Charlie Munger - Beyond 99 years!!!

- Alok Sharma, Nimit Gala & Swadha Sinha

Charlie Munger was not only a legend in the investment industry but also an encyclopaedia of wisdom. As he once quoted in his interview when asked, what he might want for an epitaph of no more than 10 words, his reply was “I tried to be useful, not I was useful. That would be for other people to judge. But I tried.”

The intent of this note is to reiterate some of his wisdom nuggets on life and investing which we believe can be used to make our lives better.

Born in 1924, in Omaha, Nebraska, on January 1, Munger studied mathematics at the University of Michigan and later served in the US Army Air Corps as a meteorologist. After his stint in the army, he graduated from Harvard Law School and founded his own law firm in 1962.
He went from working for Warren Buffett's grandfather as a teenager for 20 cents an hour during the Great Depression to spending more than four decades as Buffett's second-in-command and as Vice Chairman of Berkshire Hathaway. Even though Munger and Buffett ran their separate investment vehicles, they maintained a close relationship, discussing investment ideas and strategies. Berkshire Hathaway's outstanding share performance over the years exhibits Munger's investing prowess.

A man who never took a single course in economics, business, marketing, finance, psychology, or accounting, and managed to become one of the greatest, most admired, and most honourable businessman. He was noted by essentially all observers for the originality of his thoughts, especially about business and human behaviour.

So, what was Munger's investment approach? Munger was a value investor. He invested selectively using a thorough screening process. He sought out easy-to-understand businesses that could flourish in any market environment. His decision-making framework relied on a diverse set of cognitive tools known as “mental models”. In simple words, mental models enable our brains to make sense of the world by reducing its complexity. These models have helped him make better decisions in business, life, and the stock markets.

Charlie Munger's Mental Model Approach can be described pretty well by a mental model illustration—the Swiss Army Knife Approach. A Swiss army knife is a little pocketknife with numerous tools attached. No matter the problem, you will find something that helps you solve it. That's how Charlie Munger thinks about his latticework of Mental Models. Listed below are Charlie Munger's core mental models:

1. Latticework of mental models - build a latticework of mental models to develop a comprehensive understanding of the world

2. Inversion process - a technique that involves solving problems by working backward

3. Stay inside your circle of competence - focus on areas where you deeply understand and avoid those where your knowledge is limited

4. Worldly wisdom - involves learning from a wide range of disciplines and understanding the fundamental principles that govern the world

5. A multidisciplinary approach - integrating ideas and principles from various fields, one can develop a deeper understanding of complex problems

6. Identify folly and avoid it - recognizing common mistakes and biases can help us make better decisions in our personal and professional lives

7. Learn from your mistakes - using the lessons from our mistakes as opportunities for growth and improvement

8. Opportunity cost - value of the best alternative forgone when deciding, guiding us to make informed choices by considering the trade-offs involved

Here are few of Munger's 'Pearls of Wisdom':

Pivoting to emerging technology/new ideas:
Munger was a key influence of Berkshire's investment in BYD, a Chinese electric car manufacturer, way back in 2008 (when EV car was not even a buzz word). This investment was a departure from Berkshire's traditional focus and reflected Munger's ability to recognise potential in emerging technologies and markets. "I have never helped do anything at Berkshire that was as good as BYD," Just for perspective - Berkshire's $270 million investment into BYD at its peak was valued at $8 billion.

Always be Open to learning from Others:
Charlie often advised against relying solely on personal experience for learning. By learning from the successes and failures of others, individuals can make wiser decisions and avoid common investing pitfalls. He once quoted Newton: "If I have seen a little farther than other men it is because I stood on the shoulders of giants."

No Good Investor Is Either 'Value' or 'Growth':
Munger influenced Buffett to move beyond Ben Graham's cigar-butt-style of value investing and embrace great companies - even if it means paying higher prices for them. The key insight is that the worth of any company is a function of its growth prospects and how confident one can be that the growth will materialize. While the distinction between growth and value is highly popularized, it is advised to be open to various investing style - whether it is value or growth-based investing.

Patience is the name of the game:
Charlie Munger once said, "The big money is not in the buying or selling, but in the waiting,”. He emphasised the importance of patience and long-term thinking in successful investing. In this context, big money is made by being patient and giving your investments enough time to compound and appreciate in value over the years. Successful investing often relies on the power of compound growth and waiting implies avoiding hasty decisions driven by short-term market volatility or emotions.

Buy Wonderful Businesses at Fair Prices:
Charlie Munger's approach to investing has been about wonderful businesses at fair prices, compared to buying fair businesses at wonderful prices. He opted for investments in companies which were rock solid as businesses first and foremost. Buying these companies and then planning to hold them for a long period would give time for the market to reflect their intrinsic worth over many years.

To conclude, Munger's life is the perfect example of lifelong learning, integrity, and intellectual humility. Charlie did leave behind a legacy that will continue to educate, inspire, and guide everyone for generations to come in their personal and professional lives.