investor tries to get more value than he pays for. (Source)
***
We want to buy something that’s intrinsically a very good business, meaning that an idiot could run it and it would do all right. Then we want that business, which an idiot could run successfully, to have a wonderful person in it running it. If we have a wonderful business with a wonderful person running it, that really turns us on, and it works very well. Now, we do make exceptions, but not many. It’s a pretty simple philosophy. (Source)
***
I had a friend when I practiced law and he said, “If it won’t stand a little mismanagement, it’s not much of a business.” We like businesses that stand a lot of mismanagement but don’t get it. That’s our formula. (Source)
***
If you have a pharmaceutical company and you’re trying to guess what new drug is going to be invented, I’ve got no advantage. Other people are better in that than I am. I don’t play in a game where the other people are wise and I am stupid. I look for a place where I’m wise and they’re stupid. And believe me, it works better… That’s my philosophy, and I think you have to know the edge of your own competency. You have to kind of know “This is too tough for me. I’ll never figure this out.” I’m very good at knowing when I can’t handle something. (Source)
***
A place like Berkshire Hathaway or even the Daily Journal, we’ve done better than average. And now there’s a question. Why has that happen? And the answer is pretty simple. We tried to do less. We never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about canned soup and aerospace and utilities and so on and so on and so on. We never had that dream. We never thought we could get really useful information on all subjects like Jim Cramer pretends to have. And we always realized that if we worked very hard, we can find a few things where we were right. And the few things were enough. And that, that was a reasonable expectation. That is a very different way to approach the process. (Source)
***
There are huge advantages for an individual to get into a position where you make a few great investments and just sit back and wait: You’re paying less to brokers. You’re listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2, or 3 percentage points per annum compounded. (Source)
***
It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it — who look and sift the world for a mispriced bet that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple. (Source)
***
You’re not talking to a great exiter. My Berkshire, I bought in 1966… I’ve been a good picker. But other people know more about exiting. I’m trying never to have to exit… I think there’s working styles of investments that work well with constant exits. It just hasn’t happened to been my forte. So I’m no good at exits. I don’t like even looking for exits. I’m looking for holds. (Source)
***
Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result. So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects. (Source)
***
I did not make my fortune, such as it is, by predicting macroeconomic changes better than other people. What Buffett and I did was we bought things that were promising… Sometimes we had a tailwind from the economy and sometimes we had a headwind. Either way we just kept swimming. That’s our system. (Source)
***
Averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But, very rarely do you find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business. (Source)
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In my whole adult life, I’ve never hoarded cash, waiting for better conditions. I’ve just invested in the best thing I could find. (Source)
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Beating the market averages, after paying substantial costs and fees, is an against-the-odds game; yet a few people can do it, particularly those who view it as a game full of craziness with an occasional mispriced something or other. (Source)
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Part of the Berkshire secret is that when there’s nothing to do, Warren is very good at doing nothing. (Source)
On the Stock Market as a Pari-Mutuel System
The model I like to sort of simplify the notion of what goes on in a market for common stocks is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.
Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it’s not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it’s very hard to beat the system…
In the stock market, some railroad that’s beset by better competitors and tough unions may be available at one-third of its book value. In contrast, IBM in its heyday might be selling at 6 times book value. So it’s just like the pari-mutuel system. Any damn fool could plainly see that IBM had better business prospects than the railroad. But once you put the price into the formula, it wasn’t so clear anymore what was going to work best for a buyer choosing between the stocks. So it’s a lot like a pari-mutuel system. And, therefore, it gets very hard to beat. (Source)
On Handling Booms and Busts
I’ve had my Berkshire stock decline by 50% three times. It doesn’t bother me that much. That’s just a natural consequence of adult life, properly lived. If you have my attitude, it doesn’t really matter. I always liked Kipling’s expression in that poem called If. And he said, “Success and failure.” He says, “Treat those two imposters just the same.” You just roll with it. (Source)
***
You get crazy booms. Remember the Dotcom boom? When every little building in Silicon Valley rented at a huge price and a few months later, about a third of them were vacant. There are these periods in capitalism and I’ve been around for a long time and my policy has always been to just ride them out… What shareholders actually do is a lot of them crowd into buying stocks on frenzy, frequently on credit because they see that they’re going up, and of course that’s a very dangerous way to invest. I think that shareholders should be more sensible and not crowd into stocks and just buy them just because they’re going up and they like to gamble. (Source)
***
Everything in life has dangers. Since it’s so obvious that investing in great companies works, it gets horribly overdone from time to time. In the “Nifty-Fifty” days, everybody could tell which companies were the great ones. So they got up to 50, 60, and 70 times earnings. And just as IBM fell off the wave, other companies did, too. Thus, a large investment disaster resulted from too high prices. And you’ve got to be aware of that danger. (Source)
***
I didn’t get rich by buying stocks at a high price earnings multiples in the midst of crazy speculative booms, and I’m not going to change. (Source)
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If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it. And so my lesson to all of you is conduct your life so that you can handle the 50% decline with aplomb and grace. Don’t try to avoid it. It will come. In fact, I would say if it doesn’t come, you’re not being aggressive enough. (Source)
On Creative Destruction
The Harvard Business School, when it started out way early, they started out with a history of business and they’d take you through the building of the canals and the building of the railroads and so on and so on and you saw the ebb and flow of industry and the creative destruction of economic changes and so on and so on. It was a background which helped everybody. Of course, what I’m saying is that if I were teaching business, I would start the way Harvard Business School did a long time ago…
If you stop to think about it, business success long-term is a lot like biology and in biology, what happens is the individuals all die and eventually so do all the species and capitalism is almost as brutal as that. Think of what’s died in my lifetime. Just think of the things that were once prosperous that are now in failure or gone. Whoever dreamed when I was young that Kodak and General Motors would go bankrupt? It’s incredible what’s happened in terms of the destruction. Of course, that history is useful to know. (Source)
***
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 substantial outcome. 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…
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…
Some people try to get on the cutting edge of change. So they’re destroying other people instead of being destroyed themselves… Other people, like me, do some of that, joining things like Apple. And in some ways, we just try to avoid big change we think is likely to hurt us. (Source)
***
The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you. And most people do not get this straight in their heads. But a fellow like Buffett does. (Source)
On Mistakes and Avoiding Stupidity
We were very lucky early. The habit of buying horrible businesses that were really cheap, gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom. That early experience was so horrible – fixing the unfixable – that we were very good at avoiding it thereafter. So I would argue our early stupidity helped us… But you have to try it for a long time and fail and have your nose rubbed in it to really understand it. (Source)
***
I’m constantly making mistakes where I can, in retrospect, realize that I should have decided differently. And I think that that is inevitable because it’s difficult to be a good investor. I’m pretty easy on myself these days. I’m satisfied with the way things have worked out and I’m not gnashing my teeth that other people are doing better. I think that the methods that I’ve used, including the checklist, are the correct methods. (Source)
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I have made bad business decisions. You can’t live a successful life without doing some difficult things that go wrong. That’s just the nature of the game. And you wouldn’t be sufficiently courageous if you tried to avoid every single reverse. (Source)
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I’m a very blocking and tackling kind of a thinker. I just try and avoid being stupid. And I have a way of handling a lot of problems. I put them on what I call my “too hard pile” and I just leave them there. I’m not trying to succeed in my too hard pile… I sometimes get into things that are too hard, and when that happens, I fail. (Source)
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A good bit of the Munger fortune came from liquidating things we originally purchased because we were wrong. Of course, you have to learn to change your mind when you’re wrong. And I actually work at trying to discard beliefs. And most people try and cherish whatever idiotic notion they already have, because they think if it’s their notion, it must be good. And I think, of course you want to be re-examining what you previously thought, particularly when disconfirming evidence comes through. And there’s hardly anything more important than being rational and objective. (Source)
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How do you scramble out of your mistakes without them costing too much? And we’ve done some of that too. If you look at Berkshire Hathaway, think of its founding businesses. A doomed department store, a doomed New England textile company, and a doomed trading stamp company. Out of that came Berkshire Hathaway. Now, we handled those losing hands pretty well when we bought into them very cheaply. But of course, the success came from changing our ways and getting into the better businesses. It isn’t that we were so good at doing things that were difficult. We were good at avoiding things that were difficult. Finding things that are easy. (Source)
***
I almost worship reason… The people I know that are good, they feel you have a duty to become as wise as you can be by constantly studying things and thinking about it. And that angle is partly temperamental. And partly, it was family example in my case. My Grandfather Munger, whose name I bear, was a self-made, self-educated man. He was a damn genius. And I watched him, and his life worked pretty well. He was not making many mistakes. (Source)
***
Envy is such a stupid thing to have because you can’t possibly have any fun with that particular sin. Who in the hell ever had any fun in envy? What good could envy possibly do for you? And somebody is always going to be doing better than you are. It’s really stupid. My system in life is to figure out what’s really stupid and then avoid it. It doesn’t make me popular, but it prevents a lot of trouble. (Source)
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If I had to name one factor that dominates human bad decisions, it would be what I call denial. If the truth is unpleasant enough, people kind of — their mind plays tricks on them, and they think it isn’t really happening. And of course, that causes enormous destruction of business. (Source)
***
If you’re just not crazy, you have a big advantage over 95% of the people, because most people have all kinds of crazy patches. And if you just are consistently not crazy, you get a big advantage in life. Then if you’re patient and a gratification deferrer, in addition to being not crazy, then it’s practically a cinch. (Source)
***
The single most important thing, if you want to avoid a lot of stupid errors, is knowing where you’re competent and where you aren’t. Knowing the edge of your own competency. And that’s very hard to do because the human mind naturally tries to make you think you’re way smarter than you are. (Source)
***
At times in my life, I have put myself to a standard that I think has helped me. I think I’m not really equipped to comment on this subject until I can state the arguments against my conclusion better than the people on the other side. If you do that all the time, if you’re looking for disconfirming evidence and putting yourself on a grill, that’s a good way to help remove ignorance. (Source)
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We all start out stupid, and we all have a hard time staying sensible. You have to keep working at it. (Source)
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Warren and I are better at tuning out the standard stupidities. We’ve left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error. (Source)
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I was raised by people who thought it was a moral duty, be as rational as you could possibly make yourself. And that notion, which was just inherited basically from my genes and my surroundings, it served me enormously well. It’s like Kipling said, “If you can keep your head when all around you are losing theirs.” It’s a big advantage. (Source)
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I think that many CEOs get carried away into folly. They haven’t studied the past models of disaster enough and they’re not risk-averse enough. (Source)
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Most good things have undesired “side effects,” and thinking is no exception. The best defense is that of the best physicists, who systematically criticize themselves to an extreme degree, using a mindset described by Nobel Laureate Richard Feynman as follows: “The first principle is that you must not fool yourself and you’re the easiest person to fool.” (Source)
***
If you’re going to live a long time, you have to keep learning. What you formerly knew is never enough. So if you don’t learn to constantly revise your earlier conclusions and get better, you are — I always use the same metaphor. You’re like a one-legged man in an ass-kicking contest. (Source)
***
I think a life properly lived is just learn, learn, learn all the time. I think Berkshire’s gained enormously from these investment decisions by learning through a long, long period. Every time you appoint a new person that’s never had big capital allocation experience, it’s like rolling the dice. We’re way better off having done it so long. But the decisions blend and the one feature that comes through is the continuous learning. (Source)
***
A lot of other people are trying to be brilliant and we’re just trying to stay rational. And it’s a big advantage. Trying to be brilliant is dangerous, particularly when you’re gambling. (Source)
On Incentives
I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.”… So what makes sense for the investor is different from what makes sense for the manager. And, as usual in human affairs, what determines the behavior are incentives for the decision maker. (Source)
On Luck
I did not intend to get rich. I wanted to get independent. And just overshot… Some of the overshooting was accidental… You can be very deserving, and very intelligent, and very disciplined, but there’s also a factor of luck that comes in to this thing. And the people who get the outcomes that seem extraordinary, are the people who have discipline, and intelligence, and good virtue, plus a hell of a lot of luck. Why wouldn’t the world work like that? So you shouldn’t give credit for the unusual. (Source)
***
It’s so simple to spend less than you earn, and invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, et cetera, et cetera, and do a lot of deferred gratification because you prefer life that way. And if you do all those things, you are almost certain to succeed. And if you don’t, you’re going to need a lot of luck. And you don’t want to need a lot of luck. You want to go into a game where you’re very likely to win without having any unusual luck. (Source)
On a Happy Life
The first rule of a happy life is low expectations. That’s one you can easily arrange. And if you have unrealistic expectations, you’re going to be miserable all your life. And I was good at having low expectations, and that helped me. And also, if when you get reverses, if you just suck it in and cope, that helps if you don’t just fretfully stew yourself into a lot of misery. (Source)
***
Give a whole lot of things a wide berth… Crooks, crazies, egomaniacs, people full of resentment, people full of self pity, people who feel like victims, there’s a lot of things that aren’t going to work for you. Figure out what they are and then avoid them like the plague. (Source)
Related Reading:
More Charlie Munger Quotes
Charlie Munger’s Tendencies of Human Misjudgment
Charlie Munger’s Guaranteed Misery
Charlie Munger’s Art of Stock Picking (and Worldly Wisdom)