Tao of Charlie Munger a compilation of Charlie Munger quotes with commentary by David Clark.
I was interested in getting to know the mind of Charlie Munger after watching several interviews of him and Warren Buffet. This book gave me enough material to understand Munger’s investing and business strategy. David Clark has done a decent job putting into context what Charlie Munger has said in media. Nevertheless, there are many instances when he goes overboard in his commentary by offering irrelevant facts or opinions to what otherwise is an understandable statement from Munger. Is he trying to make the word count?
I am not a fan of the title of this book. I had to Google what “tao” means, which is a Chinese word for “way or “path.” “The Way of Charlie Munger” would have been a more appealing title.
The desire to get rich fast is pretty dangerous.
The short-term price direction of any security or derivative contract is subject to all kinds of wild price swings due to events that have nothing to do with the actual long-term value of the underlying business or asset.
Charlie did use a lot of leverage on his stock arbitrage investments, but as he got older he was the grave danger he was putting himself in and now passionately avoids using debt and bets only on the long-term economics of a business.
Circle of Competence
Knowing what you don’t know is more useful than being brilliant.
At the height of the bull market bubble in technology stocks in the late 1990’s, many very brilliant people were seduced into investing in internet stocks. Charlie realized that he didn’t understand the new Internet business, so he and Berkshire avoid them completely. Most of Wall Street thought he had lost his touch.
Avoid Being an Idiot
People are trying to be smart – all I am trying to do is not be idiotic, but it’s harder than most people think.
Charlie’s investment philosophy is predicated on the theory that a shortsighted stock market will sometimes underprice a company’s shares relative to the long-term economic value of the company. The only thing he has to be careful about is not doing something stupid – not acting when he sees a good investment or buying too little of it when the opportunity presents itself.
Strong swimmers are the ones who swim away and potentially get themselves in trouble.
Life is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand – you must learn to handle mistakes and new facts that change the odds.
My idea of shooting a fish in a barrel is draining the barrel first.
When there is panic and investors are fleeing, stock prices drop, which makes it easy to find underpriced great businesses.
Benjamin Graham, Buffet’s mentor, believe in buying a stock at below its intrinsic value – which to Graham meant half a book value or at a very low price -to-earnings ratio. The problem with Graham’s investment philosophy was that it required an investor to sell the stock once it rose to its intrinsic value.
In 1988, Berkshire bought Coca-Cola stocks at $3.24 a share which equates to a Price/Earnings ratio of 18, way too high for the likes of Benjamin Graham.
Berkshire invested $1.299 billion in Coke in 1988. Over the last twenty-seven years, the stock is worth $17.184 billion, giving Berkshire an average annual compounding rate of return of 10.04% for twenty-seven years, which doesn’t include all the dividends that it received in that time period. In 2015 alone, Coca-Cola paid Berkshire $528 million in dividends.
More Benefits of Long-Term Investing
Constantly buying and selling means constantly being taxed. If one holds an investment for twenty years there is only one tax to pay, which according to Charlie, equates to an 1 to 3 extra percentage points of profit per year.
Consider a million-dollar investment compounding at 4% a year, will have grown in year twenty to $2,191,123. Add three percentage points (4% + 3% = 7%) so that the million-dollar investment is compounding for twenty years at 7%, the total sum is $3,869,684 in the 20th year.
A Mispriced Gamble
You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.
Why does mispricing phenomenon occur? Because of the shortsighted nature of institutions – primarily mutual funds and hedge funds – that are the dominant players in the stock market.
Charlie discovered that if we invest in companies with great long-term economics, we can bring the number of companies to invest down to ten or fewer, and still be protected against unexpected business failure. It is much easier to keep a sharp eye on our basket if there are only ten eggs in it.
When to bet heavily
You should remember that good ideas are rare – when the odds are greatly in your favor, bet heavily.
Mimicking the heard invites regression to the mean.
I’ve never been able to predict accurately. I don’t make money predicting accurately. We just tend to get into good businesses and stay there.
Financial Crisis Equals Opportunity
Both Charlie and Warren let cash pile up, waiting for a recession/crash. Even if it means getting low rates of return on their cash holdings until the inevitable comes.
Cash is Key
The way to get rich is to keep $10 million in your checking account in case a good deal comes along.
Berkshire keeps $72 billion sitting around in cash, waiting for the right deal to show up. The lousy return in their cash balances are getting a trade off -poor initial rate of return in exchange for years of high returns from finding excellent businesses selling at a fair price.
Danger of Finance Companies
Where you have complexity, by nature you can have fraud and mistakes… This will always be true of financial companies, including ones run by the governments. If you want accurate numbers from financial companies, you’re in the wrong world.
It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.
You have to wait for the right company – one with a durable competitive advantage – that is selling at the right price. Warren got out of the stock market in the late 1990’s, and he waited five years before he found anything he was interested in buying.
Ownership of a business
View a stock as an ownership of the business and judge the staying quality of the business in terms of its competitive advantage.
Charlie begins by figuring out what an entire company is selling for, by multiplying the share price by the number of shares outstanding. A $6 per share stock multiplied by 1 million shares outstanding equates to a market value for the whole company at $6 million.
Then he asks himself what the company is worth as an economic entity from a long-term perspective. If the company is worth a lot more than its market valuation, it is a potential buy.
If we are going to buy and hold a company for twenty years, we don’t want the product it is selling to be obsolete in year five.
Most of the businesses that Charlie and Warren own (Coca-Cola, Wells Fargo, American Express, Swiss Re, Wrigley’s Gym, Krafts Foods, and even Anheuser Busch before it was bought out) have been selling the same product or service for more than a hundred years.
Too Big To Fail
Capitalism without failure is like religion without hell.
Going to Extremes
The one thing that all of Berkshire’s businesses have in common is that they are managed by people who are willing to go to great lengths to keep costs low.
A great business at a fair price is superior to a fair business at a great price.
Two Kinds of Businesses
“There are two kinds businesses: the first earns 12% and you can take it out at the end of the year. The second earns 12%, but al the excess cash must be reinvested – there’s never ant cash. It reminds me of the guy who looks at all of his equipment and says, “There’s all of my profit.” We had that kind of business.” Direct quote from Charlie Munger
In the fifty years that Charlie has owned Berkshire Hathaway stock he has seen its stock price fall by 50% three separate times. If he had sold his shares during any one of those declines his net worth would be a fraction of what it is today.
Quality of business vs. quality of management
“Averaged out, betting on the quality of a business is better than betting on the quality of management… but, very rarely, you find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business.” Direct quote from Charlie Munger
One step at a time
Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.
What we deserve
The best way to get a good spouse is to deserve a good spouse.
Quality attracts quality, be it in business or in marriage.
“Three rules for a career: 1) Don’t sell anything you wouldn’t buy yourself; 2) Don’t work for anyone you don’t respect and admire; 3) work only with people you enjoy.
Out with the Old
Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.
One of the greatest defenses – if you’re worried about inflation – is not to have a lot of silly needs in your life – if you don’t need a lot of material goods.
In marriage, you shouldn’t look for someone with good looks and character. You look for someone with low expectations.
I think people who multitask pay a huge price.
Tell the truth, and you won’t have to remember your lies.