Charlie Munger presided over Daily Journal’s annual meeting on February 14th, Valentine’s Day, perhaps to ensure that only the most dedicated adherents choose to attend. Charlie is known for his blunt wit and investing insight, and his intellect has not gotten any duller with age. We can all learn from his insights both in investing and in life.
While Charlie Munger spoke and answered many questions over two hours, these five insights paraphrased below really stood out:
1. “My idea of being properly educated is being right when the professor is wrong. Anyone can just spit back what the professor is saying. It takes a really educated person to think for themselves.”
You always want to think from first principles, yet relatively few people do so. All too often people think something is right because it is widely accepted in their field or because some authority figure said so. If you look at many fields (e.g. medicine), much of what used to be accepted wisdom 20, 30 or 40 years ago has now been shown to be either incorrect or incomplete. No, you don’t want to reinvent every wheel, but you do want to think for yourself.
2. “It is really important to stay within your circle of competence. If you are not sure what the boundaries of that circle are for you, then you do not have real mastery of your field.”
Warren Buffett once said that the size of your circle of competence is not nearly as important as being very clear about its boundaries. Charlie Munger highlighted this again today, making the point even stronger: if you are unsure of the boundaries of your circle of competence that in and of itself should tell you that you haven’t mastered your domain.
3. “The first rule of fishing is to fish where the fish are.”
Charlie spoke a lot about how few good investments there are today, and how overly-competitive many developed markets like the U.S. have become. He was much more optimistic about the opportunity set in China, although it was clear from his answers that he relied on Li Lu, with whom he invested part of his family’s capital, rather than trying to become an expert in Chinese securities himself.
4. “If you have trouble finding good investments, join the club… My advice to the seeker of high compound interest is to reduce your expectations. Things are likely to be tough for a while.”
Munger talked about how the 10% nominal return achieved by U.S. stocks over the long-term is unlikely to be replicated in the future from the current starting point. He thought that a mid single-digit rate of return was much more likely given the starting level of valuation and lower inflation.
5. “The idea of diversification makes sense to a point. If you don’t know what you are doing and don’t want to embarrass yourself, then owning a lot of investments makes sense. But that is not something that deserves a big reward. The idea of diversification if you are looking for excellence does not make sense… At Berkshire Hathaway and the Daily Journal our investment results have been better than the index. Now why is that? Because we try to do less. We don’t know much about a lot of things, so we just focus on the few that we do know well.”
Charlie Munger thought that it was perfectly reasonable to admit that you don’t know enough about individual securities and invest your capital in a low-cost index fund. What is not reasonable in his view is being widely diversified and expect exceptional returns. He elaborated that at Berkshire Hathaway and at the Daily Journal they work diligently studying many opportunities, but that amazing opportunities are very rare. When combined with having a limited circle of competence, this has led them to make very few investments each year. If you are finding plenty of investments that you think are great in this environment this should serve as a warning – chances are you are too optimistic or overconfident.
The goal of learning from great investors such as Charlie Munger is not to blindly imitate them. Nor is it to impress others by being able to quote them better than the next person. What you should be trying to do is to learn from their experience and insights, and then apply what you learn to your own investing, customized to your own strengths and weaknesses. Don’t try to be the next Charlie Munger. Instead, focus on becoming as strong of an investor as you can be by learning from his wisdom.
If you are interested in learning more about the investment process at Silver Ring Value Partners, you can request an Owner’s Manual here.
Note: An earlier version of this article was published on Forbes.com and can be found here.