Charlie Munger and Warren Buffet are probably the best known investing duo that ever lived.
Both of these investors are great in their own right but when they come together, they have leveraged there knowledge and made decisions that have turned Berkshire Hathaway into the colossal conglomerate it is today.
Both Buffet and Munger have a great eye for wonderful businesses and this had led them to achieve great returns on their stock market investments over the years. Buffet and Munger stock selection strategy is relatively straightforward and easily implementable by the average investor. In Mungers own words, their stock selection strategy is as follows:
We have to deal in things we’re capable of understanding, and then, once we’re over that filter, we have to have a business with some intrinsic characteristics that give it a durable competitive advantage, and then, of course, we would vastly prefer a management in place with a lot of integrity and talent, and then, finally, no matter how wonderful it is it’s not worth an infinite price so we have to have a price that makes sense and gives a margin of safety given the natural vicissitudes of life.
It is really that simple. The Buffet and Munger strategy has 4 filters or criteria.
- Understand the business
- The business should have a competitive advantage or an economic moat
- Good Management with a lot of integrity and talent,
- The price paid should be in line with intrinsic value
When it comes to your portfolio, you can easily copy Buffets and Mungers investment philosophy. Stick to investing in companies you know that have a strong history, great economic moats and have the ability to compound wealth over the long term. Coca Cola, Apple and American Express fit this criteria and it is easy to see why they are major holdings in Berkshire Hathaway.
Stocks like these are not golden ideas but something so simple that very one can do. And this is what most people find the hardest, investing in simple stocks. Most people want to own stocks that have a great story or involve a fast growing company or are the next Apple (AAPL). But it is really hard to consistently make mont in these companies. You should not be greedy – just look at what happened to the investors of GTAT. Rather, it is better to follow the buffet and Munger strategy. By keeping it simple, you are not only able to preserve capital but grow it over the long term!