The Wisdom of Charlie Munger

by Nicholas Vardy

"Wisdom acquisition is a moral duty. It's not something you do just to advance in life. Wisdom acquisition is a moral duty. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know."

- Charlie Munger, 2007

Coming out of law school, I had a job offer to work with a quirky law firm in Los Angeles named Munger, Tolles & Olson.

I recall the name because it was the only law firm that pursued me actively.

It was only many years later I learned that the "Munger" in the name was Charles (aka Charlie) Munger, Warren Buffett's long-standing investment partner.

You've probably seen pictures of Charlie Munger.

He's the staid fellow who sits on stage next to Buffett during Berkshire Hathaway's annual shareholder meetings.

But don't let Munger's modest appearance deceive you.

The 94-year-old vice chairman of Berkshire Hathaway has one of the most remarkable minds on the planet.

Buffett and Munger have a lot in common...

Both hail from Omaha, Nebraska.

Both worked in the same grocery store when they were kids.

And both became billionaires through investing.

Based on their personal balance sheets, Buffett is the far more successful investor.

Munger's net worth is a mere $1.7 billion compared with Buffett's $84.6 billion.

But even Buffett is quick to admit that Munger is the far more interesting character.

The Remarkable Mind of Charlie Munger

Buffett has called Munger...

"The best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you even finish the sentence."

What's Munger's secret?

He has spent his life studying the best ideas across all disciplines.

This practice helps him generate a set of "mental models" through which he sees the world.

Munger also embraces his role as a curmudgeon who acts as a foil to Buffett's folksy image.

Buffett cites Dale Carnegie's How to Win Friends and Influence People as an important influence on his life.

In contrast, Munger quotes philosophers like Epictetus and Cicero.

Munger's Art of Worldly Wisdom

Surprisingly, Munger has never committed his mental models to paper.

I learned about them mostly by listening to Munger's speeches.

Below are five that have stuck with me over the years...

1. Ignore the Propeller-Heads of Modern Finance

Munger disdains the army of academics who created the discipline of modern finance.

Munger argues that equating financial risk to a security's volatility is bunk.

Like Buffett, Munger was weaned on Benjamin Graham's philosophy of value investing.

Munger transformed Graham's concept of "margin of safety" - buying stocks at a discount to a company's true worth in order to minimize losses - into the idea of a "moat," or a company's sustainable competitive advantage over time.

In other words, buy the right stock in a company with a hard-to-replicate product, brand or business model... and you may never have to sell it.

2. Avoid Difficult Decisions

Munger believes limiting yourself to the simplest ideas is the key to investment success.

Munger also recommends you play to your strengths.

This idea applies to both investing and life.

If you're 5 feet 2 inches tall, don't make playing in the NBA your long-term goal.

Stick to something that comes easily to you.

3. Don't Trust Wall Street

Munger disdains Wall Street's locker room culture.

He blames Wall Street's hypercompetitiveness for its willingness to push ethical boundaries.

Wall Street's culture of greed and envy is the source of much of the financial industry's problems.

4. Invest Only in Companies You Can Trust

Munger emphasizes the importance of trust in investing.

That's why Berkshire Hathaway invests exclusively in companies with sound and ethical management.

The acquisition of See's Candies, for example, was executed on a single sheet of paper.

5. Understand the "Psychology of Human Misjudgment"

Munger stresses the importance of understanding human psychology in order to thrive in business and investing.

You must recognize emotions like fear and greed - and what Graham famously described as "Mr. Market's mood swings."

Sure, newfangled "behavioral finance" has highlighted the importance of psychology in investing.

But don't expect to read any academic papers on the impact of envy, resentment, revenge and self-pity on investing anytime soon.

The Remarkable Team of Munger and Buffett

What Munger and Buffett have achieved together is astonishing.

After all, a couple of old guys sitting in Pasadena, California and Omaha, Nebraska, became two of the most successful investors in the world.

In the meantime, generations of the best and brightest on Wall Street have come and gone, never to be heard from again

Munger says it all comes down to "accurate thinking."

And accurate thinking is what you too can develop by studying the wit and wisdom of Charlie Munger.

Good investing,


Thoughts on this article? Leave a comment below

Behold This Moat

You know the Munger "moat" Nicholas references above? There's an index for that.

The Morningstar Wide Moat Focus Index tracks companies that are mostly household names - reliable blue chips including Munger's own Berkshire Hathaway (NYSE: BRK-B).

Amgen (Nasdaq: AMGN) is another Morningstar-tracked moat focused on creating new drugs to treat inflammatory diseases and cancer. Chief Income Strategist Marc Lichtenfeld discussed it in the January issue of his Oxford Income Letter...

Based in California, Amgen (Nasdaq: AMGN) is a profit-churning biotech company with a stake in the biosimilars business.

Amgen's biosimilar products focus primarily on treating inflammatory diseases and various types of cancer.

So far, the only product that has received FDA approval is its biosimilar adalimumab, which is branded as "Amjevita."

It was a long-awaited alternative to one of the most popular drugs on the market, AbbVie's (NYSE: ABBV) Humira, and will offer a huge savings for patients.

Both Humira and Amjevita are made to treat rheumatoid arthritis, plaque psoriasis and other inflammatory diseases.

In its last reported quarter, ending in June, AbbVie's Humira sales hit $4.7 billion, making it the world's top-selling prescription drug.

In an effort to delay the competition, AbbVie filed a lawsuit against Amgen that resulted in a settlement this year. Amgen agreed to delay the launch of its biosimilar until 2023.

It also agreed to an unspecified royalty deal on sales of Amjevita once it finally hits the market.

In short, AbbVie may have won the battle... but Amgen is another example of generics and biosimilars gradually winning the war on Big Pharma.

Last quarter, Amgen generated $5.8 billion in total revenues, a 2.1% increase over the previous year. Earnings spiked 15% over the previous year to $2.2 billion.

The company's operating and profit margins are 44.5% and 35.5%, respectively.

Stakeholders in Amgen's $3.1 billion profit-sharing program currently collect a $4.60 annual dividend per share, or an annual yield of 2.31% at today's prices.

Amgen's payout has an impressive track record of steady growth.

Over the past five years, its dividend grew annually at an average rate of 26.29%.

Amgen's stock is up 15.5% in six months and up 107% in only five years.

It's undervalued - trading at a price-to-earnings ratio of 17, compared with an industry average of 71. That's a 76% discount.

This is the perfect play to cover your prescriptions costs and ride one of the few blue chip biotech stocks in the market today.

- Donna DiVenuto-Ball with Marc Lichtenfeld

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