Charlie Munger – famed for being the other half of Berkshire Hathaway – has a low of wit and wisdom. His business partner, Warren Buffet, has attributed much of his success to Charlie Munger. In his must-read book, Poor Charlie’s Almanac, Munger puts forth a 10-step checklist that even the most inexperienced investors could benefit from.
1. Measure risk
All investment evaluations should begin by measuring risk, especially reputational.
As an investor, you need to be aware that from time to time, your investments won’t turn out the way you wanted. Mistakes are always inevitable. By realising this, position yourself in a way where you have a large margin of safety. Only take on risk where you are sure you’ll be satisfactory rewarded.And most of all, avoid questionable people.
2. Be independent Only in fairy tales are emperors told they’re naked
Be carefully who you listen to. Know how people are compensated. Many stock brokers are rewarded for activity so will tell you to trade often. The best way to good returns is to think independently. Chasing others’ opinions may seem logical, but investors like Munger and Buffett often succeed by going against the grain. Big Berkshire investments such as Coca-Cola (NYSE:KO), were largely ignored by the masses when they were first made.
3. Prepare ahead
The only way to win is to work, work, work, and hope to have a few insights.
You need to turn over many stones to find those hidden gems. It should come as no surprise that the best stocks aren’t the ones touted in the media. You need to do the work to get the results. As an example, Buffett reads thousands of annual reports to cultivate ideas — even if he only comes up with a few candidates each year..
4. Have intellectual humility
Acknowledging what you don’t know is the dawning of wisdom.
Stay in your comfort zone. This is what Warren Buffet does. If you don’t understand a company, don’t invest in it – even if its share price is shooting higher. Only invest in what you know and what you can understand.
5. Analyse rigorously
Use effective checklists to minimise errors and omissions.
Do extensive research before making an investment. You want to minimise any downside risk. After all it is your own hard earnt money. Why would you want to throw it away?
6. Allocate assets wisely
Proper allocation of capital is an investor’s No. 1 job.
Position sizing is important. In Mungers early days, when good ideas came, he poured significant capital into them; otherwise, he just sat around doing nothing. If a great opportunity arises, don’t be afraid to go in big.
7. Have patience
Resist the natural human bias to act.
Munger said it best himself: “Half of Warren’s time is sitting on his ass and reading; the other half is spent talking on the phone or in person to a highly gifted person that he trusts and trust him.”
Whilst many of us get itchy fingers and want to constantly trade, the big money is made by being patient. Don’t spend your life looking at ticker symbols. It won’t do you any good.
8. Be decisive
When proper circumstances present themselves, act with decisiveness and conviction.
Don’t be swayed by the heard mentality. If you have conviction in a stock, go out there and buy it.
9. Be ready for change
Accept unremovable complexity.
Change in inevitable. Be prepared to adapt your thinking. Munger and Buffett hated airlines for decades, but as the times changed, they threw their old thoughts out the door and invested billions into airline stocks. The world is constantly changing, be prepared to adapt.
10. Stay focused
Keep it simple and remember what you set out to do.
In chasing little, unimportant things, we often overlook huge and critical factors. By keeping thins simple, we can concentrate on what really matters, buying good companies at a good price, and holding them until they’re fully priced.