"Charlie Munger is Berkshire Hathaway's Vice Chairman and Warren Buffett's Right Hand Man.  His Value Investing Techniques Have Consistently Beaten Market Indices By a Ratio of 4 To 1"

Introduction

Charlie Munger

Charlie Munger is probably best known as the partner of Warren Buffett and their highly successful company - Berkshire Hathaway.

Charlie Munger was born in Omaha, Nebraska as long ago as 1924. 

He studied mathematics at the University of Michigan but his degree was interrupted by World War II.  After the war he studied at Harvard Law School.

He met Warren Buffett in the early 1960s at which time he ran a partnership for a group of investors generating financial returns of 20% compared to 5% for the Dow Jones Index for the same period.

Impressive stuff!

"Charlie Munger's Methods"

Charlie Munger learned value investing from Benjamin Graham. It is therefore not surprising that Charlie's methods are not too disimilar to those of Benjamin Graham.

Charlie learned four basic principles from Graham and put his own interpretation on them.

In his book, 'Charlie Munger - The Complete Investor' Tren Griffin breaks down Graham's four basic principles with the intention of making them more understandable to the average investor (that's you and ourselves).

Here are Charlie's (learned from Graham) four basic principles:

1. Grasp that the shares that you have in a company are a proportional ownership of that business (which they are)
   
   
2. Buy shares in a company at a significant discount to their intrinsic value - thus creating a 'margin of safety.'
   
   
3. Make "Mr Market" your servant rather than your master
   
   
4. Be rational, objective and dispassionate

Tren Griffen took these 4 principles and created a framework to make them easier to understand.  His framework was in two parts:  firstly, he identified x attributes that make up a successful investor, and secondly, he reckoned that value investors should create their own methodologies - he called these 'variables.'

Here are the attributes:

1. Patience - Charlie reckons it is nigh on impossible to predict when a stock, at a considerable discount to its true value, will be at its low point.  Therefore, his technique is to wait until bargains appear.  This may take weeks, months, or even years.  The good bit is he will be monitoring more than one stock
   
   
2. Discipline - being a value investor does require discipline.  It is easier to follow the crowd than it is to be a contrarian investor.  If you want to be a value investor understand that inactivity in the market is a virtue.  Only invest when you spot the right stock, at the right price, and at the right time.
   
   
3. Be calm but courageous and decisive - Charlie reckons: "If you're not willing to react with equanimity to a market price decline of50 per cent two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get compred to the people who do have the temperament..."
   Courage is an essential part of success in the Graham value investing syatem
   
   
4. Reasonably intelligent but not misled by their high IQ - Warren Buffett has gone on record as saying that a successful value investor requires an IQ of 125 at least.  But he has also gone on record as saying that you don't need extraordinary intelligence to succeed as an investor.
   We reckon common sense comes to the fore
   
   
5. Honesty - Munger believes that honesty in business is parmount.  People who trust each other are much more likely to succeed than those who tell porkies.
   
   
6. Confidence - Charlie states that it is possible to be confident in your beliefs and still be focused on your limitations.  He goes on to say that genuine confidence is as valuable as false confidence is dangerous and that it is valuable to know the difference between these two types of confidence. 
   
   
7. Long-term oriented - In this day and age people have a hard time living with the thought of having to wait for gratification.  Charlie Munger recognised tha it is hard for someone to think long term especially if they are just getting started.  
   And the magic of compounding is especially favourable the longer it goes on.  Long termism and compounding are difficult concepts for most - especially the young.
   
   
8. Passionate - people who are passionate are more likely to work hard and invest more to achieve their goals.  Passionate people also read more which gives them an informational edge over their competitors
   
   
9. Studious - as mentioned in point 8 above, people who read have an edge over those who don't.  Benjamin Graham himself said that you must understand the stock that you are investing in, and understanding the stock meant understanding the business to which it is connected to.
   Philip Fisher, author of 'Common Stocks and Uncommon Profits' was admired by Charlie for one of his principles of getting familiar with businesses and creating a network of people who could educate them about their competitors.
   
   
10. Collegial - Having someone you can bounce your ideas off is a great way of minimising your mistakes.  Warren Buffett nd Charlie Munger have got each other.  Most of us have got to find someone.
    
    
11. Sound Temperament - Keep your emotions in order.  If you don't have all the qualities to be a value investor - find another strategy that does suit your temperament.
    
    
12. Frugal - there are so many instances in history where over-spending ones income leads to ruin and misery.  Money frittered away could be money spent on investing andtherefore made into more money.  Yes, you've got to live a little - just spend wisely and don't por it down the drain
    
    
13. Risk averse - Warren Buffet once said that risk comes out of not knowing what you are doing.  If you do your homework like Warren Buffet and charlie Munger you will hardly ever take risks.
    

And here are the variables:

1. Determining the approximate intrinsic value of a company
   
   
2. Determining the appropriate margin of safety
   
   
3. Determining the scope of an investor's circle of competence
   
   
4. Determining how much of each company to buy
   
   
5. Determining when to sell
   
   
6. Determining how much to buy when you find a mis-priced company
   
   
7. Determining whether the quality of a business should be considered
   
   
8. Determining what companies to own (in whole or in part)
   
   Rather than make an attempt at explaining the above 8 variables, it would be much better if readers were to purchase Tren Griffin's book.  Besides, why would we copy verbatim from the book?  That's illegal isn't it?
   

"Rules of Charlie Munger"

Charlie Munger was a disciple of Benjamin Graham, so all of Benjamin Graham's rules would be abided by Munger.

However, like all serious investors (and that includes you and ourselves), we need to construct a set of our own rules - even if these are not far removed from those of Graham, Buffett, Munger and all the other gurus.

In his book, 'Poor Charlie's Almanac,'  Charlie gives a 10 point checklist that is common sense, but as we keep saying - common sense is not so common.

Read Charlie's book (see below) - better still buy it.  You'll be glad you did.  Here's Charlie's checklist:

1.  Measure Risk.  Give yourself a wide margin of safety and avoid dealing with people of questionable character.  Only take on risks when you are sure the rewards are in your favour.  Better still, in our opinion, never take risks and if you do, only do so with profits already made.

2.  Be Independent.  Stockbrokers get paid for the amount of activity you do (overtrading?).  Do your own research and pick your own stocks.

3.  Prepare Ahead.  Charlie Munger does his due diligence.  He is curious about everything he does in life.  He asks questions.  He's willing to go the extra mile (and a half).

4.  Have Intellectual Humility.  A lot of Charlie's success has come from him not straying from his comfort zone.  He's not afraid to admit to acknowledge what he doesn't know.

5.  Analyze Rigorously.  Munger likes to estimate a stock's worth, even before looking at the price.  He focuses on the value of the business and nothing else.  He opts for simplicity not complexity.

6.  Allocate Assets Wisely.  A lot of investors divide their capital by say, 10.  Meaning that they intend to have 10 investments and invest equally in them.  But occassionally, there comes along a special company.  When you find an exceptional investment, don't be afraid to spread your capital more in favour of that one investment.  

7.  Have Patience.  Charlie Munger, and his partner Warren Buffett, are true life examples of "time in the markets."  They know that true fortunes are made from being in the markets with quality companies and not in and out of companies.  There are exceptions to this rule but Munger and Buffett like their "forever" stocks.

Their mantra is that it is "time in the markets" and not timing the markets that's important.

8.  Be Decisive.  Charlie and Warren have made their billions by not following the herd.  One of their special quotes is: "The time to be greedy is when everyone else is fearful.  And the time to be fearful is when everybody else is greedy."

9.  Be Ready for Change.  Investing success means that we need to accept changes.  Charlie Munger hated railroads for decades but times changed and he, and his partner, invested billions in railroads. 

10.  Stay Focused.  Keep things simple.  Buy good companies at good prices, hold them, and only sell them when they are fully priced.

Remember what it was that you first set out to do and stay with it.

"Books About Charlie Munger"

Charlie Munger The Complete Investor

Charlie Munger The Complete Investor by Tren Griffin

We've not consumed a book as well written as this one for some time.  And we read many books - at least one per week.

This is one of those books that you want to read in one sitting.  And then read it again to ensure you grasp all the points.

We've read some books three, four, even more times.  This book by Tren Griffin is going to be one of those.

Well recommended!

Charlie Munger Summary

Tren Griffin's book 'Charlie Munger - The Complete Investor' is a must read if you want to know more about one of the best investors of his generation - and you should.

In about 50  pages get the gist of what Charlie Munger thinks about investing and in particular, all he learned from Benjamin Graham in this summary guide.

The Tao of Charlie Munger

Authored by David Clark - who is the co-author of the Buffettology series (the other author being Mary Buffett).

The book is a witty collection of quotes by Charlie Munger on life, wealth creations, and investing.

Poor Charlie's Almanack

In this book Charlie gives an in-depth explanation of his 10 point checklist.

His success, he says is down to fully understanding the basics and then keeping things simple. He goes on to say: "I observe what works and what doesn't and why."

Damn Right - Behind the Scenes with Charlie Munger by Janet Lowe

Into The Minds of Warren Buffett and Charlie Munger by Daniel Pecaut

Conclusion

Every generation has its legends.  Warren E Buffett and Charlie Munger are certainly qualified for our generation. Between them they have well over 130 years of experience in investing.

Of course, what makes them legends is not just their years in the markets but the proof that they are both BILLIONAIRES! 

Common sense and logic musn't apply to the investing world, if they did, everyone would invest like Charlie Munger, and those wise enough to do so, would be wildly successful.

But they're not.  Why not? 

We're fairly sure that it is because people want instant gratification.  They want to see instant profits.  They're impatient. They obviously haven't read Charlie Munger and other similar works.

We used to fall into that category until we started to read Warren E Buffett and others like him.  Quick kills and 'ten baggers' rarely exist.  The best policy is get rich long.

Grab yourself copies of books about Charlie Munger and start to put some of that common sense and logic into your investing.

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