Charlie Munger has helped Warren Buffett build Berkshire Hathaway (BRK.A 0.37%) (BRK.B 0.36%) into a $540 billion masterpiece of American capitalism. As the company's vice chairman, he has amassed a billion-dollar fortune and created vast wealth for Berkshire's shareholders along the way.
Yet Munger's greatest contribution is arguably the incredible quantity of wisdom he's shared with investors over the past several decades. Here are a dozen pieces of this legendary investor's most valuable advice.
1. "Those who keep learning will keep rising in life."
Reading voraciously will make you a better investor and help you improve in many other areas of your life. Follow your interests, but read broadly and deeply.
2. "Knowing what you don't know is more useful than being brilliant."
Staying within your circle of competence helps to reduce risk. It's good to continuously expand your base of knowledge and understanding, but venturing too far outside it when selecting investments is a recipe for disaster.
3. "One of the greatest ways to avoid trouble is to keep it simple."
There are no extra points for difficulty when it comes to investing. And often, the best businesses are the ones that are easiest to understand.
4. "People calculate too much and think too little."
Financial figures are important, but they don't tell the whole story. Taking the time to understand the qualitative aspects of a business -- a company's culture, management's vision for the future, etc. -- can give you an edge over investors who focus only on the quantitative data.
5. "We have three baskets for investing: yes, no, and too tough to understand."
You don't need to make a buy or sell decision on every stock. Focus only on the businesses you understand well, and leave the rest for other investors.
6. "A great business at a fair price is superior to a fair business at a great price."
Buying an undervalued stock can result in profits when you sell, but buying a business with powerful and sustainable competitive advantages, and then holding onto it for many years, can help you build incredible long-term wealth.
7. "Success means being very patient, but aggressive when it's time."
You don't need a lot of great investment ideas to build wealth in the market. But to grow rich, you'll need to invest significant sums in your best ideas.
8. "The big money is not in the buying and the selling, but in the waiting."
Well-chosen stocks can rise many times in value. But it takes time. The ability to sit and wait for these gains to materialize is crucial to generating truly life-changing returns in the stock market.
9. "You must force yourself to consider opposing arguments. Especially when they challenge your best-loved ideas."
Don't succumb to confirmation basis. Instead, constantly search for new information that might disprove your investment theses. If you come to realize that your expectations were wrong, adjust your portfolio accordingly -- and without delay.
10. "Don't drift into self-pity because it doesn't solve any problems. Generally speaking, envy, resentment, revenge, and self-pity are disastrous modes of thought."
Life can hit you. And when it does, it often hits hard. But rather than wallow in our struggles -- whether financially related or otherwise -- we need to pick ourselves back up and find a way to move forward.
11. "Invert, always invert."
It can often be useful to look at a problem in reverse. What do you want to avoid? Act in a manner that reduces your chances of failure, and you'll find your path to success.
12. "Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts ... slug it out one inch at a time, day by day. At the end of the day -- if you live long enough -- most people get what they deserve."
This passage needs no explanation, so to quote Munger one final time, "I have nothing further to add."