Friday, 12th March 2010

Charlie Munger on How to Get Rich

Written by George Traganidas Topics: Habits, Stock Investing

1. Measure risk
All investment evaluations should begin by measuring risk, especially reputational.
In 2003-2007, investors loved banks because they were big and made lots of money. What few asked was how much risk they were taking on. Those who properly analyze how much risk the run-ups have added will end up happiest.

2. Be independent
Only in fairy tales are emperors told they’re naked.
Maybe the hardest part of investing is that the greatest odds of being right come when most think you’re wrong, and vice versa. If your plan is to watch CNBC and invest in what the most talking heads like, you’ll likely end up with average results at best.

3. Prepare ahead
The only way to win is to work, work, work, and hope to have a few insights.
The past decade was defined by delusions of success: Buy a house, and you’ll be rich. Have a credit card, and you’ll be rich. Buy penny stocks, and you’ll be rich. Live in America, and you’ll be rich. None of it was true. But this fact is as true today as it’s been for eons: The best way to become financially successful is to work hard, save harder, learn a lot, and invest patiently and prudently.

4. Have intellectual humility
Acknowledging what you don’t know is the dawning of wisdom.
A related Munger quote: “The iron rule of life is that only 20% of the people can be in the top fifth.” Sad, but true. You’re not Warren Buffett. You don’t know what’s going to happen next year. You might not even know what a balance sheet is. It’s OK. And not just OK, but vital to admit it, and either pass on things you don’t understand, or learn from someone who does.

5. Analyze rigorously
Use effective checklists to minimize errors and omissions.
There’s truth to the adage that people spend a month researching a new dishwasher, but 10 minutes researching a new stock. Take your time. Be patient. Be selective. Read annual reports. Crunch numbers. Get other people’s opinion. This is your hard-earned money we’re talking about.

6. Allocate assets wisely
Proper allocation of capital is an investor’s No. 1 job.
Last fall, stock funds were liquidated en masse while money market funds got inundated with demand. No doubt this was because investors feared that the worst was ahead. But it also took a big, scary event to make people realize their allocation was dangerously skewed. Too many stocks, too little cash. The worst part is that most of these investors had to either sell or increase cash savings at precisely the same time stocks were cheapest.

7. Have patience
Resist the natural human bias to act.
It all comes back to one of Buffett’s most famous sayings: “The market is there to serve you, not instruct you.”

8. Be decisive
When proper circumstances present themselves, act with decisiveness and conviction.

9. Be ready for change
Live with change and accept unremovable complexity.
If the past two years taught us anything, it’s that what you don’t think can happen not only can, but probably will. In both personal finance and investing, there’s no more dangerous place to be than relying 100% on a certain set of circumstances. That’s just not how life works.

10. Stay focused
Keep it simple and remember what you set out to do.
As Dale Carnegie said, “Success is getting what you want. Happiness is wanting what you get.” It doesn’t get better than that.

Follow the practical way,
George

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