Investing is a subject in which there is no end to learning. Each additional piece of knowledge accumulates and compounds, and over time makes the investor more effective.
If ever there was an investor that came close to knowing it all, Warren Buffett is it. He’s been doing it a long time, picking up his first stocks at 11 years old. Even before his time at Berkshire Hathaway, he was running an extremely successful partnership with his close friends and family. After that, he never worked for anyone else.
Buffett was introduced to Charlie Munger in 1959. The two got along with each other immediately.
Munger is now Buffett’s right-hand man, and has been since 1978, when he left his own investment practice to join Berkshire Hathaway.
Over the past 60 years in which they have been friends and business partners, it’s clear they have both influenced each other. Let’s take a look at how Munger has shaped Buffett’s investing style over this time, and what we can learn from him.
Psychology of economics
Back in the 1990s, Munger gave a string of speeches about the intersection of economics and psychology. He feels that human psychology could be just as important as economic factors when it comes to investing.
It may be why Buffett has said that “every time I’m with Charlie, I get some new slant on an idea that causes me to rethink certain things.”
Here, Munger’s investment style seems to be almost contrarian. In understanding where economics and psychology meet, he is able to take a step back when the market is over-reacting to a piece of news, and take an educated guess at how the market may change due to the human element.
Like Buffett, Munger seeks simplicity in the companies he invests in. If he doesn’t understand a business, he won’t buy it. He has said that at Berkshire Hathaway, they have “three baskets for investing: yes, no, and too tough to understand.”
Similarly, he believes that “excessive diversification is madness.” In his view, an investor will get better rewards if they truly understand their investments.
With new technology constantly emerging, and alternative investments like Bitcoin, it is as important as ever for an investor to understand what they are buying.
At 95 years old, Charlie Munger is one of the more seasoned investors. One of my favourite quotes of his is that “the big money is not in the buying or selling, but in the waiting.”
Being a long-term investor is at the crux of his and Berkshire Hathaway’s success. Over time, compound interest from reinvested dividends and stock price growth is a powerful force.
Berkshire Hathaway has owned some stock longer than many millenials. For example, it began buying shares in Coca-Cola in 1988. The company has added to its holding over the years, making it one of its largest holdings.
Charlie Munger is one of the great minds in the investing world. By keeping things simple, thinking of pyschology behind the economics, and holding, we could hope to emulate some of his success.
T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019