Charlie Munger's investment approach
Charlie Munger's investment approach was predicated on the assumption that good opportunities are rare. As he once said, "Life is not just bathing you with unlimited opportunities."
Munger's process wasn't about finding as many good ideas as he could; he tried to eliminate bad and mediocre ideas first. This might seem like a backward approach, but he often spoke about the value of inverting one's thinking.
Munger's preference toward thinking in reverse was clearly illustrated when he said, "It's remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."
Because he believed good opportunities are rare, Munger seized opportunities when he finally saw them. Quoting his great-grandfather, Munger said, "When you get a lollapalooza, for God's sake, don't hang by like a timid little rabbit."
Consequently, Munger didn't share widely held views on diversification -- even holding 10 stocks could risk over-diversification, in his opinion. After all, if good ideas are truly rare, then why would one diversify a portfolio into dozens of things? The mediocre investments in the portfolio would dilute the positive impact of the good ideas.
Munger employed a buy-and-hold investment strategy. When he found a good idea, he held the stock and let compounding work for him. As he said, "The big money is not in the buying and the selling, but in the waiting."
Finally, Munger was known to be a value investor, but there is an important distinction to be made. Many value investors look for what is cheap, regardless of a business's quality, but Munger was willing to pay more for quality.
In his 2014 letter to Berkshire Hathaway shareholders, Buffett credited Munger with changing his perspective on value investing. Buffett quoted Munger as saying, "Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices."
To summarize the investment approach, Munger believed that good investment opportunities are few, so he concentrated his portfolio around only those few good ideas, provided he could buy them for a fair price. After he bought these, he simply held on for the long haul.
