When I retired early a few years ago I had visions of being able to regularly travel and to exercise a few hours a day when at home. All was going according to plan until the COVID-19 pandemic hit. Now, we have provincial quarantine restrictions. Couple these restrictions with less than pleasant weather conditions and I have more free time on my hands than anticipated. I am using this time to re-read some wonderful books related to investing. My most recent read is Charlie Munger - The Complete Investor by Tren Griffin. In Chapter 5, Griffin covers Charlie Munger's 13 personal attributes to improve investment success.
The probability of replicating Warren Buffett's and Charlie Munger's investment success is remote. Over the years, however, Munger has identified and shared several attributes that make up the 'right stuff' of a successful investor.
Munger admits he struggles with these attributes. None of us, therefore, should feel inadequate if we also struggle. The best we can do is to be aware of these attributes and to do our very best to follow them wisely to improve life in general.
These are the 13 personal attributes Munger has touched upon most extensively and frequently in the years he has been vice-chairman of Berkshire Hathaway.
- dramatic increase in the number of new equity investors;
- the extent to which investors are prepared to invest in highly speculative companies or speculative 'investment' instruments;
- the high degree of very active traders;
- the unprecedented level of debit balances in customers' securities margin accounts
suggest we are currently in the midst of another period of irrational exuberance like that witnessed during the .com days in 1999 - early 2000.
Many investors associate investing with active trading. Holding securities for anything longer than a day or two is now 'long-term' for many.
According to Munger,
'Success means being very patient but aggressive when it comes time.'
The probability of being able to purchase an asset at a significant discount is significantly higher when Mr. Market is fearful. The challenge, however, is that it is impossible to predict when this will happen. Investors should, therefore, wait for bargains to appear.
Munger's approach is to be patient and to be prepared for occasional fast spurts.
Buffett also weighs in on this topic and says the stock market is designed to transfer money from the 'active to the patient.' If we are patient, rational, and seek value in high-quality companies, Mr. Market will inevitably deliver its financial gifts.
The ability to think and to be a contrarian is a key personal attribute to improve investment success; it is much easier to follow the crowd than to be a contrarian.
A successful investor does not mean 'active investing.' There is no bonus for being an active investor. In fact, there are penalties for being overactive. These penalties come in the form of taxes, fees, and expenses.
Calm But Courageous and Decisive
At the 2003 Berkshire Hathaway AGM, Munger stated:
'I think there's something to be said for developing the disposition to own stocks without fretting.'
Munger believes that if an investor is not likely to remain calm and composed when a company's share price declines 50% two or three times a century, then that investor should not be a common shareholder.
Mathematics dictates an investor must deviate from the view of the crowd if the intent is to outperform the broad market.
To profit from courage, cash must often be on hand. Holding cash in a rising market also requires courage because it is hard to sit on cash when markets are rising.
A courageous investor sticks with good ideas even when a company's share price takes a hit.
Many investors are unable to be patient or are not prepared to act aggressively and decisively when the right opportunity is identified. These investors should hold a portfolio of low-fee index funds and exchange-traded funds.
Reasonably Intelligent But Not Misled By High IQs
Buffett has stated that:
'You don't need extraordinary intelligence to succeed as an investor.'
Munger has also stated:
'A lot of people with high IQs are terrible investors because they've got terrible temperaments.'
Many smart people get into trouble trying to predict things that are not predictable.
Someone can be highly intelligent but lack common sense. A lack of common sense can lead to poor habits such as trying to predict the unpredictable. Highly intelligent people with expertise in a specific field might also assume this intelligence is transferable to other fields.
Character matters greatly in all aspects of life including investing. According to Munger,
'You ought to have an internal compass. So there should be all kinds of things you won't do even though they are perfectly legal.'
When business people trust each other because they are honest, the efficiency that results from that trust improves the financial return of the business.
Confident and Nondeological
It is important to be confident of our beliefs and skills and to focus on our potential fallibility.
An awareness of our limitations helps us keep important decisions within our circle of competence.
Genuinely humble people tend to make far fewer mistakes.
Many people have a difficult time with the concept of deferred gratification.
Some investors who are just starting or who are starting over have a difficult time focusing on the long-term.
The power of compounding becomes more evident over the long term. Understanding the power of compounding, however, is not natural.
Munger argues that:
'Passion is more important than brain power.'
Passionate people typically work harder and invest more in achieving their goals. They also read and think more and tend to have an informational edge over those who are not passionate.
Of key importance is that we are less likely to be passionate about something we do not understand. The more we know about a topic, the more likely we are to become passionate. Very often, the level of passion about something grows over time.
A successful investor must be inherently interested in business problems. In essence, understanding a business is fundamental to investing. Merely closely analyzing stock charts is not being studious.
We will make investment mistakes but it is far better to learn from the mistakes of others to accelerate our learning process.
A good way to avoid mistakes and possibly improve the odds of success is to have trustworthy and intelligent people with whom we get along. A formal or informal network of such people is invaluable when you want to discuss ideas or decisions.
'Having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control.'
The degree to which an investor can control their temperament depends on natural abilities and the extent to which the investor improves on that baseline. The best investors have a calm and rational temperament.
Some investors do not have the temperament that is suitable for investing and never will regardless of how much training they do. Most people, however, can succeed with continual hard work and persistence.
Our degree of success is determined by how well we control the dysfunctional urges that can overcome other investors.
Keep investment expenses under control!
Understand opportunity cost and the power of compounding. Once we learn both we begin to naturally compare the value of consumption today against the value of greater consumption in the future.
Risk comes from not knowing what we are doing.
The volatility of a company's stock price is an inappropriate means by which to assess the risk of an investment. This is because volatility is merely one type of risk.
Munger states that risk boils down to:
- the risk of permanent loss of capital;
- the risk of inadequate return.
In the 1993 Letter to Berkshire Hathaway shareholders, Buffett states:
'The real risk that an investor must assess is whether his aggregate after-tax receipts from an investment (including those he receives on sale) will, over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake. Though this risk cannot be calculated with engineering precision, it can in some cases be judged with a degree of accuracy that is useful. The primary factors bearing upon this evaluation are the certainty with which:
- the long-term economic characteristics of the business can be evaluated;
- management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows;
- management can be counted on to channel the rewards from the business to the shareholders rather than to itself;
Investors must also take into consideration:
- purchase price of the business;
- levels of taxation and inflation that will be experienced and that will determine the degree by which an investor's purchasing-power return is reduced from his gross return.
These factors will probably strike many analysts as unbearably fuzzy since they cannot be extracted from a database of any kind. But the difficulty of precisely quantifying these matters does not negate their importance nor is it insuperable.'
Charlie Munger's 13 Personal Attributes To Improve Investment Success - Final Thoughts
As much as COVID-19 has disrupted lives, we need to adapt.
I certainly did not expect to have as much free time on my hands as I have had recently. Fortunately, better weather is around the corner and I can resume outdoor activities on a more regular basis...solo of course!
In the interim, I am using my free time to re-read wonderful books to improve my investment success and life in general.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. You should not make any investment decision without conducting your research and due diligence.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with the company mentioned in this article.