Last week, we looked at five quotes from Berkshire Hathaway's (NYSE: BRK-B) co-chairman Charlie Munger. The man has a lot to say; you could spend weeks sifting through his writings and so-called "Munger-isms," and hardly be content. So without further ado, here are five more.
1. "If you took [Berkshire's] top fifteen [investing] decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stick to your principles and when opportunities came along, you pounced on them with vigor."
I know of very few true "traders" who've accomplished much more than stressing themselves out, making their brokers rich, and making tax day a living nightmare. Sure, a handful have made fortunes exploiting short-term factors through hyperactivity, including Steven Cohen, James Simons, and Ken Griffin, etc. But for every billionaire success story, there are a million wallowing wannabes. In fact, a study published in the Journal of Finance showed that during a five-year period in the early and mid '90s, those who traded the most underperformed the market averages by more than 6% per year. Patience, grasshopper.
2. "If you have competence, you know the edge. It wouldn't be a competence if you didn't know where the boundaries lie. Asking whether you've passed the boundary is a question that almost answers it self."
Munger's referring to an investor's "circle of competence," or the areas of investing you know like the back of your hand. For long-term investors, knowing and respecting this boundary is vital. Take some of Buffett's better-documented investments, such as Coca-Cola (NYSE: KO), Gillette (now Procter & Gamble (NYSE: PG)), and Wells Fargo (NYSE: WFC). All of these companies have products Buffett would probably use on a near-daily basis, even if he weren't an investor. He doesn't need an analyst report every quarter updating him on where the industry is going; he has firsthand knowledge of the companies' strengths.
Contrast that with another company Buffett never showed much interest in -- Microsoft (Nasdaq: MSFT). For years, investors questioned why Buffett steered clear from the company, especially since he and Bill Gates have long been pals, and its characteristics fit some of Buffett's guidelines (wide moat, industry leader, tollbooth company, etc.) In all likelihood, his lack of interest had nothing to do with Microsoft the company -- software in general probably lies outside his circle of competence.
3. "People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts."
If you knew what the winning lotto numbers would be, would you tell anyone? If someone truly knew what the future had in store, they'd have a huge incentive not to tell you, and to exploit as much of the advantage as they could. The people most eager to slip you secret forecasts are usually focused on selling you something. The best anyone can do is make an educated guess on the probabilities of different outcomes, then hope for the best.
4. "Stocks are valued partly like bonds, based on roughly rational projections of producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up so far. This situation can conceivably produce much mischief."
Visa (NYSE: V) provides a good example of this. While few suggest it's necessarily overvalued, the amount of hype surrounding the gangbusters success of rival MasterCard's (NYSE: MA) 2006 IPO caused some investors to expect more of the same, bidding shares up to a position that could crowd out much of the upside from here. Visa's undoubtedly a great company, but when so much attention is focused on how dramatically credit card companies' shares have risen, giddy investors can soon forget that previous price movements have absolutely nothing to do with Visa's success as a company. Dot-com bubble, eat your heart out.
Finally, this last quote needs so further explanation, yet it remains one of the most elusive financial skills out there:
5. "Spend less than you make. Always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer!"
Enough said.
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