Charlie Munger is Warren Buffett’s mentor and life partner, today’s greatest investment thinker, and vice chairman of Berkshire Hathaway, the world’s fourth largest listed company, ranked No.4 in the world’s top 500 in 2019, known as the most respected company in the industry.
1. The art of stock selection
There’s no doubt that Munger’s most fascinating part is its smart investment decisions. This not only helped Munger achieve financial freedom, but also created extraordinary value for Berkshire Hathaway.
This article will give you a brief account of how munger’s wise decision-making came into being.
(1). Invest within the capability circle
Munger divides the investment objects into three types: investable, non investable and too difficult to understand.
He and Buffett both invest only for the objects in the ability circle (i.e. those that can be invested). In order to identify “investable” potential projects, Munger usually selects a mainstream industry that is easy to understand, has development space and can survive in any market environment.
(2). Comprehensive consideration of various relevant factors
Throughout the detailed evaluation process, Munger will take into account various relevant factors, including the internal and external factors of the enterprise, as well as the industry situation in which it is located, even if these factors are difficult to be identified, measured or reduced to numbers.
Great enterprise with fair purchase price
“Great companies with fair share prices are better than ordinary companies with ultra-low share prices.”
In stock selection, Munger will calculate the real value of the whole enterprise and determine the value of each share compared with the market price considering the dilution of future equity.
(3). Pay attention to the safety margin of enterprises
With regard to the margin of safety, Munger often says that investors can benefit from the “redundant thinking model” of engineering. When engineers design a bridge, they give it a back-up support system and extra protection against collapse — as should the investment strategy.
2. Checklist of using investment principles
After evaluating the value of the stock correctly, Munger will make a more accurate screening, at this time, he will use a very effective checklist to make a quick and comprehensive evaluation.
Decisive attack in “golden opportunity”
After the above tedious work, Munger will patiently wait for the “golden opportunity” to come. When all the conditions are just right and Munger decides to invest, he is likely to make a big bet. His investment behavior combines extreme patience and determination, which is an essential quality of success.
Finally, the original words of Munger will be used as a summary of this part: “The most important idea is to regard the stock as the ownership of the enterprise and judge the holding value of the enterprise according to its competitive advantage. If the discounted cash flow of the enterprise in the future is higher than the stock price you buy now, then the enterprise has investment value. It’s very basic to take action when you have an advantage. You have to know the odds, train yourself, and bet when they’re good for you. We just keep our heads down and try our best to deal with the downwind and the headwind, and pick up the results every few years. “
Munger’s Checklist
“Why do smart people often make mistakes? They didn’t do what I asked you to do: use a checklist to make sure you have all the major models and use them in a diverse way. “ — — Charlie Munger
Double track analysis
1). Rationally, which factors really control the interests involved?
(for example, macro and micro economic factors.)
2). When the brain is in the subconscious state, which subconscious factors will automatically form useful but often failed conclusions in various ways?
(instinct, emotion, greed, etc. cause people to make wrong judgments.)
Super simple universal concept
1). Solve the obvious problems first
2). Use mathematical operation ability
3). Reverse thinking (reverse thinking)
4). Apply basic interdisciplinary wisdom and never rely on others completely
5). Pay attention to the joint effect of many factors — that is, the lolla Palooza effect
Tendency based on Psychology
25 standard causes of human misjudgment
Investment and decision checklist
(Munger’s informal list of factors to consider is detailed.)
1). Risk — investment evaluation should start from measuring risk (especially credit risk)
● measure the appropriate margin of safety
● avoid dealing with people with ethical issues
● insist on appropriate compensation for the scheduled risks
● always remember the risks of inflation and interest rates
● avoid making big mistakes; avoid continuing capital losses
2). Independence — “only in fairy tales can the emperor be told that he is not dressed.”
● an objective and rational attitude requires independent thinking
● remember that whether you are right or wrong doesn’t depend on whether others agree or disagree with you — the only thing that matters is whether your analysis and judgment are correct
● following the flow will only bring you closer to the average (only moderate performance)
3). Preparation — “the only way to win is to keep working and hope to have a little insight.”
● cultivate yourself as a lifelong scholar through extensive reading; cultivate curiosity and try to be a little smarter every day
● more important than the willingness to win is the willingness to be prepared
● master the thinking model of each university
● if you want to be smart, the question you have to keep asking is “why”
4). Modesty — admitting your ignorance is the beginning of wisdom
● only act within their own clearly defined competence circle
● identification and verification of negative evidence
● refrain from pursuing false accuracy and false certainty
● the most important thing is, don’t fool yourself, and remember that you are the one who is most easily fooled by yourself
5). Rigorous analysis — the use of scientific methods and effective checklists can minimize errors and omissions
● differentiate between value and price, process and action, wealth and scale
Remember that it’s better to be simple than to be profound
● become a business analyst, not a market, macroeconomic or securities analyst
● consider the overall risks and benefits, and always focus on potential second-order effects and higher-level impacts
● think ahead, look back — think in reverse, always in reverse
6). Allocation — the most important work for investors is to allocate capital correctly
● remember that the best use is always measured by the next best use (opportunity cost)
● very few good ideas — when the opportunity is good for you, gamble hard (allocate capital)
● don’t “fall in love” with investment projects — even if you put in a lot of effort, it depends on the situation and the opportunity
7). Patience: restrain human’s natural preference for action
● “compound interest is the eighth wonder of the world”. Don’t interrupt it when it’s not necessary
● avoid excessive transaction taxes and friction costs and never act for action
● keep your head clear when you are lucky
● enjoy the results and the process, because you live in the process
8). Determination — take resolute action when the right time comes
● be afraid when others are greedy; be greedy when others are afraid
● opportunity doesn’t come many times, so when it comes, seize it
● opportunity only for those who are prepared: investment is such a game
9). Change — learn to change and accept the complexity that cannot be eliminated in life
● recognize and adapt to the real nature of the world around you, don’t expect it to adapt to you
● constantly challenge and proactively revise your “favorite ideas”
● face reality, even if you don’t like it — especially when you don’t like it
10). Focus — don’t complicate things, remember what you were going to do
● remember that reputation and integrity are your most valuable assets — and can vanish in an instant
● avoid arrogance and boredom
● don’t neglect the obvious because you care too much about the details
● never rule out unnecessary information: “the Bank of thousands of miles, the ant nest”
● face your big problems and don’t hide them
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