Mungerisms: Investment insights from Charlie Munger

The partnership between Charlie Munger and Warren Buffett was perhaps the most famous in investment history. As we approach the end of 2024, a century after Munger’s birth, we reflect on some of Munger’s greatest insights. These are affectionately known as Mungerisms.¹

When investors think about the markets, their attention is often drawn to those key moments of decision-making — the careful research that goes into buying a stock or a savvy plan of when to sell. Munger’s insight reminds investors to put their focus on holding companies over the long term. This period of holding, as compared to trading, tends to get less attention from investors, since it can feel like “watching the grass grow.”

Think of a high-quality company of the kind Charlie Munger favoured. Over a period of 10 years, the investor may spend a few days or weeks researching the company, together with a brief period exiting the investment. Yet an investor can spend most of their time just holding. This lengthy period of time allows for the investment to play out — enabling management to execute on its plan, experience some setbacks and build on the company’s strengths. Munger’s insight is that investors should get out of the way and not tinker with high-conviction holdings, instead letting compound growth do most of the work.

The importance of innovation and technology has ushered in the role of CEO as genius or GOAT (greatest of all time). Investors are familiar with the concept of a company being priced for perfection, where its share price is based on an aggressive plan of growth and any setback can lead to a sharp correction in the company’s market value. In the same way, a company can become priced for perfection under the leadership of a singular CEO, where it becomes difficult to imagine what the company would look like without a transformational leader.

Munger’s insight is that investors should certainly consider the character of a company’s leader but that they should also look in a more impersonal way at the structure of a company’s advantage in the market — the economic “moat” that allows it to withstand threats from competitors and maintain healthy profits over time. This moat can vary by industry and company, including branding, technology and network effects.

With a strong enough moat, the company should not need a leader of extraordinary ability to achieve good results. If investors focus too much on the qualities of a remarkable leader, they may pay less attention to underlying issues in the company’s competitive position. Leaders still matter but moats enable companies to generate long-term wealth for shareholders.

Munger believed that investors should think critically about an investment and consider it from a variety of perspectives. A key example of this was his famous advice to “Invert, always invert.” For example, a beverage company plans to launch a new version of a soft drink, with flavours and ingredients designed to appeal to a younger market. An investor is excited to hear about this product launch and believes it will help the company to gain market share.

To think more critically about this decision, however, the investor can practice inverting by asking what the company would do if it wanted to lose market share. Perhaps the company would find ways to alienate long-standing customers or offer too many products for retailers to handle. This gives the investor pause for thought before making their decision, since they are now considering a broader range of possible causes and effects.

Inverting is one of the tools that Munger developed from wide reading and active interest in a variety of disciplines. To develop even a few tools like this and to become proficient at using them is to have a toolbox of models. This toolbox can help investors apply independent, critical thinking to investment decisions.

Munger said of the approach he shared with Warren Buffett: “We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.” Compare this to our modern culture of short videos from influencers on social media or constant streams of news from our favourite websites. The Munger approach might sound impractical to many, especially the busy. Yet in its own way, Munger’s approach was highly practical.

Munger and Buffett could move very quickly when needed; they were capable of valuing and offering to buy a business in a matter of hours. This was not because they did extensive financial analysis or used the latest software. Rather, it was because they had spent so much time figuring out their approach and the markets in which they operated that they could recognize great opportunities when they arose and hone in on the few important aspects of the decision. Compare this to the hyper-informed investor or trader. How many of these busy people could calmly and confidently allocate a large portion of their net worth to a handful of investments, over and over again? Opportunity comes to the prepared mind.

The partnership between Charlie Munger and Warren Buffett struck a very rare balance between never arguing but always respecting each other’s opinions. Having to explain your thinking to a curious and open-minded person is a great gift to a self-directed investor. It can help the investor get out of their own head, whether by providing a broader perspective on their favoured style of investing, identifying risks they may not have considered or helping them stop over-analyzing after they’ve done enough diligence. Ideally, an investment partner is someone who knows you well but can remain objective, while learning with you.

• Holding a high-conviction investment for the long term can be difficult but rewarding. Many investors focus on the activity around trading, rather than the inactivity around holding.
• Considering the character of a company’s leaders is important but investors should also look objectively at the strength of a company’s moat or competitive position. Go for moats, not just GOATs.
• Reversing or inverting the logic of a situation can provide useful and unexpected insights. Munger believed investors should have a variety of models like this in their toolbox, to help them think critically and independently about investment opportunities.
• Reading widely and deeply over the course of his life enabled Munger to think clearly about his approach as an investor and move purposefully when promising opportunities came his way.
• Having an investment partner can help the self-directed investor get out of their own head and become a wiser investor over time, even if they don’t have Warren Buffett as their partner.

¹ The most comprehensive source for Mungerisms is Charles T. Munger and Peter D. Kaufman: Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger (2005).