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In today's video, we will discuss Charlie Munger's five investment principles and also share a couple of his investment stories. Everyone knows who Charlie Munger was. He handled investments with Warren Buffett at Berkshire Hathaway, where he was also the vice chairman. They worked together for 60 to 65 years, and the results are in front of you.
How big the Berkshire Hathaway company has become. Warren says that Charlie is a better investor than Warren. Charlie met Warren around 1960 at a dinner party, and after a five-minute meeting, he decided that the two would work together. So, without wasting time, let's start talking about his rules.
Charlie Munger's first principle is that big opportunities are rare, so don't let them go. Not everyone gets many life-changing opportunities. If a big opportunity comes your way, recognize it and grab it. Even in one of his interviews, he talked about Berkshire Hathaway's investments. She also said that if you remove the top 20 best investments from all his investments, then nothing will be left in Berkshire Hathaway.
He has made these 20 investments in a time period of 40-50 years, which means it took him two to three years to get a big opportunity. Another example of this is that in 2016, he started buying shares of L Company from Berkshire Hathaway when its share price was $27. He invested a huge amount in it, so much so that at one time his portfolio had money at $50.
Then you should have enough strength to invest a big amount in it. Investing in a stock at $50 would not be right for new players, but after a time you can do it. Like Covid was a rare opportunity, after that till now how many people understood the value of the opportunity and took advantage of it. Manger's second point is to keep learning.
Beyond this, Charlie says that I have been learning all my life. He says that Varun is even better than him in this work. Stay with people who want to learn new things. How did they follow this? I will explain it to you with an example. Today, if you want to invest in the green energy sector, for example, but you don't have an idea of what works in it, then you should read the annual reports of the last 57 or 10 years of the big players and big companies working in it.
This will give you an idea of what has happened in this sector over the years. Plus, you will also get an idea of the direction in which these people want to go or are going. I have also heard that Varun and Manger, who used to invest in companies, used to read the annual reports of their peer group companies from the beginning till today.
This helped them in better judgment of the entire business. The next point is humidity. Humility means that you should know what you don't know. In simple words, it is not necessary for you to have knowledge of everything, but become a master in the thing you have knowledge of. This will give a better understanding of this example.
Varun Buffit has done a lot He made money from the stock market, but his plus point was his business. He was able to judge the company's business better, especially the insurance business, and from there he made a lot of money in his start-up. Similarly, Red Alu, he has a good understanding of economics.
Varun's mentor, Benjamin Graham, understood valuation or stress business better. Jat Bogle used long-term charts in his investments. Look at India, Rakesh Jhunjhunwala had a better understanding of India's economic growth. Similarly, our Ramdev Agarwal, he earned all his money from safe stocks, that is, large caps.
No one has complete knowledge of all businesses. In fundamental analysis, many people spend many days just on the balance sheet because their edge, their skill, is based on the balance sheet. Similarly, many people do not invest without talking to management because they are able to judge management very well.
So, you have to find your edge and polish it on the basis of which you will invest. That means, do not have little knowledge about many factors, but about fewer factors. There's a saying, "Jack of all trades, master of none." Before meeting Charlie Munger, Warren's investing style was similar to that of his mentor, Benjamin Graham.
It's mainly called the Cigar Butt Theory, which states that even in a poorly-off company, if shares are available at a low price, meaning less than the total asset value, then buy them. After Charlie Munger's arrival, Warren 's investments improved. Charlie was n't just a friend or partner, he was also a mentor.
Around 1960, Warren bought shares of a windmill company. The company wasn't anything special. Its products were similar to others, but the share price, compared to its asset value, was quite low, meaning it was an undervalued stock. The same Cigar Butt Theory. However, the company manufactured windmill parts and water irrigation systems.
This was n't a very good business. However, if Warren received $50 a share in 2025, he would buy it. A lot of time passed, but the company 's share price didn't rise. Warren started buying more shares. This is how the situation turned out. It was reported that Warren had almost 70 shares of the company, but the company's business did not improve and the share price also did not increase.
Then Charlie guided Warren. First, he told him not to buy into a business that is not doing well. Second, he asked him to bring a manager named Harry Bottle into the company, after which the business improved a bit and the remaining assets were sold. Finally, the shares that Warren bought in 2030 got a share price of $80.
So Charlie was a good guide. The next point for Varun in his starting days is Simple Business, Great Company. This point can be called the most important point. Charlie Munger says that Berkshire became such a big company because it kept the rules of investment very simple and the main rule was to invest in simple businesses that are being managed very well.
If a business needs a very talented person to run it, then Berkshire never invests in it. Simply look, they have an investment in Coca-Cola, before that shaving blades. A candy company like See's Candy, a furniture manufacturing company called Nebraska Ma, and a bank are all common and simple businesses.
Berkshire became so big by investing in them. If we look at Tesla today, it requires Elon Musk to run it. Without Elon Musk, Tesla would not have become such a big company. Tesla would not have justified Charlie Munger's rules, so he never invested in it. Let's try to understand this another way: if a business is very bad or inferior and is run by a very capable person, the results will be bad.
It's better to choose a business that is so simple that even a donkey can run it. Even Warren and Charlie himself made this mistake. In the past, they invested in an airline company managed by the best of the best people, but ultimately, after years of struggle, they had to sell it at a loss because this sector is such that many companies in India have also wasted money in it.
Another point is not to predict the market. In an interview, Charlie Munger tried to explain that Warren And the huge amount of money Charlie made was neither a prediction nor a fluke. He further says that our job is to swim, it is not our job to predict the price of water. Sometimes it will go in your direction, sometimes it will not.
Let me explain this in stock market terms. Big investors stay invested in the market. They don't see if there is a big event ahead, if the wallet is there then we will invest after that, we keep the cash now. No, when you stay in the market for a long time, normally after two to four years a bull market comes, which easily increases the value of your investments.
So if you stay invested for 10 years, then most likely you will see two to three bull markets. Good stocks never waste all the gains of a bull market. If a ₹1 share goes to 300 in the first bull market, then it may come down to 200, but in the next bull run it will also show 500 or 600. So, like a trader, time it or Don't try to predict that you will buy at 100 and sell at 300, then buy at 200 and sell at 500.
This will never happen. Simply buy it and let the market do the rest. The more bull markets your stock and your portfolio see, the greater the chances of wealth creation. Similarly, in 1972, there was a family business called See's Candy that sold chocolates and candies. Warren wanted to acquire it, but this company, which had sales of $31.3 million, was asking for $30 million.
This price was four times the asset value. However, Warren preferred to buy at a price lower than the asset value. Then Charlie Munger explained to Warren and with great difficulty, he convinced him to buy this business because Charlie knew that this business had a very high brand value. So, somehow, at Charlie 's request, Warren acquired this business for $25 million at that time.
He earned $31 million in the next 10 years. The sales value increased to $133 million and profits also kept increasing at a CAGR of 20.7 and this philosophy worked. Later when he invested in Coke and how much return he got from Coke is a different story, so these were Charlie Munger's top investment rules.
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