In 1986, Charlie Munger gave the commencement speech at the Harvard School, a prep school that five of his sons attended. Munger took his inspiration from a prior commencement speech given by Johnny Carson in which Carson, using inversion, told the students how they could guarantee a miserable life. Here’s Carson’s prescription:
- “Ingesting chemicals in an effort to alter mood or perception;
- Envy; and
Munger offered his own reflections on Carson’s prescription, and added four more of his own:
- Be unreliable;
- Ignore the experience of others, both living and dead;
- If you get knocked down in life, stay down; and
- Ignore the advice of the rustic who said, “I wish I knew where I was going to die, and I’d never go there.”
Inversion allows you to see a problem or situation from a different perspective in order to gain fresh insights that you did not previously notice or that you took for granted. It is in that spirit that I offer the following advice for how to be a poor investor.
1. First, don’t spend much time looking for new investment ideas. Don’t look for ideas off the beaten path, but rather stick with ideas and themes that enjoy a strong consensus. Also, be inconsistent in searching for investment ideas and lose interest when the market is going down and everyone is negative and afraid.
2. Second, be content with superficial analysis of your investment ideas and count on being able to quickly dump your stocks if things go wrong. Don’t do your homework like you would if you were investing substantially all of your net worth in a local business or farm. Save yourself a lot of time by making your purchase decision based on a write-up in a business magazine, analyst report or blog post.
3. Third, don’t limit yourself to simple, boring investments that are easy to understand. Look for ideas in more exotic, “fast-moving” sectors – biotech, commodities, options, alternative energy, and emerging markets – where you have little experience or competence. Ignore the examples of others – including sophisticated institutions – who have lost their capital by speculating in areas they did not understand.
4. Fourth, invest in businesses with mediocre or poor returns on invested capital that do not enjoy any durable competitive advantages. Reach for more speculative returns by betting on the turnarounds of poorly performing businesses. Count on the fact that, even though you have no expertise in a given industry, you’ll be able to predict if a struggling company will be able to turn around. Ignore the advice of investors like Buffett and Greenblatt who have found that good businesses have a much better chance of delivering satisfactory investment results.
5. Fifth, don’t take the time to investigate the track record of a company’s management. That way you won’t be troubled if management has a poor record of allocating capital, if they will be highly compensated regardless of how the business performs, or if there is evidence that they have been dishonest or unethical in their prior dealings.
6. Sixth, don’t worry about the price you pay for an investment as long as the company’s story is sufficiently exciting, loved by the media or a consensus winner. If you do decide to look at how much you’re paying, don’t spend a lot of time thinking about valuation, normalizing earnings power, and future growth prospects. Instead, rely on simple (simplistic) metrics like price-earnings ratios or price-to-book ratios where you don’t have to think too much or that don’t require as much research. Be content with a superficial valuation and assume that the factors that led to the business’ past success will be firmly in place for the next five to ten years.
7. Seventh, buy a lot of small positions. That way, you’ll never miss out on the excitement of betting on your latest hunch, and you’ll never need to worry too much about a position because it won’t overly matter if the investment works out or not. You’ll always have plenty of action and you can hedge against not really knowing much about any of your investments.
8. Eighth, embrace the newer short-term oriented approach to investing and don’t fall for an out-of-fashion strategy like patiently buying and holding an investment. Who wants to wait three to five years for an investment to work? Focus on investments that will be up big in the next six to twelve months – or sooner. Ignore the fact that there is no rational basis for consistently making short term predictions of prices.
9. Ninth, ignore the lessons of your past mistakes. It’s psychologically painful to go back over your failed investments and it takes time. Ignore developments in behavioral finance and assume that you’re above all that anyway – that you already know what you’re doing. Assume that you’ll get better results in the future without changing any of the methods and behaviors that led to your past results.
10. Finally, take pride in the fact that you already know what you need to know and that learning the lessons of financial history are a waste of time. Also, don’t take the time to study all the great investors who have generously shared their investing methods. Ignore the fact that business is an evolving, complex reality and that investing is a highly competitive endeavor where you go up against the best and the brightest. Ignore the examples of investors like Munger and Buffett – and most successful investors – who are life-long learners.