Archives for 2015

I’ve just finished reading new book Charlie Munger: The Complete Investor by Tren Griffin. For the unaware, you can read the Wikipedia for Charles T. Munger, otherwise probably best know as the Vice Chairman of Berkshire Hathaway and partner of Warren Buffett. The book is meant to corral all the various sources of Munger teachings into a “unified theory” of investing. As is my practice, here are my favorite highlights of the book followed by a quick review. I will try to clearly separate what are Munger quotes and Griffin book excerpts.

First, some good sentences on why learning from reading is awesome (Griffin):

The point is not to treat anyone like a hero, but rather to consider whether Munger, like his idol Benjamin Franklin, may have qualities, attributes, systems, or approaches to life that we may want to emulate, even in part. This same process explains why Munger has read hundreds of biographies. Learning from the success and failure of others is the fastest way to get smarter and wiser without a lot of pain.

Munger on efficient markets:

I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don’t think it’s totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It’s efficient enough, so it’s hard to have a great investment record. But it’s by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.

The book also serves as a good introduction to value investing based on Benjamin Graham’s teachings. Griffin emphasizes the fact that it is about patience and waiting around a mispriced asset to appear. It is not about forecasting the future. Griffin:

Successful Graham value investors spend most of their time reading and thinking, waiting for significant folly to inevitably raise its head. Although Graham value investors are bullish about the market in the long term, they do not making investing decisions based on short-term predictions about stocks or markets.

What kind of qualities does any person owning stocks need (even index funds)? Here’s what Munger said when once asked about how much he worried about a big drop in the value of Berkshire:

Zero. This is the third time Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.

Why professional money managers don’t make big alpha (Munger):

For most professional money managers, if you’ve got four children to put through college and you’re earning $400,000 or $1 million or whatever, the last thing in the world you would want to be worried about is having gumption. You care about survival, and the way you survive is just not doing anything that might make you stand out.

Munger has been talking about the link between behavioral psychology and investing before it was popularized by books and mainstream media. There are many sources of misjudgments, but I like that he covers many of the more subtle ones that I put under “help me live a good life” more than “help me make more money”. Take envy and jealousy (Munger):

The idea of caring that someone is making money faster [than you] is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on the trolley?

On drug and alcohol addiction, this is Griffin writing about Munger:

His timeless advice is to avoid situations with a massive downside and a small upside (negative optionality). Why play dice with something that can ruin your life forever?

Commentary. This book was a solid, short introduction to the world of Charlie Munger from an investing point of view. It has a ton of Munger quotes, but Griffin also does a solid job weaving in quotes from other famous investors like Warren Buffett and Seth Klarman. If you are a fan of Warren Buffett, you will like this book.

Of course, what makes Munger special to me is that he talks about stuff beyond investing, like ethics and morality. For example, I liked that he points out the lifetime benefits of simply “being reliable”. So many workers are just not reliable. Therefore, for a more complete picture, I recommend reading Poor Charlie’s Almanack, which includes transcripts of all his talks, lectures, and public commentary. Reasons for why it is not more popular include the length (really long) and the cost ($50+). After reading and digesting it all, I feel it was fifty bucks well spent. However, if you choose to skip the Almanack, I’d say you’d get $15 of value out of this book.