AKA the gateway drug for more expensive Charlie Munger books
I was going to read Poor Charlie’s Almanack last week but balked at the price of nearly £90. According to one reviewer this may make me a poor investment decision-maker but we’ll come back to that later. Instead I read Charlie Munger: The Complete Investor by Tren Griffin on the basis that it was 10% of the price and I reckoned must contain 10% of the wisdom. Surely even Charlie would think that was a bargain?
Value investing has always fascinated me. I’ve read a lot about Ben Graham, Warren Buffett and Berkshire Hathaway but I’d never really read much specifically about Charlie Munger, Buffett’s ‘partner’ and Vice-Chairman of the company. Their straightforward, common sense approach to investment and way of doing business that values honesty, loyalty and growth over the long term has certainly influenced the way I do things.
(As an aside I think they’ve had massive blind spots because they haven’t thought about the future in any great detail — they famously ignore any projections or forecasts. It always amazes me they didn’t spot their investments were in part causing climate change or inequality for example. I think it has something to do with the psychological refusal to make any predictions about the way decisions will play out into the future.)
The way Munger has studied his own decision making is pretty impressive as well as all the time he’s set aside for studying other peoples’. The book is based on extracts from speeches, articles and interviews with Munger and outlines his various mental models and rules for making decisions.
The starting point of his approach is that the shortcut to being smart is often simply not to be stupid. Knowing what you don’t know is sometimes far more useful that being brilliant. This is a big part of what is perhaps the most important first filter for investments at Berkshire Hathaway. When assessing whether you can estimate the intrinsic value of an investment you should be able to very quickly put it in a basket for ‘yes’, ‘no’ or ‘too tough’ and unless you have a special insight, put it in the ‘too tough’ basket and move onto something where that’s inside your ‘circle of competence’.
Fundamentals of Graham investing
Both Buffett and Munger describe themselves as ‘disciples’ of the Ben Graham approach to investing. In this book Munger describes that approach as having four tenets:
- Treat shares as proportional ownership of a business (not just pieces of paper or numbers in a spreadsheet) because that’s what they are.
- Only buy when you have a significant ‘margin of safety’ on price so you know that you’re getting a good price compared to the price that others might pay.
- Mr Market should be your servant not your master. Treat it as having a split personality — something that sometimes offers you lots of money for what you have (a bull market) and occasionally offers you something you want very cheaply (a bear market).
- Apply the three rules above with consistency and discipline. This rule is the hardest of the four.
Know your own biases
A lot of the book focuses on Munger’s diagnosis and awareness of common psychological biases, including his own. Munger talked about these in a lecture he gave at Harvard back in 1995 outlining ‘18 causes of human misjudgement’ which you can read about here but the book does an excellent job of setting them out and collecting further Munger quotes from elsewhere.
Finally, the book has an interesting section on another important element of the Berkshire Hathaway investment strategy — this is the concept of the ‘moat’ that an individual company has to defend it from competition or somebody else try to do the same thing. Moats come in five forms:
- Supply side economies of scale — you have access to more of the thing that you’re selling than anyone else.
- Demand side economies of scale (Network effects) — your product or service becomes more valuable as more people use it.
- Brand — you have developed a story and reputation that means people are willing to pay significantly more for your product than others.
- Regulation — you’ve learned to understand regulation so well that it actually serves as a barrier to entry/moat for their competitors.
- Patents or protected intellectual property — you’re able to fend off competition because you’ve legally protected your innovation.
Overall, I really enjoyed the book. Munger’s a great person to learn about and I’ve taken the plunge and I ordered a second hand copy of Poor Charlie’s Almanac.