[FREE] Charlie Munger's Investing Principles Checklist

Reflections #10

Welcome to this week’s Reflections. With election week likely to bring more market volatility, we thought it fitting to revisit some sound investment advice from Charlie Munger. Today, we’re diving into his investing principles from Poor Charlie’s Almanack. Munger’s framework emphasises disciplined thinking and sound judgment, qualities that can make the difference between an average investor and a truly great one. By the end of this article, you’ll gain insights into Munger’s approach, with actionable points to enhance your investing strategy.

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1. Risk

All investment evaluations should begin by measuring risk, especially reputational.

• Margin of Safety: Always ensure you’re buying with a cushion to protect against mistakes.

• Character Matters: Avoid doing business with people who compromise integrity.

• Proper Compensation: Only take risks if the reward makes sense.

• Watch Inflation and Interest Rates: These can erode returns over time.

• Avoid Major Mistakes: Shun permanent loss of capital.

“The desire to get rich fast is pretty dangerous.” — Charlie Munger

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2. Independence

“Only in fairy tales are emperors told they are naked”.

• Think for Yourself: Make your own calls, even if they go against popular opinion.

• True Value Over Consensus: Remember that just because other people agree or disagree with you doesn’t make you right or wrong - the only thing that matters is the correctness of your analysis and judgement.

• Avoid Herd Mentality: Mimicking the herd invites regression to the mean (merely average performance).

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3. Preparation

“The only way to win is to work, work, work, and hope to have a few insights”.

• Be a Lifelong Learner: Curiosity and constant learning lead to better decisions.

• Will to Prepare: More important than the will to win is the will to prepare.

• Learn Mental Models: Build a foundation across different fields to see connections.

• Ask Questions: If you want to get smart, the question you have to keep asking is “why, why, why?”

“In my whole life, I have known no wise people who didn’t read all the time—none.” — Charlie Munger

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4. Intellectual Humility

Recognise what you don’t know.

• Stay in Your Circle: Focus on what you truly understand.

• Seek Disconfirming Evidence: Look for reasons you might be wrong.

• Avoid Overconfidence: Resist false certainty and overestimating your knowledge, remember that you are the easiest person to fool.

“It’s 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

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5. Analytic Rigor

Avoid shortcuts and think deeply.

• Value Over Price: Assess true value, not just the current market price.

• Obvious Over Esoteric: Simpler ideas often yield better results.

• See the Full Picture: Consider all potential outcomes and their ripple effects.

• Business Analyst Mindset: Focus on analysing businesses rather than just market trends, macroeconomic factors, or security prices.

• Consider Total Risks: Take into account all levels of risk and the potential consequences of your decisions.

• Think Forwards and Backwards: Always invert your thinking; understanding the opposite scenario can provide clarity.

“Knowing what you don’t know is more useful than being brilliant.” — Charlie Munger

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6. Allocation

Place your bets wisely.

• Opportunity Cost: Your capital should always be in its best possible use.

• Bet Big on Great Ideas: When odds are strongly in your favour, invest heavily.

• Avoid Attachment: Don’t get too close to investments; stay flexible and opportunistic.

“It’s not supposed to be easy. Anyone who finds it easy is stupid.” — Charlie Munger

For more on portfolio allocation, in particular concentrated portfolios, check this article out:

The Case for a Concentrated Portfolio

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7. Patience

Resist acting just for the sake of it.

• Let Compounding Work: Interrupting compounding wastes returns.

• Minimise Costs: Avoid unnecessary fees and taxes.

• Be Ready for Luck: Sometimes luck plays a role; be prepared to take advantage.

• Enjoy the Process: Enjoy the process along with the proceeds, because the process is where you live.

“The big money is not in the buying and selling, but in the waiting.” — Charlie Munger

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8. Decisiveness

Act confidently when the time is right.

• Act on Opportunities: When conditions align, don’t hesitate.

• Fear and Greed: Be fearful when others are greedy, and greedy when others are fearful.

• Seize Rare Opportunities: Good opportunities are infrequent—capitalise on them.

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9. Change

Embrace and adapt to reality.

• Accept Complexity: The world isn’t simple, and it won’t adjust to fit your preferences. Adapt as it evolves.

• Challenge Beliefs: Stay open to changing your mind and questioning long-held ideas.

• Face Facts: Confront uncomfortable truths; ignoring them won’t make them disappear.

• Recognise Reality: Accept situations as they are, especially when they’re inconvenient.

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10. Focus

Simplicity and integrity are key.

• Keep It Simple: Avoid overcomplicating things; stay aligned with your original goals.

• Protect Your Reputation: Reputation and integrity are invaluable and can be lost in an instant.

• Guard Against Hubris and Boredom: Don’t let overconfidence or boredom lead you off track.

• Avoid Distractions: Filter out unnecessary information that doesn’t serve your purpose.

• Address Big Problems Directly: Don’t ignore significant issues; tackle them head-on to avoid larger consequences.

“Step by step you get ahead, but rarely in fast spurts. But you build discipline by preparing for fast spurts.” — Charlie Munger

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Conclusion

In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life:

Preparation. Discipline. Patience.

Embracing these lessons can sharpen your decision-making and improve your investment outcomes over the long run.

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ICYMI

Our investing philosophy:

Our Investing Philosophy [Free Checklist]

If you like our work and you’re interested in the types of companies we invest in, check out our most recent portfolio update here:

Portfolio Update #3

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We hope you enjoyed this post. If you found it valuable, feel free to share it, and stay tuned for our next edition!

Enjoy the rest of your week.
The S.C. Team

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Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.