Taking it easy with Charlie Munger | Value Research Timeless advice for investors – we don’t have to prove anything by trying difficult things. Stick to your circle of competence.
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Taking it easy with Charlie Munger

Timeless advice for investors - we don't have to prove anything by trying difficult things. Stick to your circle of competence.

Taking it easy with Charlie Munger

I've been a huge Charlie Munger fan ever 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 the most expensive book I have bought in my life but worth every bit of its Rs 7,000 price tag. Note that I used the word 'fan'. Am I also a Warren Buffett fan? Well, no, not really. I deeply admire Warren Buffett. I think he is worth emulating, and I recognise that he is a central figure in the world of business and investing. However, I would not use the word 'fan' for my attitude towards him. Charlie Munger, on the other hand, is a character, in the true sense of the word. At the age of 98, he is also witty, lively, and irrepressible.

During the pandemic, Charlie Munger lived up to his reputation. At that time, when most of us were obsessed with our mortality and our fears of illness, an old man (then 96) was cheerfully talking about life. You can watch the whole thing here. Interestingly, Munger and Buffett were connected when they were practically kids. Charlie 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 World War II. 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 the 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 three-quarters of a century, you reach a deeper realisation. Eventually, everything decays and 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.

Munger and Buffett have avoided technology like the plague for most of their investing lives. 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 like an improved wax cylinder. He thought it would take over all recording technology, and Munger thought so too. However, someone else invented magnetic tape around the same time. The tape was so superior that the product Munger had invested in sold just 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 was 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 most important thing is knowing 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."

And 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 Stock Advisor, you get the detailed logic and thought process behind each selection, and I would expect you to reject some of them. 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 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 based on different criteria types. 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 a 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, Ben Graham, Joel Greenblatt, John Neff, Peter Lynch and Walter Schloss. While we have started covering these in 'Wealth Insight', having an interactive version so you can apply any other criteria makes a big difference.

With Munger, the last thing 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. The knowledge that has been pre-digested and regurgitated by someone else just isn't the same as the 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 fortunes. Over the last decade or so, technological changes 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.

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