Four investing principles Charlie Munger lived by

In late November 2023, Charles (Charlie) Munger, longtime partner of Warren Buffett, passed away at the age of 99. Munger served as vice chairman of Berkshire Hathaway for decades. In addition, many market commentators regard Buffett as one of the most influential investors of recent times. Together, they grew Berkshire from a small textile manufacturer into a large conglomerate. As of late 2023, public market data put its market capitalization at approximately US$775bn. This article looks at four investing principles Charlie Munger lived by, along with their limits.

Munger’s philosophy rested on multidisciplinary thinking. For example, he drew insight from diverse fields such as psychology, history and economics. He also stood out for a fundamentals-based approach to investment decisions. In other words, he evaluated the essential aspects of a company. These included its revenue sources, earnings potential, balance sheet health and market position.

The four investing principles Charlie Munger lived by

Munger promoted these ideas alongside Buffett.

• The big money is not in the buying and selling, but in the waiting. In practice, Munger was not active in day-to-day trading. Instead, he tried to identify positions he considered as safe as possible and hold them, often for several years. However, no investment is risk-free, and holding for years does not guarantee a gain.
• Buy wonderful businesses at fair prices. Munger avoided stocks that looked appealing only because they seemed cheap. Instead, he favored companies with strong fundamentals and reasonable valuations. In his view, the market would eventually recognize their intrinsic value over the long term. Of course, markets can take years to reflect value, and sometimes never do.
• Great opportunities are rare. Munger believed that life does not shower anyone with unlimited opportunities. As a result, he aimed to rule out as many weak or unsupported investment ideas as possible. He favored significant moves at those rare moments when a strong opportunity appeared, and only after thorough analysis. Therefore, his approach required patience and a willingness to sit out long stretches without acting. Meanwhile, concentrating on a few large bets can increase risk if one goes wrong.
• Good businesses are ethical businesses. One of Munger’s favorite tenets was that good business is ethical business. Conversely, he argued that a business model built on deception is headed for failure. Munger and Buffett built a reputation for closely analyzing the companies they considered. For instance, they looked for strong growth potential and models they viewed as fair, equitable and ethical.

How to read these ideas today

These principles describe a mindset more than a formula. For example, waiting patiently only helps if an investor first understands what they own. In addition, a fair price depends on careful research into a company’s fundamentals, not on a quick glance at its share price. Next, an investor who wants to wait for rare opportunities needs a clear view of their own goals and time horizon. Otherwise, it can be hard to tell discipline from simple inaction.

The ethical test also deserves attention. In practice, investors can review how a company treats customers, employees and shareholders. They can also read annual reports and compare management’s statements with actual results over time. However, none of these steps removes risk. Markets can fall, businesses can change, and even careful analysis can prove wrong. As a result, many investors spread their holdings across several assets rather than relying on a single idea.

A lesson beyond investing

Perhaps his most significant reflection was about life rather than investing. Above all, he said that the best thing a human being can do is help another human being know more. Finally, the four investing principles Charlie Munger lived by reflect one investor’s views and experience. They may not suit every investor’s goals, time horizon or risk tolerance.

Important information

This article is educational and is not individual investment advice. Past results do not guarantee future results. Consider speaking with a qualified financial professional about your own situation.