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‘The best thing a human being can do is help another human being know more.’ Charlie Munger
I want to share with you some of the salient points from one of the books I read over the Christmas period today, because quite frankly it’s gold dust! Imagine spending an extended tutorial with one of the world’s most successful investors spanning many decades…well, reading Charlie Munger - The Complete Investor is a little like doing that.
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Transcription of the show
Hello, and welcome to another episode of The Property Voice podcast. My name is Richard Brown and as always, it’s a pleasure to have you join me on the show again today.
Happy New Year to you! I hope you managed to get some rest over the Christmas period. I confess that I did need a bit of a chilled week or two myself and so went on a bit of a go-slow for the past couple of weeks.
However, one significant upside of that is that I managed to read a couple of books over this period as a result. I want to share with you some of the salient points from one of those books today, because quite frankly it’s gold dust! Imagine spending an extended tutorial with one of the world’s most successful investors spanning many decades…well, Charlie Munger - The Complete Investor is a little like doing that.
And, do you know the best part…this book was a gift to me from a member of my community too! Thank you so much Valter for the very kind and thoughtful gift; I didn’t fully appreciate the great riches it contained until I picked it up over the Christmas period.
Let’s see what investment principles we can all learn from The Complete Investor right now then!
Property Chatter
Today’s episode is not a full review, but taking some of the key elements from the book: Charlie Munger – The Complete Investor, by Tren Griffin.
So, who exactly is Charlie Munger? Well, if you have not heard of him, you will probably have heard of his long-time business partner, none other than Warren Buffett! Charlie and Warren are the co-founders and key stakeholders in Berkshire Hathaway, which as an investment business has consistently out-performed the stock market over many decades. So, quite frankly, anything that Charlie has to say about being a successful and durable investor in the long-term is worth paying attention to.
I will use many direct quotations in the course of today’s episode, which are from Charlie Munger, unless otherwise stated.
First, some context. Charlie Munger and Warren Buffett practice a form of investing made popular by Ben Graham called Value Investing. In a nutshell, value investing according to Graham, Buffett and Munger, involves uncovering businesses or assets that are available below their ‘intrinsic value’ and create a positive net present value over time. So, that’s two principles right there:
- Below intrinsic value, which is different to below market value or price.
- Creating a positive net present value on the remaining lifetime cashflow. Meaning businesses and assets that generate income in excess of expenses over an extended period, which implies a residual income stream, but can include selling the asset later at a profit.
Whilst Munger, Buffett and Graham subscribe to many of the same principles, Munger and Buffett have modified the original Graham Value Investing Method to allow them to find more investments than would be possible if following the original Graham Model alone.
The four fundamental principles of value investing, as created by Ben Graham are as follows:
- Treat a share of stock as a proportional ownership of the business – ‘Understanding how to be a good investor makes you a better business manager and vice versa. ’In other words, treat investing as a business operation.
- Buy at a significant discount to intrinsic value to create a margin of safety. ‘Be motivated when you are buying and selling securities by reference to intrinsic value instead of price momentum.’. In other words, look at net cashflows and return on investment to value an asset, not the market value or price. ‘An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. In other words, income returns are more like investments and market capital growth is more like speculation. Margin of safety is the difference between the present value of the cash flows and the market price, we might use the term ‘discount’.
- Make bipolar ‘Mr Market’ your servant, not your master. The market is only ‘somewhat efficient’ according to Munger and exaggerates the highs and lows as if dealing with a manic depressive. The trick then is to swim against the market tide, or at least don’t be carried away with it when it ebbs and flows.
- Be rational, objective and dispassionate. ‘The idea of being objective and dispassionate will never be obsolete.’ Munger understands and applies theories and models from a wide range of disciplines, including economics, statistics, psychology and the natural sciences among others. ‘You must know the big ideas in the big disciplines, and use them routinely – all of them, not just a few. Most people are trained in one model, economics, for example – and try to solve all problems in one way. You know the old saying: to the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.’ But equally: ‘People calculate too much and think too little.’
‘The best thing a human being can do is help another human being know more.’ Charlie Munger
How does this play out in practice?
Well, Munger reads a LOT! In particular, he has read literally hundreds of biographies. As Griffin puts it ‘learning from the success and failure of others is the fastest way to get smarter and wiser without a lot of pain.’ Or, as I like to put it: experience is learning from our own mistakes, whilst wisdom is learning from other people’s mistakes.
However, turning ourselves into a learning machine, which clearly Munger has done, is not the only requirement. As a contrarian investor…and as Buffett famously put it ‘be fearful when others are greedy and greedy when others are fearful’, takes courage and a calmness, an ‘emotional framework’ or the ‘right temperament’.
‘I’m a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.’ So, even one of the greatest investors in the world uses a checklist!
Some of Munger’s investment principles:
- Avoid complexity – ‘We have a passion for keeping things simple.’
- Avoid being stupid – ‘It’s remarkable how much long-term advantage people like us have gotten by trying to be not stupid, instead of trying to be very intelligent.’
- Be ‘Wordly Wise’ – as Griffin notes, ‘…knowledge from one domain is not enough. ‘To be wise, one must also have experience, common sense and good judgement. How one actually applies these things in life is what makes a person wise.’
- We can’t ALL beat the market – ‘The idea that everyone can have wonderful results is inherently crazy. Nobody expects everyone to succeed at poker.’
- We have natural tendencies leading to misjudgement – ‘Bias arises from the nonmathematical nature of the human brain in its natural state as it deals with probabilities employing crude heuristics and is often mislead.’ Or, we have a range of natural investment biases that can be counter-productive and cause us to make investment errors. These include tendencies such as: liking/disliking, doubt-avoidance, reciprocation, pain-avoiding denial and over-optimism and social-proof tendencies to name a few.
- Stick to what you know and understand (our ‘circle of competence’) – ‘We have to deal with things that we’re capable of understanding.’
- Value investors wait for mispriced assets to appear rather than predict the future [price movements] in the short-term. This means they sit and wait for the right opportunities and that could mean long periods of inactivity.
- If you can’t beat the market, BE the market – ‘One standard prescription for the know-nothing investor with a long-term time horizon is a no-load [low-cost] index fund.’ In other words, if you don’t have what it takes, then stick to market-based index funds with low-cost and tax deductions instead.
Have the ‘Right Stuff’…Munger has spoken about what constitutes the right characteristics of the intelligent investor over many years, which Griffin boils it down to the following traits:
- Patient – ‘Patience combined with opportunity is a great thing to have. My grandfather taught me that opportunity is infrequent, and one has to be ready when it strikes.’
- Disciplined – ‘We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American businesses. We read and think. So, Warren and I do more reading and thinking and less doing than most people on business.’
- Calm but Courageous and Decisive – ‘It’s amazing how fast Berkshire acts when we find opportunity. You can’t be timid – and that applies to all of life.’
- Reasonably Intelligent but Not Misled by Their High IQs – ‘A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.’
- Honest – ‘You ought to have an internal compass. So, there should be all kinds of things you won’t do even though they’re perfectly legal. That’s the way we try to operate.’
- Confident and Nonideological – ‘If you get a lot of heavy ideology young and then you start expressing it, you are locking your brain into a very unfortunate pattern. And you are going to distort your general cognition.’
- Long-Term Oriented – ‘Almost all good businesses engage in ‘pain today, gain tomorrow, activities.’
- Passionate – ‘I would argue passion is more important than brain power.’
- Studious – ‘Develop into a lifelong self-learner through voracious reading, cultivate curiosity and strive to become a little wiser every day.’
- Collegial – ‘I hardly know anybody who’s done very well in life in terms of cognition that doesn’t have somebody trusted to talk to.’
- Sound Temperament – ‘Having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control.’
- Frugal – ‘Mozart…overspent his income his entire life – that will make you miserable.’
- Risk Averse – ‘Using [a stock’s price] volatility as a measure of risk is nuts. Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return.’
So, there you have it, my snapshot perspective into the methods and approach of one of the world’s most successful investors. Of course, a lot more was covered in the book than is even possible to highlight here for sure. Equally, Munger invests in businesses and you might be wondering, how does this apply to property investing? Well, I have tried to extract characteristics from the book that apply to any form of investing to formulate some investment fundamentals if you like. I hope you find these useful reference points for your own investing journey. Although, I can highly recommend that you get yourself a copy of the book and do as I did…read it with a highlighter pen in your hand!
Speaking of books…you may know that I launched my second book at the end of the year. It is called: #PropTech: A guide of how property technology is changing how we live, work and invest. There is a link in the show notes to the book, which is available on two types of Kindle and both colour and black and white paperback too.
I am going to let you into a little secret now too. If you happened to buy a copy of my first book, Property Investor Toolkit and wrote in to receive the book bonuses, then you will have access to information on how to grab a copy of the #PropTech book at a discount.
Now then, if you want a quick hack, then I suggest that you grab a copy of the Property Investor Toolkit now, which will also be available for a special price for the Kindle version until Sunday. Then, a limited time access to a special price on the #PropTech book will be made known to the people on the Property Investor Toolkit book bonus mailing list only.
If that just sounds too confusing, then you can simply go and buy a copy of either or both books instead, they are fairly priced, and the royalties go towards funding what I do here for you each week at The Property Voice. So what’s not to like about that?
OK, so that’s me done for the first week of the New Year. Don’t forget to make a note of the top one or two investment fundamentals courtesy of Charlie Munger…mine is to try and avoid being stupid! You can find them all in the show notes over at www.thepropertyvoice.net. Or, if you want to talk about anything from today’s show, or just talk property investing more generally, email me at podcast@thepropertyvoice.net, I would be happy to hear from you!
Once again, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.