Charlie Munger, the Vice Chairman of Berkshire Hathaway, is celebrated for his wisdom, humor and irascible nature. Warren Buffett’s long-time friend and partner, Munger is also the chairman of the Daily Journal, a legal publishing and software company in Los Angeles. On Thursday, Munger as he does every year, spoke at the Daily Journal shareholder meeting. Here are a few of his annotated quotes, and my thoughts the implications and practical applications for financial planning clients.
Munger on common sense:
“When people talk about ‘common sense’ they mean ‘uncommon sense.’ It is much harder to have common sense than is commonly thought.”
A consistent Munger theme is common sense, which I take to mean: the sophistication of simplicity; striving to always search for the objective truth in yourself, others, markets, and the world in general; a never-ending, iterative quest to focus on sound core principles and themes, and the avoidance of noise and meaningless minutia; working to always behave rationally and unemotionally; open-mindedness. Common sense can be developed by studying our personal shortcomings and mistakes, as well as the “folly” of others, both today and throughout history. Common sense, it turns out, is fairly rare, but foundational for sound financial planning and investing.
Munger on integrity:
“A man has this wonderful horse, it's got an easy gait, good-looking... but occasionally it gets dangerous and vicious. [The man] goes to the vet and says ‘What can I do about this horse?’ And the vet said ‘That’s a very easy problem and I’d be glad to help you...The next time your horse is behaving well...sell it.’ There has always been chicanery. People just seek out the weaknesses of their fellow man and take advantage. You just have to get wise enough to avoid them all. There are just so many people who should be avoided. Warren has a great saying ‘Take the high road, it's never crowded.’”
Munger spent a considerable period of his talk pillorying the financial and investment management industry, and rightly so: its poor investment performance, high fees, tendency to promotionalism and hype, and poor ethics. My takeaway for investors: focus first on your advisor’s character and integrity, not on his resume. Work with an advisor who is non-promotional and is focussed on delivering long-term value for his clients, not short-term, unaligned personal gain. You can’t make a good deal, or get a good outcome, with a bad person.
Munger on saving and avoiding envy:
“Here’s the greatest composer who ever lived [Mozart]-and what was his life like? He was bitterly unhappy and he died young. What the hell did [he] do to screw it up? He did two things that are guaranteed to cause a lot of misery. He overspent his income-scrupulously. That is really stupid. Number two: he was full of jealousies and resentments.”
“Warren and I [started out] with tiny little bits of money. We always underspent our income, we invested, and if you live long enough you get rich. It’s not very complicated.”
“The truth of the matter is that not everybody can learn everything. Some people are just way the hell better. And of course, no matter how hard you try, there’s always [somebody] that achieves more. My attitude is ‘So what?’”
It’s been my observation that many of the large financial mistakes people make can be traced back to violating these 2 core principles. At Dolan Partners we work hard to get clients to focus on their spending and saving, and have consistently found that the clients who achieve a sound balance between spending today and saving for the future, tend to be the happiest, and least anxious about their financial lives. It’s not rocket science. Like losing weight, the concepts are relatively straightforward, nut it’s the implementation,persistence and accountability that are difficult.
Similarly, people with high degrees of envy, I have found, tend to be poor investors and are prone to making large, repeated investment gaffes. They find it particularly hard to avoid jumping into financial bubbles, as they perceive that everyone is getting rich around them. Working with an advisor who can help you manage spending/saving as well as help mitigate the effects of envy on your portfolio can be critical, particularly to those who struggle in these areas.
Munger on the importance of patience in investing:
It’s amazing how intelligent it is to just spend some time sitting. A lot of people are way too active.”
Impatience is often a predictor of poor financial outcomes. Munger consistently expounds on the power of compounding. But compounding can only be harnessed by patience, a long-term orientation, and the ability to delay gratification. Investors should patiently work through the process of finding the right advisor, and then spend the time and effort to collaboratively craft the proper financial plan and investment portfolio for their situation. Then, critically, they need to BE PATIENT. Tune out the noise, focus on long-term progress and outcomes, and don’t try and accelerate the process by constant changes and activity. The most patient investor usually gets the best long-term outcome, particularly after fees and taxes.
Munger on the current investment environment:
“Generally speaking, as things have gotten tougher [in markets], we’ve been better at sitting on our ass with the [businesses] we have. If you’re having trouble [finding investment opportunities] at the present time, join the club.”
“My advice for a seeker of [high investment returns], is to reduce your expectations, because I think it’s going to be tougher for awhile. It helps to have realistic expectations-it makes you less crazy. They say common stocks, from the aftermath of the Great Depression, which was the worst [bear market] in the English speaking world in hundreds of years, to the present time, [have] produced maybe 10% [per year]. But that’s pre-inflation. After inflation it’s likely 7%. The difference between 7% and 10% and its [compound] consequences is hugely dramatic over a long period of time. And if that’s 7% in real terms, starting at a perfect period [a depression low] and through the greatest boom in history, starting now, it could well be 2% or 3% in real terms. The ideal way to cope with that is to say ‘If that happens, I will [still] have a happy life.’ If you want to hit it out of the park easily, you should talk to Jim Cramer.”
Investors have to accept getting less than they were accustomed to getting under different conditions. Just as an old man expects less out of his sex life than he did when he was 20.”
Munger is unequivocal: from today’s starting point, stock returns are likely to be lower, perhaps meaningfully lower, than the past 100 years. Should that be true, financial plans and portfolios that are implicitly built on a continuation of historical return data, could deliver painful outcomes for investors.. Sound planning accepts the realities of the current investment environment. Clients should work with an advisor who can get them to their goals, without relying on unrealistic investment return scenarios.
