How much money would you be willing to pay Warren Buffet for advice and words of wisdom on investing?
Regardless of how much you’d pay, we all know that taking him out for a coffee and asking him questions is likely not going to happen for most of us anytime soon. So, what’s the next best thing? Perhaps it is to learn from a distance – to listen to his teachings, to read his books, and to learn whatever we can.
But what if there were a more direct way to learn from him even though it may not be learning directly from him?
The answer is to learn from the people he has taught – the people closest to him.
Right Hand Man
One of those people is Charlie Munger. Charlie, like Buffet, is also from Omaha, Nebraska. He is the vice-chairman of Buffett’s Berkshire Hathaway and is considered, even by Buffet himself, to be Buffett’s “right-hand man.”
Charlie is an extremely intelligent and experienced individual. He served his country in WWII, earned a law degree at Harvard University, and even started his own (very successful) investment partnership, all before even meeting Buffett.
In this post, we will look at some of Munger’s words of wisdom and glean some insights which may help us to become better investors ourselves.
So, let’s examine 4 concepts from Charlie Munger that are packed with wisdom for today’s investors.
1. “Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris – I wanted to independence.”
There are two pieces of wisdom one can get from this single statement. First, we have to really want to make money. There is nothing wrong with that. Napoleon Hill’s classic Think and Grow Rich basis one of its main premises on this concept. We have to truly desire this.
Second, we have to want it for a good reason. Notice I say a “good” reason, not the “right” reason. The “right” reason is subjective. Munger doesn’t want flashy things. He wants independence. What makes that a good reason is not the reason itself but the fact that he knows exactly why he is doing this.
Our reason may be different or similar to his. The reason itself is not as important as knowing the reason and to make our decisions with that particular goal in mind.
2. “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.”
It’s not that Munger is against education (we will explore that shortly), but he emphasizes behavior over knowledge. What you know is about 20% of investing, the other 80% is what you do about it.
Temperament, in light of investing, refers to patience, risk tolerance, and self-discipline. Munger is not devaluing a financial and investing I.Q., but he is indicating that the most important indicators of success are behavioral.
3. “If you think your I.Q. is 160, but it’s 150, you’re a disaster. It’s much better to have a 130 I.Q. and think it’s 120.”
Again, it may seem Munger is insinuating that education is not important. But that is not what he means at all. What he’s telling us it that we are to make informed decisions based on real facts, not based on arrogant presumptions which stem from us thinking we know more than what we do.
The two things one must glean from this concept is that it is important to educate ourselves through books, advice, and blogs like this one. Secondly, it is essential that we not make rash moves assuming we know more than what we do. It is better to take our time and be certain rather than to assume and be hasty.
4. “Live within your income and save so that you can invest. Learn what you need to learn.”
It’s almost easy to overlook this and not include it in a blog post because it’s not catchy. It’s not exciting and doesn’t sound flashy. In fact, it’s quite boring and mundane. And that is why many people overlook its wisdom. It is also why many people lose out while trying to build wealth.
Nonetheless, what Munger is saying is truth. It is the bottom line. If we are to be successful investors, we have to spend less than what we make. We have to have money available for investing. And we have to learn how to invest and in what to invest our money in.
Again, it doesn’t sound sexy, but it does work. Earn money, save money. Don’t overspend it. Learn what to do with it. Then invest it properly. Consistently done over time, this strategy will bring success and long-term rewards.
Taking it all in
All in all, Munger leaves us with a few takeaways from his 4 words of wisdom.
Have a passion to invest and know why you do it. Focus on behavior, not just knowledge. Be modest in your self-assessment. Spend less than you earn, and learn how to invest the rest.