The investing world lost a legend last week. Charlie Munger -- vice chairman of Berkshire Hathaway (BRK.B -0.69%) (BRK.A -0.76%) and longtime business partner of Warren Buffett -- passed away at the age of 99. A figure of the investing world for decades, the billionaire was known for his wit, insight, and wisdom.
Here are three lessons anyone can take from the late great Charlie Munger that apply not just to improving your investing acumen, but your life in general.
1. Always be learning
Munger was keen on consistently learning new things. He thought it was important for anyone trying to succeed in a profession -- whether in investing or any other industry -- to go to bed a little smarter than they woke up. He thought the best way to do this was by reading:
"In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero. You'd be amazed at how much Warren reads -- and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out."
If you're looking to improve your investing skills, the best thing to do is to read about it every single day. This could include Securities and Exchange Commission (SEC) filings from companies you are interested in, historical business books, or simply books from investing legends such as Benjamin Graham's The Intelligent Investor (Buffett's favorite investing book). Learning about investing, finance, and business may seem daunting at first. But if you are methodical and take it day by day with a consistency like Munger, eventually you will become quite knowledgeable.
2. Know your circle of competence
Another famous piece of wisdom from Munger that applies to all investors is staying within your circle of competence. Or, in other words, knowing what you don't know.
Staying within your circle of competence means identifying what stocks, businesses, and industries you have no expertise in and avoiding putting your investments there. A clear example that applies to a lot of investors (myself included) is biotechnology and pharmaceuticals. These sectors are science-heavy and are hard to understand unless you work in the field, making it quite difficult for non-specialized (or, generalist) investors to reasonably generate an investment thesis.
If you look at Munger and Buffett's investments over the decades, almost all of them were in sectors they understand extremely well: consumer products, financials/banks, and energy. With strict obedience, the two stayed within their circle of competence and rarely left it, if ever.
Outside of investing, this can apply to all of us when finding a profession. You may have terrible musical ability and would fail to try to play the violin as your line of work. But you may have great expertise as an electrician and thrive with this as your profession. Munger would recommend you stick within your circle of expertise and find a profession you can thrive. For him, that was investing professionally.
3. Stay patient
Munger would say most investors are too impatient. They either frantically buy and sell stocks or want to generate wealth instantly. He would say the point of investing is to stay patient and bet on outcomes over the long haul: "It takes character to sit with all that cash and to do nothing. I didn't get top where I am by going after mediocre opportunities."
What Munger means by this is that it is difficult to just sit on your hands as an investor, but it is the best way to build wealth. If you are buying dozens of different stocks every year, most of them are going to be subpar ideas. Investors who follow this Munger philosophy wait patiently for the best ideas to show up and then make a few large investments over time, perhaps only one per year. That way, you are not over-diversified with your money scattered around dozens and dozens of different investments. If you're going to do that, you might as well buy an index fund. The results will be the same.
This can also apply to compound interest. As Buffett would say, "Nobody wants to get rich slowly," but it is the easiest way to build wealth over the long haul. If you have $100,000 earning a 10% compound annual growth rate (CAGR) for 10 years, you will have $259,000 in year 10. Compound that same money for 50 years and you will have just under $12 million. This is how Munger built his wealth: He had incredible patience.
Of course, this applies to life as well. Whether learning skills for your profession or building relationships with family and friends, Munger would argue you need to be patient and let the power of compound interest -- whether numerical or metaphorical -- work over the long haul. To him, this is how you have a fulfilling life for yourself and others around you.
