"Try to be consistently not stupid, instead of trying to be very intelligent" (Charlie Munger)

"It is 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"

(Charlie Munger, 1024~2023)

In the third installment of the Insights from Guru series, I’ve brought in words from Charlie Munger. The previous two posts were quotes from Warren Buffett, so it seems I've inadvertently created a Berkshire Hathaway series (I promise the next one will be non-Berkshire related!)

First, a brief introduction to Charlie Munger. Born in 1924, he served as a military officer, studied mathematics at the California Institute of Technology, and later graduated from Harvard Law School. He worked as a lawyer and had seven children between his two marriages. It is said that his responsibility to support such a large family led him to start investing (which feels relatable, though I don’t have seven children).

Munger joined Berkshire Hathaway in 1978 and was Warren Buffett's right-hand man and vice chairman until he passed away at the age of 99 at the end of 2023. Munger, along with Philip Fisher, had a significant impact on Buffett's shift from a value investing strategy to buying great companies at reasonable prices.

Charlie Munger has emphasized the importance of investors understanding their "circle of competence" and focusing on areas where they have expertise. For example, it is unwise for an investor who knows little about biotechnology to invest in biotech stocks, or for someone unfamiliar with the chemical industry to invest in chemical companies.

While there are more examples of "stupid actions" than just investing in areas one doesn’t understand, Munger’s advice is to avoid the obviously foolish mistakes. Often, what seems obvious with hindsight was not so clear at the time. For example, in March 2000, at the peak of the dot-com bubble, it was easy to find companies with a P/E ratio exceeding 100. Even having a P/E ratio over 100 was somewhat fortunate, as it meant the company had positive earnings. At that time, many internet companies had negative earnings or very little revenue but boasted market capitalization of hundreds of millions of dollars or even over $1 billion. Before the subprime crisis erupted in 2007, banks were indiscriminately giving out mortgage loans to home buyers. The term "NINJA loans" even emerged, which stands for "No Income, No Job, and No Assets," referring to mortgages granted to people with no income, job, or assets. Looking back, it’s clear that these were obviously unreasonable practices, and even very "smart" people were caught up in the madness of the times.

Becoming more intelligent than others is not easy, but avoiding blatantly foolish actions is something any investor with basic common sense can manage. However, greed often blinds us, making it difficult to avoid these mistakes. Most investors struggle with the balance between greed and fear.

You may have heard of Warren Buffett’s two most important investment principles. The first principle is: "Never lose money." The second principle is: "Never forget the first rule." But what does this really mean? While everyone wants to avoid losing money, how is it possible to ensure this consistently in investing? I interpret this in connection with Charlie Munger’s advice. It suggests that one should avoid "blatantly foolish investments" driven by the madness of the times. (The original meaning is more about understanding investment risks and only engaging in investments with a substantial margin of safety, so the probability of losing money in the long term is almost nonexistent. However, I think the first step is to avoid "blatantly foolish investments.")

Understanding your own capabilities and steering clear of areas you don’t understand, while resisting the madness of the times and avoiding obviously foolish investments, is the starting point for never losing money and gaining a competitive advantage.

Thanks for reading. Wish you grow rich slowly and surely!

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