What Did Warren Buffet Learn? Quality Above All.Charlie Munger’s contributions to Warren Buffet's success cannot be overstated. Apart from providing his input on almost all of Berkshire Hathaway’s potential investments, his influence shaped Buffett’s fundamental investment strategy. The shift was subtle, but powerful. What Munger did was convince Buffett to stop looking in the garbage bin for good investments. Instead of finding average companies selling at rock-bottom prices, he began to look for high quality companies selling at fair prices. This idea is now a major pillar in Buffett’s philosophy.
More than two Sides to the EquationMunger’s own investment philosophy goes much broader than business, and it can be applied to not just investing, but also life in general. His view is that anything you can learn—from any subject—will have a useful place in your investment framework and in your personal life. He calls this the multi-disciplinary approach, and it is based on combining the big ideas from all of the major disciplines. The power behind this idea is that when you approach an investment decision using many different—or multi-disciplinary—viewpoints, what you will end up with are several factors that interact in interesting ways. Some of these viewpoints will give you conflicting conclusions, so you will have to be able to use critical thinking to understand the tradeoffs involved. But sometimes, when there are enough forces pointing in a favorable way, they can combine to get what Munger calls a lollapalooza effect. A lollapalooza effect is a powerful exponential interaction that does not appear very often, so when you see one of these lollapalooza effects, Munger's advice is to bet early and bet big. But getting back to the core of Munger's multi-disciplinary approach, it's important to look at where these alternative viewpoints come from.
Humanities Majors, Listen Up!Munger knows that investing experience is a major part of the game, but for beginning investors (and even seasoned ones) he offers some clues on where you can start—in addition to stock trading simulation platforms—taking his ideas and insights from disparate subjects such as physics, chemistry, biology, psychology, economics, mathematics, and even engineering. You see, learning about these other subjects, or disciplines, is beneficial because it will help you expand your view beyond the investment itself, and allow you to examine the ecosystem that your potential investment (i.e. the company) belongs to. Munger recognizes that companies do not exist in a vacuum, and no company is immune to external pressures. So if you study these other subjects, you can approach investing opportunities with more clarity and insight than if you only approached them from one angle. Companies can look good on paper, but business is not just done on paper. Business happens with people and products. People change. Opportunities change. And these changes are often unexpected. If you think about it, it's also why sports aren't played on paper. The point is that you want to look at Investment Opportunities from many different Alternate Point-of-Views.
Life LessonsMunger’s thoughts on how to make life decisions is more specific than his advice on honing your general approach to investing. His most important piece of advice involves three steps:
- Examine your goals and your decisions.
- Frame these in the form of a question.
- Invert the question.