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Charlie Munger is a brilliant investor and partner of Warren Buffett at Berkshire Hathaway. He recently interviewed CalTech alumni who have a lot to teach us about investing. There was a lot of insight for investors in that interview, but I want to focus on one area, where an observer asks Charlie:
“How would you encourage fans to take big bets on big margins, and how should this be taught at CalTech?”
Charlie Munger replied:
“I don’t think CalTech can make big investors out of most people. That’s partly because they’re like great chess players – they’re almost born as investors.
Obviously you need to know a lot. But to some extent it is a temple. To some extent it is a joy of delay. You have to be willing to wait.
Good investment requires a strange combination of patience and aggression. And not many people have it.
It also requires a lot of self-awareness about what you know and what you don’t know. You need to know the edge of your own ability. “
Let’s find out Charles’ answer:
1. Some people are born investors – Charlie reveals that not everything can be learned about investing. Yes, you can read the great investment books out there. And you should. You can check out all the previous big investors. And you should. However, that is necessary but not enough. You also need certain features that some people have and others … just don’t.
2. Temperance – What are those effects? Well, it is better defined as temperance. What does that mean? Imagine a situation where everything is going wrong for you as an investor. The stock market marks your investments down. Your peers agree with you. Your clients are starting to doubt you. You haven’t had a good year in the market in a while. Can you still stick to your reasonable investment process? Or do you fall apart and take in the pain and start moving to try to get up faster rather than later?
3. Patience – It seems so simple. Just do nothing when nothing is worth doing. And yet, this looks so critical to most investors. They convince themselves, or are convinced by others, that if they are just smart enough, they will work hard enough, there is always something sensible to do. So they slide down the slippery slope “good enough. “Every compromise seems small, or not a compromise at all, but in the end they are well down from the highest levels of investment control they have ever wanted.
4. Attack – Despite all the activity when patience is needed, when it is time to take action, most… investors are not active enough! I remember Peter Lynch coming in to give a talk to Fidelity portfolio managers and analysts early in my career, about 20 years ago. He told the audience when they found a good idea that they should, triple-, quadrilateral weigh. It’s not just a small “fat” situation compared to their criterion. There was silence. No one agreed with the legendary investor. Yet when the portfolio managers returned to their offices the next day, I did not see anyone change their approach or records, which contained hundreds of small, minority investments, usually.
5. Self-awareness about the edge of your own ability – Knowing the edge of your circle of potential is crucial as an investor. If you are not sure whether there is something inside it, the answer is simple: no. The penalty for waiting for an investment is low, as long as you strictly follow the few investment opportunities you come across. Yet so many are trying to answer hard questions that as an investor they should leave in the “too hard” position and move on. Unless that’s too much bias in action, I don’t know what is.
Charlie Munger has given us plenty of insights about investing before. To stay reasonable. To value company quality, stock is not just statistically cheap. To pay attention to the acumen and integrity of the management team.
Ultimately, none of this is enough to make our investors good if we can’t do two simple, but not easy, things well when it’s harder to do them. To be patient when there is nothing to do, and to be very aggressive on the rare occasions when the stars align and there is a huge investment to be made.
If you are interested in learning more about the investment process at Silver Ring Value Partners, you can request Owner’s Manual here.
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