Investing Advice from Warren Buffett’s Right-Hand Man

Words of wisdom from Charlie Munger, vice chairman of Berkshire Hathaway.

There aren’t many iron rules of investing, but one of them is “When Charlie Munger speaks, drop everything and listen.”

Munger, the 91-year-old billionaire vice chairman of Berkshire Hathaway, has two amazing traits: He’s brilliant, which gives him authority, and he’s rich andold, which amplifies freedom of speech to a level most of us couldn’t get away with. He says what’s on his mind without fear of offending anyone. It makes him one of the most quotable investors of all time.

Munger gave a talk this week at the Daily Journal, where he’s chairman. Investor Alex Rubalcava took notes. Here are some great things Munger said (my comments below).

“I did not succeed in life by intelligence. I succeeded because I have a long attention span.”

Time is the individual investor’s last remaining edge on professionals. If you can think about the next five years while most are focused on the next five months, you have an advantage over everyone who tries to outperform based on sheer intellect.

“The finance industry is 5% rational people and 95% shamans and faith healers.”

There are few other industries in which people are paid so much to be so consistently wrong while clients come back for more without demanding any change.

“I think that someone my age has lived through the best and easiest period in the history of the world.”

People ignore the really important news because it happens slowly, but obsess over trivial news because it happens all day long. News headlines will forever be dominated by pessimism, but by almost any metric we are living through the greatest period in world history.

“When things are damn near impossible, maybe you should stop trying.”

Related: Everyone should know the difference between patience and stubbornness. Patience is the willingness to wait a long time while remaining open to changing your mind when the facts change. Stubbornness is the willingness to wait a long time while ignoring and dismissing evidence that you’re wrong.

“Other people are trying to act smarter. I’m just trying to be non-idiotic.”

Napoleon’s definition of a military genius was “The man who can do the average thing when all those around him are going crazy.” It’s the same with investing: You don’t have to be brilliant, you just have to consistently be not stupid.

“If the incentives are wrong, the behavior will be wrong. I guarantee it.”

Anyone criticizing the behavior of “greedy Wall Street bankers” underestimates their tendency to do the same thing if offered an eight-figure salary.

“I don’t spend too much time thinking about what is almost certain never to happen.”

This likely includes: accurate economic forecasts, stable markets, consistent outperformance, reasonable politicians, and hyperinflation.

“I don’t think anything that any average person can do easily is likely to be worthwhile.”

Good investing hurts. It’s not any fun. It requires the ability to endure things most people aren’t, such as bear markets that last for years and times when you perform worse than average.

“The way to get rich is to keep $10 million in your checking account in case a good deal comes along.”

You don’t need $10 million, but cash in the bank will be the best friend you’ve ever had when stocks fall. If you’re upset that your cash is earning a dismal interest rate right now, you’re doing it wrong. Cash’s value isn’t its ability to earn interest. Providing flexibility and options is how it earns its keep.

“Nobody survives open heart surgery better than the guy who didn’t needthe procedure in the first place.”

Avoid debt. Spend less than you earn. Advocate humility. Learn from your mistakes. If you can manage to not screw up too many times in investing you’llprobably do just fine over time.

Buffett (about Munger): He’s given me a lot more advice than I’ve

given him. He lives a very rational life. I’ve never heard him say a word

that expressed envy of anyone. He doesn’t waste time on senseless

emotions.

Munger: There’s an old saying, “What good is envy? It’s the one sin

you can’t have any fun at.” It’s 100% destructive. Resentment is crazy.

Revenge is crazy. Envy is crazy. If you get those things out of your life

early, life works a lot better.

Buffett: It so clearly makes sense.

Munger: We’ve learned how to outsmart people who are clearly

smarter [than we are.]

Buffett: Temperament is more important than IQ. You need

reasonable intelligence, but you absolutely have to have the right

temperament. Otherwise, something will snap you.

Munger: The other big secret is that we’re good at lifelong learning.

Warren is better in his 70s and 80s, in many ways, that he was when

he was younger. If you keep learning all the time, you have a

wonderful advantage.

Make Money Like Munger: 4 Tips from Warren Buffett's Right-Hand Man

Charlie Munger is best known as the second-in-command behind Warren Buffett at Berkshire Hathaway (BRK.A )(BRK.B ). He's also a world-class billionaire investor in his own right, capable of similar market-trouncing results as Buffett himself.

As a successful investor and all around nice guy, Munger often shares his investing wisdom with those who care to listen. Paying attention to what he says and acting upon his best advice should help you make yourself financially comfortable -- maybe even rich.

With that in mind, here are some of his most pertinent words of wisdom for those who want to invest.

1. The No-Brainer Secret to Getting Rich

If you're looking to do more with your money than just stick it in a CD or savings account, perhaps the most important Munger quote of all time is this one:

"Spend less than you make; always be saving something. Put it into a tax-deferred

account. Over time, it will begin to amount to something. This is such a no-brainer."

Because you need to spend less than you earn in order to properly invest, and because investing defers your ability to spend money from today to sometime in the future, even

lousy investing beats not investing at all .

Following Munger's advice throughout your career is just about the closest thing you'll find to a guaranteed way for you to wind up financially comfortable during your retirement.

2. The Key Financial Lesson for Those Not Yet Able to Invest

For those not yet able to regularly sock away cash for their futures, Munger has these wordsof wisdom:

"Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't

get ahead paying 18 percent."

Once again, Munger is absolutely correct. He and his partner Buffett may be among a handful of investors in the world with a legitimate chance of outrunning credit card debt with investment earnings. We mere mortals don't have a prayer.

The long-run returns from investing in stocks is somewhere around the 8 percent to 10 percent annualized range -- and even that isn't guaranteed. When compared to the 13 percent or more interest rates that typical credit cards charge, the importance of always paying off that credit card bill -- and the futility of trying to beat that rate investing -- becomes abundantly clear.The most important instructions for those who do invest

Finally, for those who are ready to invest, Munger has two critically important pieces of advice. The first:

"The number one idea is to view a stock as an ownership of the business and to judge the

staying quality of the business in terms of its competitive advantage. Look for more value

in terms of discounted future cash-flow than you are paying for. Move only when you

have an advantage."

And Munger's second key piece of investing advice:

"There are worse situations than drowning in cash and sitting, sitting, sitting. I

remember when I wasn't awash in cash -- and I don't want to go back."

Taken together, they form the foundation of the value-investing strategy that made Mungerand his partner Buffett two of the richest people on the planet. In essence, Munger's advice boils down to:

Figure out why a company has a right to win (its staying quality/competitive

advantage)

Determine what that company is worth (the discounted future cash flow)

Pay less than that amount to buy it, and

It's a better idea to hold on to cash than to invest your money poorly.

It's a pretty straightforward strategy, but it's the one that made Munger the billionaire he istoday.

These Words of Wisdom Work in Good Times and Bad

Those straightforward bits of timeless advice from Charlie Munger contain the keys that will let anyone able to follow them throughout a career wind up comfortable, if not downright rich. Yet while his advice can work wonders, life does have a way of throwing us curve balls. Jobs get lost, health is not always with us, cars get wrecked, and roofs leak.

Don't let those curve balls dissuade you: Following Munger's advice gets you in a better position to hit them when they come flying past. For instance, it's a lot easier to deal with the costs of a wrecked car if you've got a pile of cash awaiting investment than if you're already in a hole from carrying credit card debt.

Even if you're not yet ready to invest, structuring your financial life around Munger's advice can set you up for success once you're able to get started.

Charlie Munger’s Investing PrinciplesPosted on September 1, 2014

“If you can get good at destroying your own wrong ideas, that is a great gift.” –

Charlie Munger

Warren Buffett famously ran a partnership for a small group of investors before

turning Berkshire Hathaway into his investment vehicle of choice. He produced

extraordinary results for himself and his investors.

Many don’t realize this but his business partner Charlie Munger actually ran his

own investment partnership as well. Here are Munger’s annual returns

measured against the Dow and S&P 500 from inception until the fund was closed

down:

The fund’s performance was stellar but you’ll notice it ran into some trouble in

the 1973-74 bear market when the partnership was down over 53% while the

Dow fell around 33%. Here’s Munger’s take on losses from the Janet Lowe’s

book Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire

Charlie Munger:

I’ve been through a number of down periods. If you live a long time, you’re

going to be out of investment fashion some of the time.

The volatility in the fund, as measured by the standard deviation of returns, was

roughly double that of the market. Should that matter as long as the results

were superior? Munger doesn’t think so:

This great emphasis on volatility in corporate finance we regard as nonsense.

Let me put it this way; as long as the odds are in our favor and we’re not risking

the whole company on one throw of the dice or anything close to it, we don’t

mind volatility in results. What we want are favorable odds.

My take on volatility is that it’s only a risk if it causes an investor to forgo their

process in favor of investing based on an emotional state of fear or greed.

Otherwise volatility creates opportunities for patient investors.

Many in the investment industry tout their strategy as the only way to invest

successfully. Munger would be on the short list of investors that could

legitimately make this claim based on his track record. Instead he has a more

nuanced take for finding a process that suits each individual’s unique tolerance

for risk and their own personality:

Each person has to play the game given his own marginal utility considerations

and in a way that takes into account his own psychology. If losses are going to

make you miserable – and some losses are inevitable – you might be wise to

utilize a very conservative patterns of investment and saving all your life. So

you have to adapt your strategy to your own nature and your own

talents. I don’t think there’s a one-size-fits-all investment strategy

that I can give you.

There are no easy answers in the financial markets. There will never be a single

technique that suits every individual. You must be willing and able to follow any

specific approach.

Investing can be hard work. This is especially true for those that try to beat the

market. It’s not impossible, but it’s not easy. Munger shared his thoughts on

whether that means most investors should simply use index funds:

Does that mean you should be in an index fund? Well, that depends on whether

or not you can invest money way better than average or you can find someone

who almost surely will invest money way better than average. And those are

the questions that make life interesting.

Regardless of your strategy, Munger makes it clear that having a long-term

orientation with minimal activity can be a huge advantage:

There are huge advantages for an individual to get into position where you

make a few great investments and just sit back. You’re paying less to

brokers. You’re listening to less nonsense…If it works, the governmental tax

system gives you an extra one, two, or three percentage points per annum with

compound effects.

A relentless reader, Munger believes that any good investor should spend the

bulk of their time in the pursuit of knowledge and understanding:

I don’t think you can get to be a really good investor over a broad range

withoutdoing a massive amount of reading.

Finally, Munger is a fan of putting long-term systems and processes in place at

Berkshire Hathaway that don’t require constant oversight by himself or Buffett:

Berkshire’s assets have been lovingly put together so as not to require

continuing intelligence at headquarters.

It’s simple, but never easy.

The Expensive Antics of China’s Gaudiest Billionaire

Liu Yiqian has conspicuously ignored the official kibosh onostentatious shows of wealth

President Xi Jinping’s austerity drive has sent China’s high rollers running for

cover, emptying casinos and golf courses as vin ordinaire becomes the new

Chateau Lafite. Billionaire art collector Liu Yiqian doesn’t seem to have gotten

the memo.

The Shanghai-based former taxi driver is on a buying binge that has left rivals

gasping at auctions as he outbids all comers for ancient scrolls, Tibetan silk

embroideries and imperial porcelain. He’s built and filled two museums with

more than 2,300 works, including contemporary pieces by Jeff Koons and

Yayoi Kusama. In the past year he’s spent more than $115 million picking up

such treasures.

Liu, 52, is a classic rags-to-riches story of new China, a high school dropout

who made his fortune in the country’s nascent stock trading of the 1980s and

’90s. What sets him apart is the delight he takes in behaving like a Chinese

Beverly Hillbilly who has no idea about designer labels (his wife buys his

clothes) and still does the grocery shopping when she’s too busy.

Billionaire art collector Liu Yiqian holds the 15th century Ming dynasty ceramic nicknamed the “Chicken Cup,” which was bought for $36 million at a Hong Kong auction.Source: Sotheby's via Bloomberg

In July he caused an online furor in China for drinking tea from a 500-year-

old ceramic bowl that once belonged to revered Emperor Qianlong. A photo

went viral showing him dressed in a short-sleeved, plaid shirt, with an

incipient smirk as he raised the precious, palm-size “Chicken Cup” to his lips.

China’s netizens couldn’t decide which was more outrageous, his treatment of

the historic artifact or the record $36 million he paid for it at a Sotheby’s sale

in Hong Kong. Even his settlement for the bowl was theatrical: 24 separate

swipes of his American Express Centurion card. He said he didn’t even realize

that he qualified for hundreds of millions of reward points.

Conspicuous consumption isn’t new among the billionaires minted during

China’s economic boom. But shows of wealth are considerably rarer since Xi

came to power in 2012 and began a corruption crackdown that’s netted

thousands of officials, some from the top echelons of power. Ten days after

Liu’s tea-drinking stunt, the Communist Party said it wasinvestigating former

internal security chief Zhou Yongkang.

“I’m not nervous at all, because all my wealth is out in the open and there is

nothing to worry about,” Liu says in an interview in one of his Shanghai

museums. “Every country has experienced an anti-corruption campaign at

some time.”

Tibetan Silk

As if to prove the point, the AmEx card was out again last month for a Tibetan

embroidered silk thangka he’d won for $45 million at an auction in November.

“In the last year and a half he has asserted himself as the greatest force in the

Chinese market,” says Nicolas Chow, deputy chairman of Sotheby’s Asia. “He

also has a knack for self-promotion and wild publicity stunts.”

An 11th/12th century Tibetan bronze seated yogi that Liu bought for $4.9 million at Christie’s New York on March 17.Source: Christies Images Ltd. via Bloomberg

A few days after paying for his thangka, Liu flew with his wife, Wang Wei, and

daughter Betty to New York and checked into the St. Regis, all on the reward

points he’d amassed. He was soon up to his old antics, stripping down to his

underwear one night in his room and mimicking the lotus position of an

antique Tibetan bronze yogi he was in town to bid for, while Betty captured

the moment on her cell phone.

“After Betty took that photo, I thought it was fun and decided to share it,”

says Liu, who juxtaposed the image with a photo of the yogi and sent it to

friends on Chinese social media service WeChat. “I was holding my breath the

whole time,” he says in Chinese as he attempts to demonstrate the pose during

the March 28 interview in Shanghai. “It’s really, really hard! You should try it

yourself!”

‘Cheeky Chappy’

By the time of the Christie’s auction, the image had been widely shared within

the tightly knit Chinese art community. “Most other collectors are quite dull.

He’s a cheeky chappy, it’s refreshing,” says London-based art dealer William

Qian. “Look at the pictures he posts, how cool is that? He’s a self-made man

and can do what he wants.”

As usual, Liu made the winning bid: $4.9 million.

“When he’s bidding, if he wants it, he gets it,” says James Hennessy, a Hong

Kong-based dealer. “That becomes his quest.”

It’s a quest that started 36 years ago, when he dropped out of school at 16 to

make leather bags, around the time that Chinese leader Deng Xiaoping was

opening the country up and extolling the virtues of being rich.

“Learning at school was useless to me,” says Liu, pointing out how years of

wielding shears left his right thumb permanently larger than his left.

Within six years he had saved enough money to buy a taxi, becoming one of

the early owner-operators in Shanghai after the state monopoly was

dismantled.

His big break came in the late 1980s, when China’s state-owned companies

began issuing shares that were often privately traded. Liu says he hit pay dirt

in his first trade, buying about 60,000 yuan (about $15,000 at the time) of

stock at 200 yuan a share in retailer Cheng Huang Miao, now listed on the

Shanghai exchange as Shanghai Yuyuan Tourist Mart Co.

Liu sold his holding when the price soared to 10,000 yuan. “I think I have an

exceptional nose for the market,” he says.

Following Bids

As his trading profits grew, Liu started buying art, making up for what he

lacked in knowledge by watching other collectors. “Whenever I saw others

bidding, I just competed, and after I made the buy I would ask them, ‘Why is

this piece good?’”

A painting measuring 200 by 180 centimeters, completed in 1996 by Chinese artist Zeng Fanzhi, belonging to the permanent collection of the Shanghai Long Museum. Liu Yiqian, together with his wife, Wang Wei, an avid collector of revolutionary and contemporary art, would like to build something to rival the Guggenheim or the Metropolitan Museum of Art.Source: Long Museum via Bloomberg

Today his holding company Sunline Group has a finance unit, a commercial

and residential property developer and an insurance arm that has a joint

venture with Paris-based AXA SA. He is also the majority shareholder in

Hubei Biocause Pharmaceutical Co. He even has his own auction house,

Beijing Council International Auction Co. Those assets make Liu worth at least

$1.5 billion, according to the Bloomberg Billionaires Index.

And that doesn’t include his art stash, and Liu says he has no idea how much

it’s worth. “It must be a very, very huge figure, but I don’t give it much

thought, because I won’t be selling the collection,” says Liu, who dreams of

creating a Chinese equivalent of the Guggenheim or the Museum of Modern

Art. “I don’t care about the value, nor do I care about the money I spent

buying it in the first place.”

That makes him hard to compete with. Earlier this month, seven other bidders

at Sotheby’s Hong Kong dropped out as Liu raised the stakes on a southern

Song Dynasty vase to more than $15 million.

Princely Cup

Yet, behind the free-spending, genial image, Liu is still the savvy 16-year-old

looking for a new opportunity.

After the Chicken Cup controversy, he commissioned replica versions in three

qualities, priced from 288 yuan ($46) to 6,900 yuan, generating 5 million

yuan in sales so far. He got more publicity out of the bowl, named after the

bird images glazed on the outside, by presenting one of the replicas to Britain’s

Prince William during a royal visit to the museum on March 3.

He also saves millions of dollars in import tariffs by keeping some of his

imported artworks in duty-free zones set up by the government. He gets a

temporary import license when he wants to exhibit one of them.

Liu remains unruffled as week by week, more cases of fraud, corruption and

tax evasion are announced by the state. Some targets are officials who flouted

expensive lifestyles, with Rolex watches, lavish dinners and even Ferraris

— acquisitions beyond their official salaries.

Private business owners, who invariably have to deal with state companies and

officials, have also mostly scaled back on public displays of wealth, even when,

as in Liu’s case, there haven’t been any allegations that it was misgotten. In

2012, Liu was investigated as part of a nationwide probe into tax evasion

connected with art imports, but wasn’t charged or fined, according to Zoe Zhu,

head of public relations at his museum.

It doesn’t hurt that he enjoys excellent relations with the Shanghai municipal

government, which sold him subsidized land in order to build his second art

repository, Long Museum West Bund, which opened last year.

It may also help that Chinese authorities and the public have tended to be

supportive of collectors like Liu who spend millions on repatriating cultural

artifacts from abroad. Thousands of sculptures, Imperial ceramics and jade

carvings were looted by foreign troops, or removed to Taiwan and Hong Kong

by Chinese fleeing the communists during the last century.

And for all the ire generated by Liu’s irreverence, for many, he still represents

a Chinese ideal, the self-made man who hasn’t forgotten his roots.

“I never felt that my wealth has risen to a level that makes me no longer a

normal person,” Liu says over a box lunch of rice, vegetables and pork cutlet at

the museum. “If buying a cup and drinking tea makes one nouveau riche, and

opening a museum makes one a gentleman, it would be too easy to

differentiate one from the other. You shouldn’t care what people call you.” —

With assistance from Emma Dong in Shanghai