Hey, freeus, here's a little propaganda for you to look over. It's an article on Charlie Munger taken form the Lone Star Investor (courtesy of Sunny on the G&K thread):
CHARLIE MUNGER: BERKSHIRE'S OTHER HALF
Numerous books have been written on Warren Buffett and his investment
philosophy, but until recently few journalists had focused on Buffett's
lawyer-investor partner Charlie Munger. But Munger played a key role in
building Berkshire Hathaway, and provided a significant influence on
Buffett's investment theory and strategy.
* Volatility Not A Concern: Ignoring Beta
Volatility does not bother Munger according to Janet Lowe, author of a
new book on his career entitled "Damn Right!" She notes that he had no
problem focusing on a few good investment ideas, concentrating his
portfolio in these ideas, and letting the long term growth of these
firms compound his returns.
Munger maintains that if you can't afford to have the value of your
stock decline by 50% than you probably should not be in the market.
Longer term, he claims investors should position themselves so that
regardless what happens to the market they can "stay in the game" by
limiting downside losses.
Both Munger and Buffett ignore beta - the measure professional investors
use to gage volatility and hence "risk" - preferring to focus instead on
the risk/reward relationship of the business over the longer term.
"Volatility over time will take care of itself" according to Munger,
provided favorable odds exist that the business will grow.
In addition to the law practice and the real estate activities that
Munger was involved with early in his career, he also owned an
investment partnership named Wheeler, Munger & Company. Wheeler Munger
was set up as a classic hedge fund in the 1960's, similar to those that
became popular in the 1990's - but the returns were very volatile.
For example, during the market decline in the early 1970's an investment
of $1,000 in the partnership on January 1, 1973 would have been worth
only $467 two years later - and while Munger was not concerned because
he knew longer term value would surface, reporting temporary losses to
his investors was painful.
* Munger's Ten Rules for Investment Success
Several themes appear in the book that help explain Munger's incredible
success at accumulating wealth as an investor:
* Live Below Your Means - Munger notes that it is very important to
consistently underspend your income, especially when starting a career,
investing the excess funds wisely. The most difficult part of building
wealth is "accumulating the first $100,000 from a standing start, with
no seed money" according to Munger. Making the first million is the next
big hurdle.
* Understand Your Risk Tolerance - Every investor has to know the level
of risk that they can comfortably assume. Since losses are inevitable -
and the book discusses numerous mistakes made by both Munger and Buffett
- an investor must adopt a strategy that fits their risk profile. Since
recent behavioral finance studies indicate that losses are three times
as painful as gains for most investors, many investors may want to adopt
a relatively conservative strategy.
* Research Opportunities - Investors must be able to process a massive
amount of information effectively, and must learn to evaluate the risks
and rewards of potential investments. Business magazines are a great
resource for evaluating trends, and Munger notes that "I don't think you
can get to be a really good investor . . . without doing a massive
amount of reading."
* Invest for the Long Term - Volatility has not been a major concern of
Munger, provided the long term odds of success are in his favor. In
fact, volatility can allow an investor to accumulate positions in a
viable enterprise at prices below intrinsic value. A long term focus is
essential when ignoring the volatility of markets and individual stocks,
and can provide impressive gains that tend to compound over time.
* Funds Are No Substitute - Americans are oversold on the benefit they
receive from money managers, especially mutual fund managers, and "that
bothers Munger enormously." Transaction costs, taxes, and fees can
significantly reduce total returns. Munger advocates buying index funds,
or alternatively buying high quality stocks that are not overvalued and
holding for the long term.
* Patience, Coupled With Decisive Action - Excellent investment
opportunities are not common. Investors should continually search and
evaluate opportunities. Utmost patience is required until an investment
is found that has extremely favorable odds of success. "People
underrate the importance of a few simple big ideas" according to Munger.
Extreme decisiveness, once the commitment is made, dramatically
improves financial results over a lifetime.
* Tax Planning - Taxes and tax planning play a major role in wealth
accumulation. As a lawyer drawing an income Munger was subject to
relatively high income tax rates, significantly above what he paid on
capital gains, which reduces the ability to build wealth. The
recognition of any capital gains on investments many times can be
delayed or offset by investment losses, allowing the investment to
compound at an accelerated rate.
* Love the Process - Because investors must initially be willing to live
below their means, have the skills to conduct a massive amount of due
diligence, exhibit patience, read voraciously, manage risk effectively,
and make decisive actions when the odds are in their favor, an investor
must love the evaluation and investment process since it is not without
a massive amount of work.
* Pay a Reasonable Price - While value is important, investors should
buy good businesses that are in sectors that exhibit favorable business
characteristics. Management can only do so much with a company in a
declining industry. Good businesses will grow in value over time.
* Choose Good Partners - Every investor relies on the advice of others
in making investment decisions - whether those are investment advisors,
brokers, newsletters, or business partners. Munger was fortunate to have
selected some of the best partners available to assist in evaluating
investment ideas. Successful investors will have top quality investment
partners. |
