scorecardresearch'Be self-critical': Here are five investing lessons from Charlie Munger

'Be self-critical': Here are five investing lessons from Charlie Munger of Berkshire Hathaway

Updated: 18 Nov 2022, 10:59 AM IST

Being an ace investor and vice chairman of Berkshire Hathaway at 98 is no mean task – to say the least. There is a slew of key investing lessons one can learn from him. We share five of them

 Charlie Munger (right) is the vice chairman of Berkshire Hathaway, a company headed by Warren Buffett (left).

Charlie Munger (right) is the vice chairman of Berkshire Hathaway, a company headed by Warren Buffett (left).

The success and wealth which Charlie Munger created in his not-too-short lifetime is indisputably massive and impressive. Most of us might want to emulate his achievement but do not know how. So, instead of making the same mistakes by fighting our own battles, we can learn some smart tips and tricks from him.

Those who are still wet behind the ears should know that Munger is a legendary investor and vice chairman of Berkshire Hathaway. He was born and raised in Omaha, Nebraska. He worked for a grocery store owned by Warren Buffet’s grandfather in 1924.

H studied law at Harvard Law School and graduated with a Juris Doctor degree in 1948. Like Buffett, he thinks differently and follows a different investing style. “Always take the high road, it’s far less crowded,” he says.

Here we share key five lessons shares by an investing legend:

1. Invest in what you understand: One of the earliest stocks Munger bought was of William Miller Instruments, a company that invented a better way of recording sound. So, it was believed that it would take over all recording technology.

However, someone else invented magnetic tape around the same time. The tape was quite superior whereas that the product Munger had invested in sold just three instruments. His investment was wiped out.

The lesson he learnt was that changing technologies was supposed to be avoided. He is, therefore, also of the view that if there are two things: one you understand and the other you don’t, then you should invest in the former.

“The most important thing is knowing where you are competent and where you aren't. The human mind tries to make you believe you are smarter than you are. Rub your nose in your mistakes,” he said.

2. Be self-critical: Although the doctrine goes completely against the widely held belief of optimism wherein you are taught to be optimistic – Charlie Munger advises investors to be self-critical.

During a Los Angeles prep school speech in 1986, Munger insisted that it was better to look for the negatives of that decision when making a decision: “Is this going to be a disaster?” rather than “Is this going to be wonderful?”.

3. Avoiding foolish acts and learning from it: Wealthy investors are known to be collectors. Munger collects foolish acts of others. He mentions that one of the most common wrong investing decisions that investors take is to buy a cyclical company at the top of its cycle.

They do not realise that the old cycle of the company would most likely come back. As a result, they don’t learn from their mistakes. It is one of the important characteristics is to learn from mistakes.

4. Don’t rush to avoid mistakes: He also highlights that there is a tendency of investors to remove doubt fast which are, otherwise, rational. People tend to take quick decisions and they steer clear of any doubts they have in their minds.

Investors are usually reluctant to even think about how our views could change. This habit of ours weakens our ability to think rationally and compels us to prioritise information that reinforces our preconceived notions.

5. Learning to unlearn: He believes that there are innumerable solutions to a problem, and to see through each of the solutions, an individual should first unlearn all the things that one has learnt from previous experiences. Similarly, while drafting an investment strategy, one needs to make a new strategy for every new investment that he/she plans to do.

These are some of the tips shared by Benjamin Graham.
First Published: 18 Nov 2022, 10:59 AM IST