Had Warren Buffett never been born, there's a good chance we'd award the "world's greatest investor" honor to his right-hand man, Charlie Munger. Not only is Berkshire Hathaway's (NYSE: BRK-A ) co-chairman a phenomenally talented investor, but he'd probably school almost anyone in a debate about philosophy, biology, physics, or just about any other topic. The man's disturbingly smart.
I'd continue this introduction, but as Munger might bluntly say, "Nobody would listen." Without further ado, here are five Munger quotes you should study before making another investment decision.
1. "This is really crucial: Warren [Buffett] is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you."
Investing is so much more than a game of numbers. If you've mastered Microsoft (Nasdaq: MSFT ) Excel and can tear apart an annual report like it's no one's business, you're on the right track, but that's hardly the end of the road. You're probably just as likely to catch Munger reading the biography of a Roman emperor as you are The Wall Street Journal. Why? Because he's intently curious about all aspects of life. He wants to learn everything. It's his and Buffett's intense desire to probe into everything they find -- to ask, "Why is that? Tell me more!" -- that ultimately drives their quest to find spectacular investments
2. "I think that one should recognize reality even when one doesn't like it -- indeed, especially when one doesn't like it."
There's a big difference between not swaying into the madness of crowds and not realizing when the facts have changed and adjusting accordingly. Unfortunately, it's incredibly hard to come to terms with this when your investments are gushing red ink. Not to pick on a battered soul, but Crocs (Nasdaq: CROX ) provides a good example. Its raging popularity and surging stock price were nearly impossible to ignore, especially in the wake of soaring inventory levels and expectations a Romanian gymnast couldn't keep up with. The reality was that Crocs was a good company with a dramatically unrealistic stock price. Those who didn't recognize reality paid dearly.
3. "To me, it's obvious that the winner has to be very selective. It's been obvious to me since very early in life. I don't know why it's not obvious to very many other people."
It's easy to get caught up in grandiose dreams about successful investments, which typically leads to rushing out and putting your hard-earned money to work as soon as possible. But think about it: If, every time you sat down at your computer in search of a winning investment, you actually found one, the good ideas would quickly be exploited and outsized returns would never exist. The big winners -- like buying Amazon (Nasdaq: AMZN ) after the dot-com crash or Google (Nasdaq: GOOG ) on its IPO day -- come around very, very seldom.
4. "Mankind invented a system to cope with the fact that we are so intrinsically lousy at manipulating numbers. It's called the graph."
Got that, chartists? If the past were a road map to the future, your high school history teacher wouldn't be driving a 1979 Volvo wagon. To pull a quote from Buffett, "I realized that technical analysis didn't work when I turned the chart upside down and didn't get a different answer." Seems simple enough, but the amount of people trying to foretell the future with squiggly lines is downright bewildering. When Devon Energy (NYSE: DVN ) shot up almost 40% in the last year, it had nothing to do with its 200-day moving average. When Sirius XM Radio (Nasdaq: SIRI ) fell 55% in the past 9 months, it had nothing to do with a "head-and-shoulders" pattern. Honestly. It didn't.
5. "Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. I would want to address the problem right now."
This quote reminds me of one thing: investors who know darn well a stock is overvalued, but insist on holding it because "it's still going higher." I guess it's only natural: The thought of selling something, only to watch it climb ever higher, can be a miserable one. The problem is that you'll never know for certain exactly when a stock either bottoms out or tops out. Those who hold out for the last drops of success are the ones who end up getting slaughtered.
Check back next week for five more Munger quotes that will make you a better investor. Until then, check out: