If you've ever been lucky enough to hear Berkshire Hathaway (NYSE: BRK-A ) Co-chairman Charlie Munger speak, you've undoubtedly walked away feeling wiser and slightly humbled. And wondering, "Did he really just say that?"
At the 2004 Berkshire shareholders meeting, a young shareholder tossed out a broad question: "What advice do you have for someone like me to succeed in life?"
Stay in school? Follow your passion? Find a good mentor? Nah! Munger's advice was to the point:
"Don't do cocaine. Don't race trains to the track. And avoid all AIDS situations."
To succeed, avoid failure
Munger's response wasn't just for a laugh. In his direct way, he reminded us of an important lesson in investing and life alike: Before spending an ounce of energy on how you'll succeed, focus first on avoiding ways to fail. You'll never worry about how to get out of a sticky situation if you're never in one. Munger also likes to say, "All I want to know is where I'm going to die, so I'll never go there."
Wall Street hands us tens of thousands of investment opportunities daily. Whether you're eyeing a high-flying Internet powerhouse like Amazon.com (Nasdaq: AMZN ) , a banking giant like Citigroup (NYSE: C ) , or a popular burrito joint like Chipotle, how can you expect to spot a good investment if you don't know what a bad one looks like? How do you know what to look for if you don't know what to avoid? Let's dive deeper into Berkshire's portfolio and take a look.
Fewer bad investments magnify your good ones
The big investments in Berkshire's portfolio, such as Coke (NYSE: KO ) and Wells Fargo (NYSE: WFC ) , have done well over the years, but they aren't incredible slam dunks compared to other notables. Coke, for example, has gone up tenfold since Berkshire began buying shares 20 years ago -- a fantastic result, but not too far from the ninefold increase Google (Nasdaq: GOOG ) accomplished just three years after going public.
What makes Berkshire such a standout isn't that it's composed of great investments, but that it's almost never wrong. Its returns don't have to be astronomical because its good investments don't need to make up for bad ones -- Berkshire avoids those. Give me some examples of where Berkshire has lost money. Go on, I'll wait.
How has Berkshire been so darn consistent? Because Buffett and Munger focus only on what they know best: Buying solid companies at great prices. Everything else is filtered out: the cocaine, speeding trains, and AIDS of the investing world.
Keep it simple, stupid
So what do Buffett and Munger stay away from?
Whether you're the Oracle of Omaha or a novice investor, you should stay within your circle of competence, and ensure there's a margin of safety. By sifting out whatever you aren't familiar with, and giving yourself room for error, you'll reduce the odds of getting in trouble before you even start to think about making a killing in the market.
Berkshire never had to fight its way out of the leveraged buyout boom of the 1980s. And it didn't get caught up in the tech bubble that roiled so many investors 10 years ago. Were Buffett and Munger smart enough to get out before everyone else? Nope. They were never in the mess in the first place.
Remember, Fools: Investing isn't complicated, but that doesn't mean it's easy. Finding winning investments is a feat in itself. Avoiding what you know and taking on excessive risk will only further complicate that situation.
As the saying goes, "Who is more valuable: the president who leads you to war and is lucky enough to win, or the one who is smart enough to keep you away from war in the first place?"
For related Foolishness: