Warren Buffet is perhaps one of the most celebrated investors in the world, but he didn’t make it to the most cherished list of investors on his own. Charlie Munger, his friend, investment partner, and adviser for more than 60 years, was instrumental in refining Buffet’s investment philosophy and helping him build a portfolio that eventually propelled the duo among the wealthiest in the world.
Munger, the acerbic vice-chair of Berkshire Hathaway, died on November 28 this year at the age of 99. A pioneer in blending psychology with investment, Munger’s quick-witted comments and advice on finance and wealth generation will guide people globally for generations. Here are a few of his pearls of wisdom and our suggestions on how you can apply them in your life and investment journey:
Take a simple idea and take it seriously
The famous quote by Charlie Munger is a definitive reminder of the power of compounding for wealth generation. The power of compounding is a well-established concept; however, its potential is often underestimated. The ability of an asset to generate consistent earnings growth by reinvesting operating cash flows is taught in secondary school years, yet often forgotten as just another math lesson early on in life.
But as they say, it is never too late to start. Just remember, benefiting from the power of compounding takes time.
Let’s put things in perspective: If you sock away, say, Dh1,000 a year, and attract 10 per cent interest on it, you will have Dh1,100 after a year. The amount will be Dh1,210 after two years, Dh1,611 after five years, and Dh6,728 after two decades. This growth occurs because each year you earn returns not only on your original investment but also on gains accumulated in earlier years. So the idea here is to understand this simple concept and apply it seriously to your investment choices.
Understandably, the first step is usually hard to take, but once you start, momentum is relatively easy to gain, too. That’s true for almost everything in life, including saving and investing. Don’t freeze at the thought of saving; instead, take a small step and squirrel away just whatever amount you can each month for the next one year. This is an experiment in behavioural finance that helps people initiate investments and build long-term wealth. Most of the people who embark on this journey are likely to stay invested for longer periods and also bump up their monthly contributions. “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things,” Munger had said.
Avoid crazy at all costs
Munger attributed his success and longevity partially to this single piece of advice: “Crazy is way more common than you think. It’s easy to slip into crazy. Just avoid it, avoid it, avoid it.” This applies to any investment choice that you do not fully understand. While your friend or friend of a friend would have made millions out of investments in cryptocurrency or real estate, for instance, if you do not fully understand the underlying currency or asset, avoid it.
If there is a chance of you making a profit, there is an equal chance of you losing your hard-earned money too. Good investment is not a gambling exercise.
Buying jewellery
“When buying jewellery for the woman you love, financial consideration probably shouldn’t enter into it,” Munger had famously said. When buying jewellery, whether it is silver, gold, diamond, or other types, it should be looked at as jewellery or a gift and not as an investment. If you are looking to invest in commodities, buying it as bullion or in electronic formats such as certificates or ETFs (exchange-traded funds) is a better choice.
Spend less than you earn
“It’s so simple. You spend less than you earn. Invest shrewdly, and avoid toxic people and toxic activities, and try to keep learning all your life, etc., etc. And do a lot of deferred gratification because you prefer life that way. And if you do all those things you are almost certain to succeed. And if you don’t, you’re going to need a lot of luck,” noted Munger. This is essentially the hallmark of all investment advice.
Discipline in saving and investing gives you independence from a whole range of worries. Munger lived a great life perfecting the art of investing well and building wealth. Reading and imbibing some of his treasured lessons in life will continue to guide people for generations. But remember, while these quotes impart wisdom, living by them is the only way to become wise. Even if these don’t mean much to you now, they may in the future. Keep reading and educating yourself on money matters.