Charlie Munger’s Six Secrets to Winning Big in Investing

Charlie Munger, business partner of Warren Buffett and vice chairman of Berkshire Hathaway, recently did an interview with Jason Zweig published by the Wall Street Journal. You can read Zweig’s notes from the interview here.

Here are the six simple but big-big ideas I’ve pulled out from WSJ’s interview of Charlie Munger – these are all you need to become a smarter investor, if you can ingrain these in your investment philosophy and practice them while making your decisions.

Over to Charlie!

1. It’s All About How Your Behave

I think we have had a temperamental advantage: Warren and I know better than most people what we know and what we don’t know. That’s even better than having a lot of extra IQ points.

Ask any successful investor his secret of success and you would know that the most important quality for an investor is temperament – how he behaves under different situations – not intellect.

In simple words, as an investor, your attitude will play a major role in your investing success than your aptitude.

2. Know What You Don’t Know

Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing. Is it a skill that can be taught or learned? It probably can, if you have enough of a stake riding on the outcome.

Some people are extraordinarily good at knowing the limits of their knowledge, because they have to be. Think of somebody who’s been a professional tightrope walker for 20 years – and has survived. He couldn’t survive as a tightrope walker for 20 years unless he knows exactly what he knows and what he doesn’t know. He’s worked so hard at it, because he knows if he gets it wrong he won’t survive. The survivors know.

Knowing what you don’t know is more useful than being brilliant.

Tom Watson [the founder of IBM] said – “I’m no genius. I’m smart in spots and I stay around those spots.”

The entire idea about the Circle of Competence concept is to help you find your spots, which is so very important to your success as an investor. And that’s exactly what I have explained in this short video.

3. Two Secrets of Successful Investing

You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don’t know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is.

4. Power of Patience

It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.

“If we are facing in the right direction, all we have to do is keep on walking,” goes a Buddhist proverb.

It captures the essence of how we can train ourselves to be patient, in life and while investing our hard-earned money. Look at patience like a muscle that grows stronger as we exercise it. So if you want to become a patient investor, it’s important you first practice patience in your daily life.

Impatience is the number one enemy for any investor and patience is possibly the greatest virtue an investor can have.

Always remember that life might be a race against time but it is enriched when we rise above our instincts and stop the clock to process and understand what we are doing and why.

A wise decision requires reflection, and reflection requires a pause.

5. You Don’t Need to be a Genius

Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points.

If genius was what was required to make money from stocks, the stock market experts would’ve become rich by investing their own money and not selling worthless stock advice to gullible small investors.

But it doesn’t happen that way, right?

6. Avoid Derivatives

It’s like the slaughter of the innocents. It makes the people who run Las Vegas seem like good people.

Well, I have nothing to add. 🙂