Buffett partner Charlie Munger kept these rules about investing and life that you can use too

By Lawrence A. Cunningham

A tribute to the late 'architect' of Berkshire Hathaway highlights his guiding principles and philosophy

Charlie Munger, the esteemed vice chairman of Berkshire Hathaway (BRK.A) (BRK.B) who passed away last November at the age of 99, was honored last week at a tribute hosted by the Museum of American Finance and the Gabelli School of Business at Fordham University.

Berkshire Chairman Warren Buffett did not attend and Berkshire Hathaway did not sponsor the event, but many Berkshire shareholders were in the audience to honor the life of the man whom Buffett has described as the "architect" of the company.

That evening, several of Munger's closest friends and associates spoke about him in a panel discussion I moderated. The panel featured Tom Gayner, CEO of Markel Group (MKL), which is among Berkshire's largest shareholders and where I am a director; Don Graham, former publisher of the Washington Post and chairman emeritus of Graham Holdings Company; and Ron Olson, partner at Munger, Tolles & Olson and a Berkshire director. Together, we delved into Munger's enduring principles, his investment philosophy and the legacy he leaves behind.

Read: Charlie Munger became a legendary investor because of this one impeccable skill

Munger was acutely aware of the psychological biases that can cloud judgment and impair decision-making.

1. Consider what not to do: One of Munger's most famous lessons is the practice of inverting. He advised to "invert, always invert," suggesting that many complex problems are best solved by first considering what not to do.

Gayner described how this principle has been instrumental in decision-making at Markel, where avoiding the "stupidest thing" is a precursor to any action. Olson, from his legal perspective, shared how Munger's advice has shaped his approach to constructing arguments by first considering the opposing viewpoint - a practice investors also will find valuable. For example, before making their arguments in a brief, lawyers at Olson's firm are encouraged to write a brief and outline the arguments as if representing the opponent.

2. Address psychological biases: Munger was acutely aware of the psychological biases that can cloud judgment and impair decision-making. Gayner spoke to the importance of curiosity and the need to consider alternative viewpoints to mitigate these biases. Graham provided a compelling example from his company, where significant capital expenditures are revisited three years after approval to evaluate expectations against outcomes. This practice of postmortem analysis instills a discipline that acknowledges and confronts what Graham called the "most dangerous psychological tendency: denial."

3. Create a circle of competence: The concept of the "circle of competence" is another Munger hallmark, emphasizing the importance of understanding one's own limitations while also encouraging the expansion of one's knowledge base.

Gayner noted the static and dynamic aspects of this concept, stressing the importance of respecting current boundaries of one's knowledge while committing to lifelong learning to expand that circle. Olson highlighted the efficiency gained by focusing on areas of strength, drawing an analogy to baseball legend Ted Williams's approach to hitting that Buffett has often cited. By making decisions strictly within the confines of your circle of competence, you can avoid the expenditure of time and energy on endeavors that are unlikely to bear fruit.

4. Use the power of reading and learning: Reading and continuous learning were central to Munger's life. Every panelist touched on Munger's sharp intellect and his belief in the benefit of learning from all disciplines, from chemistry and physics to psychology and history.

Gayner emphasized the importance of learning from historical mistakes through insightful literature, citing Frederick Lewis Allen's "Only Yesterday" and "Since Yesterday" as books that offer a deeper understanding of historical events. Graham pointed out the instructive nature of Berkshire Hathaway's annual reports, as well as the literary significance of works such as James Boswell's biography of the English writer Samuel Johnson. Olson suggested that reading about the resilience of President Theodore Roosevelt through his biographies can be particularly enlightening.

Munger championed the competitive advantages of a long-term mindset.

5. Practice long-term thinking in a short-term world: Munger's belief in the power of long-term thinking was a recurring theme throughout the evening. Olson emphasized the necessity of patience for successful investing. Gayner confessed his preference for long-term strategies is partly due to the crowded nature of short-term thinking that makes it so difficult to succeed that way. Gayner and Graham discussed their collaborative effort to endow student investment funds at two universities designed to teach students the value of long-term investment by prohibiting stock sales for 25 years.

6. Weigh capital allocation against opportunity cost: An audience question addressed the rarity of capital allocation skills, which Munger mastered. Gayner highlighted Munger's focus on opportunity cost, always questioning the relative merit of any idea by asking, "compared to what?" This relentless comparison is among the most valuable lessons every investor can take from Munger.

Munger's 'guiding light'

As the event drew to a close, the panelists took a moment to contemplate Munger's lasting impact. Olson portrayed Munger as a guiding light within the realm of capitalism. He highlighted Munger's advocacy of a lifelong commitment to reading, the pursuit of knowledge and philanthropy. Olson encapsulated Munger's legacy succinctly with the phrase, "Read. Learn. Give."

Lawrence A. Cunningham is the author of numerous articles and books about Berkshire Hathaway, including "The Essays of Warren Buffett: Lessons for Corporate America."

More: I once asked Charlie Munger about his wealth. Here's how he responded - and what he meant to Warren Buffett.

Plus: Norman Lear, Charlie Munger, Rosalynn Carter and Sandra Day O'Connor lived long and impactful lives. What can they teach us?

-Lawrence A. Cunningham

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06-15-24 1052ET

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