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But the reason for financial success was not extraordinary abilities. You know, I have a good mind, but I'm not a prodigy at all. And I have achieved amazing results in life. And this happened thanks to tricks. I just learned a few basic tricks from people like my grandfather. What were these tricks?
By now, everyone is inclined to know that Charlie Munger, with a net worth of over $2.4 billion , is a shining example of what smart investing can achieve . Have you ever wondered how he did it? Well, he has his own unique strategies. There are basic rules that even beginners can follow. Join us as we reveal three simple investing rules that will pave your path to financial success.
First, understanding that stocks are not separate from the business, but are part of the business. Imagine that stocks are part of a larger business. Imagine you are buying a share of a company. It's almost like owning a small part of your favorite store. Just as you evaluate a store before investing in it, you should consider the business behind the stock.
In the words of Charlie Munger: “When we buy stocks, we are not just buying a piece of paper that shows that we own a small share of the company. We are buying a stake in the business itself.” For example, let's say you love technology and want to invest in a technology company. You would pay attention to things like how well the company's products are selling, who its competitors are, and how the company is managed.
Now that you are considering stocks as part of a business, you need to understand what kind of business you are investing in. Is the business in a growing industry or one that is not doing well? Knowing the strengths and weaknesses of a business helps you make smarter investment decisions . Think of it as deciding whether to support a lemonade stand that sells a lot of lemonade–a good business, or one that sells almost nothing–a not-so-good business.
When considering investing in a business through its shares, you should find out how much it is worth. Imagine you are buying a used car. You would check its condition, mileage, and other factors to decide how much you would pay for it . Well, this also applies to investing. When investing, you need to evaluate how much a business is worth based on its profits, growth potential, and how it compares to other similar businesses.
This helps you decide whether the stock is a good deal or not . Number two, strong trading psychology. The second rule makes fantastic sense for how one should deal with the ups and downs of the stock market. Let's say the stock market is like a friend , Mr. Stock. He is a bit unpredictable, oscillating between extreme excitement and a depressed state.
Every day he comes to you and offers to buy or sell parts of the business that interest you. Sometimes he gives you very high prices and sometimes he offers low ones. But the catch is that you don't have to listen to it all the time . Think about it this way . If you and I owned a business together and I asked you every day to sell me your half or buy my half, that would be pretty unfair to you.
Mr. Stock is a bit like that, he keeps showing you prices. But you know what? You are not obligated to make a decision based on every price he offers you. You have no moral obligation to follow his example. Instead, you can take your time and wait for the right moment when he offers the perfect deal.
To quote Charlie Munger: “The stock market is a tool for transferring money from the impatient to the patient. Now let's get to the exciting details. Mr. Stock can be a kind of emotional roller coaster . He's like that enthusiastic friend who sometimes gets overly excited and sometimes feels very depressed.
But you, as an investor, don't need to get carried away by his emotions. You can calmly watch its ups and downs, and you only need to pay attention to it when it benefits you. Maybe there is a moment when he feels particularly depressed or extremely elated, and that is when you make a smart move. It's a bit like watching a swing.
Stock prices rise and fall, and you don't need to react to every little movement. You can choose the right moment to intervene and take advantage of the situation, and that's what makes investing in stocks so interesting . If you look at the highest and lowest prices of many strong American companies over the past year, you will notice that prices can fluctuate widely .
But you don't have to worry about it all the time. Just when it makes sense to you. Yes, I was talking about patience. I've been reading Barron's for 50 years . In 50 years, I found one investment opportunity at Barron's. I earned about $80 million from it. Remember, the market is not there to tell you what to do or to guide your decision.
It exists to serve you when you are ready to act. And the great thing is that you can value a company without being influenced by its current price. It's like estimating a race car's chances of winning a race without first looking at the odds. So, when learning about investing, remember that you are in control , and you don't need to let market emotions drive your choices.
Number three, margin safety. So, the third rule plays a crucial role in making sure you don't throw all your money into the market. Let's look at an example. If you're driving a truck and you see a bridge with a sign saying it can support 10,000 pounds, but your truck weighs 9,800 pounds, instead of...
taking a risk, you'd look for another bridge, right? Well, that's the idea of a safety margin. Just like in investing, you need a buffer. Don't invest all your money in something that's hanging by a thread. Leave a little extra space just in case. According to Charlie Munger, the idea of a safety margin, Graham's principle, will never get old.
The idea of making the market your servant will never get old. The idea of being objective and unbiased never gets old. The idea of being patient and waiting for opportunities never gets old. Let's say you're in the stock market and you see a company's stock price falling. Instead of jumping into a deal right away, you wait until it becomes clear that it's a good deal.
So, having a margin of safety means being careful and not cutting things too close. These three rules are like building blocks for your investment strategy. You need all three to have a solid foundation. You can't just throw one out and expect everything to be fine. Think of it as a three-legged chair.
If one leg is missing, you won't be very stable, right? Let's take a closer look at what we discussed with practical examples . Let's say you have a million dollars and you need to invest in three businesses. You can't change your mind after investing, so you better make the right choice. What would you pay attention to?
First, you need a business that has something special. For example, if you're thinking of opening a burger joint, you shouldn't just pick any location. You would choose one where you have a big advantage. Maybe a unique menu or a great location. This is what Charlie Munger calls sustainable competitive advantage.
You want your business to be like a castle with a large moat around it, protected from competition. A niche can arise for a variety of reasons, such as having a strong patent on your product, a great location, or a strong brand that people love. For example, think about Coca-Cola. Almost everyone knows and loves her, right?
This is a lasting competitive advantage . Charlie also talks about everyone running things, and honest and capable people. You wouldn't want to... Invest in a business run by a scammer or a complete newbie, would you? You need a team that knows what they 're doing and won't screw things up. We want to buy something that is inherently a very good business, that is, one that even an idiot could run and everything would work out well.
And then we want this business, which even an idiot could run successfully, to have a great person running it. And if we have a great business with a great person running it, that really excites us. And it works very well. Warren sometimes says you have to choose between a good person and a good business.
Do you know what he says? He says " good business". He wants something that has such enormous power that I had a friend when I was practicing law and he said, "If it can't handle a little bit of mismanagement, it's not that good a business." “And we like businesses that suffer from poor management, but we don’t understand it.
The next factor to consider according to the third rule is price. You wouldn't buy a bag of candy for $10. The same goes for stocks or businesses. You want to pay a reasonable price, not too high, not too low. Just like you research different businesses in your area throughout the week, trying to find the best ones to invest in.
You would cross out the ones that don't have anything special, don't have a good team, or are too expensive. Just like when searching for the best options, you narrow your choices down to the ones that make the most sense. Charlie Munger explains that it's actually easier to eliminate the wrong options than to choose the best ones.
It's like playing chess against a computer. Your brain filters out most of the noise and you focus on a few successful moves. Investing is something like this. Focus on what's really important and you'll be on the right track. Remember, you don't need to invest in a bunch of things. Instead…” Instead of rushing to seize every opportunity, save your punches for the best ideas.
And don't forget that the bigger your investments get, the harder it can be to find the ones that will matter. Stay with a certain margin of safety. Look for lasting competitive advantages , honest and capable people, and a reasonable price. By keeping this in mind, you will be on your way to making smarter investment decisions .
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