Charlie Munger’s Ten Rules for Investment Success

I have in my files a book review by Joseph Dancy, a law professor at SMU, of the book Damn Right! by Janet Lowe. The book is a biography of Charlie Munger, the Vice-Chairman of Berkshire Hathaway and Warren Buffett’s long-time partner. Dancy’s review includes a useful distillation of Munger’s wisdom in the form “ten rules for investment success”.

Munger is a deep thinker whose interests go far beyond investing. He is largely credited with influencing Buffett to move beyond looking solely for businesses that are statistically cheap by traditional metrics – low P/E, low P/B, etc. – and to look for so called “good” businesses that enjoy high returns on invested capital and strong competitive positions. Graham did not generally invest in these types of businesses because they were not backed by quantifiable hard assets.

CHARLIE MUNGER: BERKSHIRE’S OTHER HALF

Numerous books have been written on Warren Buffett and his investment philosophy, but few journalists have focused on Buffett’s lawyer-investor partner Charlie Munger. Munger played a key role in building Berkshire Hathaway, and provided a significant influence on Buffett’s investment theory and strategy.

Good Investment Ideas

Portfolio volatility does not bother Munger according to Janet Lowe, author of a book on him entitled “Damn Right!” She notes that Munger tends to focus on a few good investment ideas, concentrates his portfolio in these ideas, and lets the long term growth of these firms compound his returns.

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 his law practice and the real estate activities, Munger also owned an investment partnership at the firm of Wheeler, Munger & Company. Wheeler Munger was set up as a classic hedge fund, similar to those that have become so popular today – but the returns were very volatile.

During the market decline in the early 1970s an investment of $1,000 in the Munger 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 help explain Munger’s incredible success accumulating wealth as an investor: [Continue Reading]

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