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Stock investing in your circle of competence

The 96-year-old Charlie Munger tells us much about the investment mindset we should have

Stock investing in your circle of competence

Are you a Charlie Munger fan? I am, and unabashedly so. Am I also a Warren Buffett fan? Not really. I admire Warren Buffett. I think he is worth emulating and that he is a central figure in the world of business and investing over the last 50 years but I would not use the word 'fan' for my attitude towards him. Charlie Munger, on the other hand, is a character. I've been his fan since I bought the book 'Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger' in 2005 when it was first published. It's probably the most expensive book I've bought in my life but worth far more than its `7,000 price tag.

During the pandemic too, Charlie is living up to his reputation. In a time when most of us are obsessed with our mortality and our fears of illness, it is wonderful to see an old man of 96 cheerfully talking about life. Last fortnight, Charlie gave this pleasure to all fans like me (and I hope most of you) in an interview published by his alma mater CalTech (California Institute of Technology). You can watch it at https://bit.ly/cmunger.

Munger actually started working as a teenager at Buffett & Son, a grocery store owned by Warren Buffett's grandfather in the city of Omaha, where he and Buffett both grew up and where their business is still headquartered. He eventually wound up studying meteorology at Caltech and then law at Harvard, all at government expense because he had joined the army during the Second World War. By the time he was in his early 20s, he had started investing.

As befitting a 96-year-old who has had fabulous success as an investor, most of the things that he says are wisdom that can be gathered over decades. As investors, many of us keep looking for things that will not change. We identify stocks that have done well for us and developed a deep comfort with them, in the sense that we feel that their success is an unchanging fact that will be with us throughout our investing lives.

However, when you have been investing for 75+ years, you reach a deeper realisation. Eventually, everything decays as dies. As Munger says in the interview, "Over the long term, it's more like biology than anything else, and in the biological world, all individuals die. So, to all the species, it's just a question of time." Since change comes more likely from technology, it is more likely to be rapid and unforeseen, even by those who are in the field.

As it happens, Munger and Buffett have avoided technology like the plague. Charlie Munger has an amusing incident to narrate from the beginning of his career. One of the earliest stocks he bought was from William Miller Instruments, a company whose founder had invented a better way of recording sound, something that sounds like an improved wax cylinder. He thought that it was going to take over all recording technology and Munger thought so too. However, someone else, around the same time, invented the magnetic tape. Tape was so much superior that the product that Munger had invested in sold all of three instruments. The money was wiped out.

Charlie Munger could have just said that he needed to be better at knowing about technologies and predicting where they are heading but no, he did not do that. He decided that changing technologies were something to be avoided. If you have two things to invest in, one you understand and the other you cannot, what is the point of investing in the one you do not? Seventy-five years have gone by but this idea of staying within one's 'circle of competence' has served Munger and Buffett well. As he says, "I try to avoid being stupid. I'm not trying to succeed in my too-hard pile. The single-most important thing is to know 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."

Our cue
That's where Value Research Stock Advisor comes in. It's relatively easy to just publish a list and expect people to just copy it. However, that is a pointless exercise and does not fit the concept of expanding one's circle of competence. On Value Research Stock Advisor, you get the detailed logic and thought process behind each selection and I would expect you to reject some of it. Not just that, our team has designed and implemented a Stock Screener system that is by far the best you will find. This is a unique tool and nothing like it has been available for the Indian equity investor till now. It enables you to screen stocks based on any kind of a financial criteria that can be applied to a company's financial and market data. But that's not all.

We also have something even more interesting - a set of predefined screens that are based on different types of criteria. In this, there are the financial screens that are familiar to readers of our magazine, like 'Attractive blue chips', 'Discount to book value', 'Growth at reasonable price', etc. However, we also have what we call the 'Value Guru' screens. These are stocks that are automatically filtered and screened according to the investment methodology followed by the five gurus we have chosen, namely, Benjamin Graham, Joel Greenblatt, John Neff, Peter Lynch, and Walter Schloss. While we have started covering these here in 'Wealth Insight', having an interactive version, on top of which you can apply any other criteria makes a big difference.

With Munger too, the last thing that you can accuse him of is being comfortable with his circle of competence. "I'm a big fan of knowing the big ideas in all the disciplines and using them routinely in judgments. I don't believe in constantly consulting with experts in investment decisions. Life is more fun if you do that. Academia isn't very good at multidisciplinary work." That's a lesson that has been brought home strongly during the pandemic. Knowledge that has been pre-digested and regurgitated by someone else just isn't the same as knowledge that you have come to yourself.

This is a hard challenge for investors now, much harder than when Charlie Munger and Warren Buffett were making their fortune. Lately, over the last decade or so, changes made by technology have become such a dominant force that primary expertise is hard to come by. Still, the challenge has to be met. That's the price that investors have to pay - being interested and curious about the world and trying to know and understand as much as possible. I'll leave you with one more quote from Munger's interview, one which every investor will recognise as true: "Good investing requires a weird combination of patience and aggression."

Getting that balance right is your job as an investor and helping you get that right is our job at Value Research Stock Advisor.