The Practical Way

A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business

Charles Munger
USC Business School
1994

I’m going to play a minor trick on you today – because the subject of my talk is the art of stock picking as a subdivision of the art of worldly wisdom. That enables me to start talking about worldly wisdom – a much broader topic that interests me because I think all too little of it is delivered by modern educational systems, at least in an effective way.

And therefore, the talk is sort of along the lines that some behaviorist psychologists call Grandma’s rule after the wisdom of Grandma when she said that you have to eat the carrots before you get the dessert.[...]

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Quotes Charlie Munger

All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.
— Charlie Munger

The best thing a human being can do is to help another human being know more.
— Charlie Munger

Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group then to hell with them.
— Charlie Munger

In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero.
— Charlie Munger

Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.
— Charlie Munger

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Charlie Munger Investment Principles Checklist

I finished reading “Poor Charlie’s Almanack” that details the thinking principles of Charlie Munger about investments and life in general. The book is an amazing read, because it shows how Charlie thinks about problems using many different ways. This helps him to avoid the “Man with a hammer” syndrome and allows him to see other aspects of problems and try many different ways to solve them.

In the book he shares a checklist he is using in evaluating companies.[...]

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Charlie Munger on How to Get Rich

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.[...]

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How We Can Restore Confidence

The Washington Post
By Charles T. Munger
February 11, 2009

Our situation is dire. Moderate booms and busts are inevitable in free-market capitalism. But a boom-bust cycle as gross as the one that caused our present misery is dangerous, and recurrences should be prevented. The country is understandably depressed — mired in issues involving fiscal stimulus, which is needed, and improvements in bank strength. A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.[...]

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Basically, It’s Over

Slate
By Charles Munger
Sunday, Feb. 21, 2010

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature’s bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island “Basicland.”

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.[...]

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Warren Buffett Investment Lessons, part 7

How he runs Berkshire Hathaway

In 1992, Warren Buffett say that Berkshire’s after-tax overhead costs are under of 1% of reported operating earnings and less than 1/2 of 1% of look-through earnings. In 1996, the after-tax headquarters expense amounts to less than two basis points (1/50th of 1%) measured against net worth.

Warren Buffett does not believe in flexible operating budgets, as in “Non-direct expenses can be X if revenues are Y, but must be reduced if revenues are Y – 5%”. In addition, it makes no sense to add unneeded people or activities because profits are booming, or cutting essential people or activities because profitability is shrinking.[...]

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