5 Charlie Munger Lessons That Made Me a Better Investor

The financial world was saddened this week when we got news Charlie Munger passed away just a month shy of his 100th birthday.

Back in 2016, a friend and I decided if we were going to go to the Berkshire Hathaway annual meeting, we’d better get at the plan. Munger was comfortably in his 90s by then, and Buffett was in his late-80s. They weren’t getting any younger, either. In hindsight, it’s amazing both not only survived well into their 90s, but both didn’t really show any signs of cognitive decay. In fact, I just watched Munger’s last interview on CNBC, which was about a month before his death, and he was still sharp as a tack.

Back to our Omaha adventure. I got to listen to two legends for an entire day, and neither one missed a beat. We checked out Nebraska Furniture Mart and Borsheims and even drove out to Buffett’s house, taking pictures from a comfortable distance. It was five days of nerd heaven and I enjoyed most every minute, even if I only remember 0.1% of what the two legends had to say that day.

The funny part of that trip is how we only narrowly avoided disaster. The original hotel we booked flooded, leaving us scrambling to find a room about a week before the meeting. Anyone who has been to Omaha during Berkshire meeting week knows how hard it is to find rooms, but we managed to find one that didn’t cost a fortune.

I then managed to get accidentally drunk at the Borsheim’s mixer the night before the festivities — on, I think, a mere three drinks. What can I say? I’m a lightweight. I was starving when we got back to the hotel, so I acquired a giant bag of Cheetos and CRUSHED it before falling asleep in shame and jalapeno cheddar crumbs. 5 AM the next day was no fun, but we made it in time to get good seats.

Like a lot of people, I discovered Buffett before Munger. I devoured most everything I could find about the man, including reading every letter written to shareholders from about 1965 to 2010. I read and reread The Snowball, Buffett’s excellent biography that’s about ready for an updated edition. I was too busy admiring Buffett to pay much attention to Munger, and so I basically ignored Munger for years while continuing to get my Buffett fix.

In fact, I can’t remember when Charlie Munger even appeared on my radar. I think it happened sometime in the early 2010s, but that’s just a guess. The point is I ignored Munger for too many years and then, once discovering him, did my best to make up for it. I read everything I could find on Munger, including the Tao of Charlie Munger, Charlie Munger: The Complete Investor, and, of course, Poor Charlie’s Almanack, which is the most complete collection of Munger’s wisdom. YouTube is also packed with Munger interviews, with some of his more famous talks complimented by many best-of clip videos of his famous one-liners.

Charlie isn’t with us anymore, which makes me sad. But we’re fortunate enough that Munger shared enough wisdom to keep even us long-time fans occupied. In that way, he’ll still be with us forever, and that makes me less sad.

I tried to think of the best way I could honour Munger’s memory. Nothing really seems suitable, but I wanted to say something, to let at least the small audience I’ve built up what his guidance and wisdom meant to me. So here goes.

Here are five of the biggest lessons I learned from Charlie Munger, important teachings I use probably every day.

The importance of independence

Like Charlie, the desire to become financially independent was a big influence in my early adult years. I sacrificed a ton to get ahead in my youth, including not buying a car, eating a lot of cheap pasta and cereal, and working every minute I could. That capital was allocated to investments that continue to pay me dividends to this day.

I sacrificed consistently from 2001 until about 2015 or so, when I let off the gas pedal a bit. I still had a pretty elevated savings rate at that point, but I also spent money on things like travel, nicer places to live, and a move from a small town to a much larger city.

Then, starting a couple of years ago, I realized something important. All my sacrifice wasn’t worth much if I had the same life as everyone around me. What was the point of it all if I wasn’t going to enjoy the fruits of my labour? So after a lot of reflection I retired, leaving behind work for a a Mungeresque existence of reading, writing, and pretty much doing whatever the hell I wanted. That was a year ago, and it’s been great. I highly recommend it.

Guys like Charlie gave me the courage to follow an unconventional path, and I’m eternally grateful.

The no asshole rule

Another big advantage to my newfound freedom is I get to choose who I spend time with. I didn’t have a choice when I had a job. If I had an asshole coworker, supplier, or customer, I had to suck it up and deal with them for the greater good of the business I worked for.

In other words, I had a no asshole rule, but my employers didn’t. Or, if they did, their definition of asshole was a little different than mine. And that’s okay, because when you work for someone else they make the rules. Employees can either choose to follow or leave.

I have very little patience for assholes these days. I’ve blocked or muted hundreds of people on Twitter. I let texts go unanswered and avoid talking to certain people. I’m just not very tolerant of it anymore.

By the way, when I talk about assholes, that doesn’t necessarily mean I’m just talking about jerks. I avoid perfectly nice people who have particularly annoying personality traits. For instance, I can’t stand those who are chronically late, or those who say they’ll do something and never follow through.

I realize the last few paragraphs might make me sound like the asshole, so I’ll elaborate a little. I still associate with most of the same people I did before. There’s just a few assholes on the periphery that I avoid. And if I do run into an asshole unexpectedly, I’m still nice to them. To do otherwise would mean I’m the asshole. I just try to limit such interactions, that’s all.

Invert

Both Buffett and Munger are kings of inverting a problem. Their ability to think in reverse is seriously impressive.

My favourite inversion story is Buffett talking about the history of the automobile. Go back to 1903 for a second. The auto industry has just begun. Dozens of different entrepreneurs are building their own cars. Highways are being developed. It’s very obvious cars are going to be a big thing.

So an investor decides to invest in cars. Okay, great. But there’s a problem.

There were, at one time, more than 2,000 companies that were active in the auto business. By 2009, only three remained, and two ended up going bankrupt.

Buffett’s solution to this problem is genius. Instead of investing in cars, he argued, the better move would’ve been to short horses. No matter who won in the auto industry, horses were going to lose. There were about 20M horses in the United States at the turn of the last century. These days there are about 4M left.

There’s one way I commonly use inversion in my life. Whenever someone complains about the cost of their cell phone, utilities, home insurance, etc. I tell them they’re looking at it all wrong. If that business was truly ripping you off, I counter, then it must be a terrific investment.

Even if the person doesn’t invest — and spoiler alert, they almost never do — it at least shuts them up.

The waiting is the hardest part

Investing is one of the only activities humans engage in where we are rewarded for doing nothing.

Think about your day-to-day life for a second. Work isn’t about to reward you for doing nothing. Neither is your spouse, especially if the trash needs to be taken out. Sports don’t usually reward patience either, especially with a stadium of 40,000 people all yelling “swing, you bum!” And so on.

In addition, a significant portion of humans just aren’t wired to be patient. They just can’t help it, they have to tinker. Especially when activity is so rewarded in the rest of the world.

This is exactly why I’ve constructed a portfolio where I don’t have to make too many decisions. Outside of a few positions I picked up in a misguided quest for more diversification, I don’t plan to sell anything. And out of those positions that I don’t think are long-term winners, I still plan to hold some for months or years. I’m content to sit tight with the rest, watching the ol’ dividends come in.

I constantly interact with investors who have a different mindset, whether they be folks who are happy to sell winners or others who have very rigid sell rules in place. That’s not the way I operate, and it wasn’t the way Munger operated either.

I often forgot this lesson as a younger investor, and it cost me a lot of money at times. Not just when I didn’t buy McDonald’s at glorious entry point, either.

I’m glad guys like Charlie have taught me the error in my previous ways.

Discipline

Like a lot of people anxious to get ahead, I never had much cash. Every time my account balance would creep into five figures I’d get antsy and have to put that cash to work somewhere.

Things got even worse in the few years before I officially retired. I’d dip into my margin a few times a year because I just couldn’t resist some cheap stock. I knew I’d have dividend income coming in soon to pay off the debt, plus the interest rate was really low. Retirement was the big goal, and I was pretty desperate to get there.

I also aggressively added to positions this summer, practically rubbing my hands together in glee as many of my favourite stocks fell to 52-week (and sometimes multi-year) lows. That’s the time to buy, and many of those purchases are already up 10%+.

Now that the market is recovering, I’m going to raise a little more cash. Not only do I want to have a year’s worth of expenses sitting in a bank account somewhere, but I’m also going to have a little cash put aside in my brokerage account. This will limit my buys over the next few months, but I’ll still have a little bit to play with.

Berkshire Hathaway, of course, is sitting on a mountain of cash. At the end of the last quarter, it had a cash balance of more than $157B and a net cash position on its balance sheet. Buffett is famously debt adverse and incredibly selective on the acquisition side.

Although I’ll never be as patient or as selective as Buffett, or Munger, I definitely need to incorporate more cash into my portfolio. I plan to slowly create a 3-5% cash buffer in my portfolio, capital I’ll keep aside for a rainy day. It might even end up larger than that.

The bottom line

I, like everyone else reading this, will miss Munger. I’ll miss his distinctive voice, his sharp sense of humour, and his way of adding the perfect remark. But mostly I’ll miss his brain, his ability to distill a problem to its core and come up with the solution quickly may never be matched. He truly was one of a kind.

But at least we have a mountain of his wisdom he shared. I truly believe we’ll look back at Munger just like we look back on his idol, Benjamin Franklin, remembering both as some of the best thinkers in human history.

Thanks Charlie. For everything.

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