Charlie Munger: Distilled wisdom from the master of mental models
He is a consummate collector of mental models that help people make decisions that make life easier. Here are some that may change your life and your fortune as well.
There is so much to admire about Charlie Munger. As the vice chairman of Berkshire Hathaway, he helped Warren Buffet, considered by many as the greatest investor of all time, build a multi-billion-dollar empire.
While he may not be as popular and as rich as Warren Buffet, he is nevertheless revered for his wisdom in investing, his wit, and his mental models.
Mental models are models or explanations of how things work in the world. It may be a mental model in science, philosophy, business, or investing that may also be applied in other areas or disciplines.
Compounding is a mental model. Leverage, borrowed from physics, is a mental model in business as well. The principle of least effort, which describes this tendency to choose the easy path, is another.
I can think of five ways in which he has influenced me. They may help you, too.
- Investment Philosophy: Munger harped on the importance of having a broad “latticework of mental models in your head”, understanding various disciplines, and employing a multidisciplinary approach to decision-making. It has inspired me to think more holistically when analyzing opportunities. It is important to have an investment philosophy. Personally, I have a preference for unloved, undervalued names that have good potential. Each investor should have his or her own investment beliefs that they are comfortable with.
- Long-term Thinking: Munger advocates for long-term investment strategies and the importance of patience in the stock market, encouraging investors to focus on the fundamentals of a company rather than short-term market fluctuations. Sometimes it takes time for our investment thesis to play out and we should not be too emotional about short-term volatility. There was once a company that was to be taken out of the index. However, fundamentally, its financials were solid. The stock price kept dropping but we took that as an opportunity to accumulate.
- Value Investing Principles: Munger, along with Warren Buffett, popularized and reinforced the principles of value investing, focusing on investing in companies with strong fundamentals and reasonable valuations rather than speculating on short-term market trends. I look at multiples, i.e., P/E, or price-earnings ratio, and EV/EBITDA, or enterprise value to earnings before interest, taxes, depreciation, and amortization when comparing a company with peers or analyzing the historical average of companies to determine its relative value. I prefer companies with cheaper multiples over those that are priced to perfection.
- Emphasis on Learning: Munger’s continuous pursuit of knowledge and lifelong learning has encouraged investors to expand their horizons, read widely across various disciplines, and continuously seek to improve their understanding of the world, which can benefit their investment decisions. In my case, I knew what I wanted to specialize in and took steps to get there. I took necessary courses, such as the Chartered Financial Analyst (CFA) Program, to improve my skill set. I think it is also important to be curious and inquisitive by talking directly to a company’s management to learn more about their plans and infer how this could impact their stock.
- Ethical Investing: For Munger, ethical behavior in business and investing, promoting integrity, honesty, and sound ethical practices are essential factors for long-term success. On my part, I think it is important to lay out the benefits and risks of an investment to your investors. I do not agree with making misrepresentations to investors just to make a sale.
Overall, Charlie Munger’s teachings and principles have had a profound impact on shaping my mindset, encouraging me to have a more thoughtful, disciplined, and rational approach to investing.
You, too, may benefit from his practical yet profound wisdom as well.
CRISTINA GABALDON, or Gabs, graduated from De La Salle University with a Bachelor’s degree in Accountancy and Economics. In her 16 years of market experience, she has taken on roles such as Chief Investment Officer and head of equities in some of the country’s biggest banks and insurance companies before joining Metrobank. She is currently the Deputy Head of Investment Management Division of Metrobank Trust. She is also a Certified Public Accountant (CPA) and a Chartered Financial Analyst (CFA). She previously served on the board of trustees of CFA Philippines and is currently on the board of trustees of the Fund Managers Association of the Philippines (FMAP) as president. She loves spending time with her husband and two kids. Gabs is also an avid painter and joins art exhibits from time to time.