Charlie Munger, 96, has been Warren Buffett’s right-hand man at Berkshire Hathaway for years now, and he’s is right there with the Oracle of Omaha as far as investment chops go.
Munger also chairs the Daily Journal in Los Angeles, and while attending the newspaper’s annual meeting — which has become a must-attend event for many investors — he espoused some wisdom on the markets and what’s brought him and Berkshire Hathaway (NYSE: BRK.B) so much success.
Let’s take a deeper dive into some of Munger’s strategies for investing he talked about during the recent conference.
Sometimes It’s OK to Sell
Nobody’s perfect, not even one of the world’s top investors, and Munger believes it’s OK to admit when he’s wrong. He actually considers it a strength of a good investor.
“A good bit of the Munger fortune came from liquidating things we originally purchased because we were wrong,” Munger told attendees at the meeting. “Of course, you have to learn to change your mind when you’re wrong.”
Your portfolio should be met with a critical eye, and maybe a sell-off is in order when the thesis backing it doesn’t match a particular asset you are holding. When a company completely changes their business strategy, and it doesn’t match up with the reason for why you invested in the first place, it may be time to sell.
“Being able to recognize when you are wrong is a godsend,” Munger said. “I actually work at trying to discard beliefs.”
Munger tries to flip the script and solve problems by inverting them.
“You don’t think of what you want, you think about what you want to avoid and invert,” Munger said.
Forbes lays out some criteria for what makes a company a poor investment target:
- Bad businesses.
- High prices.
- Weak balance sheets.
- Managed by dishonest or incompetent people.
By looking at those things from an investing angle, you can end up with the best way to lose as much money as possible. But by inverting those principles, you can find truly valuable companies to invest in, and improve your results. Of course, finding a company that meets all those criteria in the current market can be difficult.
Don’t Practice ‘Blind’ Value Investing
“The old classical moats are disappearing rapidly,” Munger. “It’s probably a natural part of the modern economic system that the old moats stop working.”
Economic moats are distinct advantages companies have over competition, and they are a core concept of value investing, the strategy Munger and Buffett excel at. But Munger warns that maintaining a competitive edge has become much harder thanks to technology and new business models.
Because of this evolution, “blind” value investing can be an OK starting point, but it should be supplemented with more extensive research. Here’s a definition of “blind” investing, per Forbes:
(“Blind” value investing) looks backwards at the financial history, assumes that something similar will occur in the future, and considers a company a bargain if it’s cheap relative to historical profits.
A company could change its fundamental approach in order to combat competition or increase profits, so being vigilant can save you a misstep — and a lot of money.
Munger has worked hard to become one of the most prolific investors of all time, so it may be worth considering any nuggets of wisdom he has when it comes to surviving and thriving in the investment world.