ritten by Tren Griffin, he summarizes the worldly wisdom that Charlie has publicly given over the years. This elementary wisdom as he described, applies to not just investing, but also economics, life, relationships, mental models, psychology, ethics, and more. I’ve provided below the summary of the key nuggets of wisdom that I found while reading through the book.
-The best thing a human being can do is help another human being know more.
-Four fundamental principles of Ben graham: -Regard a stock share as equivalent to a portion of business ownership; acquire it at a notable discount compared to its intrinsic value to establish a margin of safety, make bipolar Mr. Market the servant rather than master, be rational, objective, and dispassionate.
-When creating a successful investing process, complexity is NOT the investors friend
-Three baskets: “in, out, or too tough”. Only deal with the basket of “in”.
-Graham value investing underperforms during bull market and short term, but over-performs in the long run
-Try consistently to not be stupid instead of smart. It’s the successful skiers who die on hills
-Look for obvious positive outcome investments (rare)
-Investing is a less than zero sum game mathematically
-Graham value investors wait for mispriced businesses rather than predict the future in the short term
-M’s: moat, margin of safety, good management, do we understand meaning of business (annual report, 10-k)
-Successful investors must possess an interest in the process
-You must be a contrarian, independent thinker to succeed
-Be motivated when you’re buying and selling securities (businesses) by reference to intrinsic value instead of price momentum
-Value investors pay no attention to price of a business or technical information, but rather the actual value of the business (e.g. book value, net tangible value, present value of future returns)
-Projections about the future or what other people are thinking is not worthwhile. Track records on the other hand are more important
-1st principle: treat owning stock as owning the business itself
-Private market value — what would you pay to buy out the whole business? Would you do it?
-Must generate free cash flow (e.g. gold doesn’t work)
-2nd principle: margin of safety (50–65% in Graham’s day, perhaps 35–60% in today’s day, lower for solid businesses)
-Buy at a buffer below intrinsic value
-Unlike Ben Graham’s time, companies do not trade below liquidation value so in that sense the rules have changed as to what is classified as a “discount”
-3rd principle: make Mr. market your servant rather than your master. EMH is not true (somewhat efficient, not fully)
-Reacting quickly and aggressively to favourable prices when they unpredictably appear is essential
-4th principle: be rational, objective, and dispassionate
-Worldly wisdom: better to use and consider multiple models and ways of thinking into a decision to produce reasonable results than one close minded way. The hard to measure intangibles may often be more important than the stuff that is easily measurable. Knows a little of a lot of disciplines, helps investing as all related
-Terribly smart people make bonkers mistakes, but they learn from them
-“our biggest mistakes were things we didn’t do”
-One needs: experience, common sense, and good judgment
The psychology of human misjudgment
-reward and punishment fallacy — people will overt adjust behavior to get rewards and avoid punishment at any cost
-liking/loving tendency: admiration also causes or intensifies liking or love. With this feedback mode in place, the consequences are often extreme, sometimes even causing deliberate self-destruction to help what is loved
-a year in which you don’t get influenced on the big ideas of life is a wasted year
-avoid evil, particularly attractive members of the opposite sex
-life is too short to do business with people you don’t like; family members do not fall outside of the disliking/hating tendency
-the skill needed to sort out whether a person is genuinely interested in you, comes with good judgment
-A handful of significant opportunities, unmistakably identifiable as such, tend to present themselves to those who persistently seek and remain patient, armed with an inquisitive mind adept at deciphering complex scenarios involving numerous variables. Subsequently, all that is needed is a readiness to make substantial investments when the odds are highly favorable, utilizing resources acquired through past prudence and patience
-say no to all sins, particularly envy
-simple psychological denial to delude oneself — common tendency
-overconfidence tendency
-loss-aversion
-social proof tendency (follow the crowd)
-intentional contrasts to get purchase of new “better” alternative
-do not make decisions under stress
-recent memory, or memory bias in general
-skills must be constantly applied or they would be forgotten; continuous learning
-success means being patient but aggressive when it’s time
-patients disciplined inactivity, ability to take losses and adversity without going crazy
-life will provide infrequent opportunities; swing big when they occur
-having a high IQ and successful investing are often inversely correlated
-Munger says it is important to stay away from anything that is illegal, immoral, dishonest
-Munger advocates the practice of routinely scrutinizing your finest ideas, deconstructing them, and seeking weaknesses as a method for personal enhancement, which is difficult to do if I am too ideological.
-long term orientation works best; compounding in all facets of life, the first $100,000 is the hardest
-people who are passionate tend to do better, though it may not come right away (nonlinear pattern)
-Collegial: everyone needs colleagues that they trust that they can talk to. Problem is people don’t volunteer to be colleagues or mentors however
-A sound contrarian, emotional temperament is key
-waste neither time nor money, but make the best use of both
-intrinsic value: PV of all future cash flows.
-owners earnings: net income + depreciation + depletion + amortization — capital expenditure — additional working capital
-you have to know what you’re good at and what you are not, and stick to what you are good at. Familiarity does not lead to competence
-Diversification is a protection against ignorance
-best holding period is unlimited
-activity for the sake of activity works against the investor
-high quality business at fair price over fair business at a bargain
-Aligned incentives, skin in the game for people involved
-Even when you combine raisins with undesirable elements, the result remains unfavorable. Munger has a zero tolerance policy for dishonest practices
-better to buy a business that even an idiot can run because eventually one will. Exceptional managers rarely come along, so focus on the business quality.
-free cash flow over GAAP earnings or EBITDA
-MOATS: Supply-side factors (such as economies of scale), must be considered alongside demand-side influences (network effect), brand, regulation, IP
-Berkshire advantages: tax efficient (don’t sell), low overhead (few internal requirements or red tape), first choice for buyers (great reputation as they buy to keep forever)
-Strong MOAT: profits is higher than OCC (opportunity cost of capital)
-return on invested capital (ROIC) and OCC is sustained positive, then that’s good
-3 skills: create a moat, identify a moat others created, identify a moat before it is evident
Charlie Munger, damn right book: never feel sorry for yourself, “woe is me”, and never feel envy (as you will be dictated by others rather than yourself). Unlike most individuals, who hunger for the world’s approval, Charlie judges himself entirely by an inner scorecard, and he is a tough grader. The seven sins are to be avoided. Being surrounded by the right values from the beginning is an immense treasure. It even has a financial advantage. To finish first you have to first finish. Live within your income and safe so that you can invest. Learn what you need to learn. Always act as honourably as possible.
-an increased percentage of people come from Nebraska when they aren’t, for status reasons” (Buffett)
-Mungers parents married with both parents side approving each other (very good sign). Very strong marriage. Lao-tzu — refers the small things as important and make much of the little
-“so what” if the economy is bad. Wolf of Wall Street mentality, dog eat dog
-if the culture is bad leaving may be the best option
-if you figure out the people you really want to be with, and tell them and why, generally lead to a favourable result
-you have to marry the best person that will have you
-Life passes by quickly — take risks by doing things badly
-amazon will continue to go far, it is the miracle of our generation
-noticed older people’s bonkerness very quickly and sought not to repeat it
-shadow banking is a fallacy
-investing as a value investor is now harder than before
-take the high road, it’s much less traveled
-if you want a good marriage, don’t try to change your spouse
-the only way to make gold jewelry is to make them out of gold, not of any other material
Disclaimer
This is not Financial Advice. This article is meant only for educational and perhaps entertainment purposes.