He quotes that great scientist, Sir Isaac Newton, the discoverer of the laws of gravity: "If I have seen further than others, it is because I was standing on the shoulders of giants." Sir Isaac read profusely the works of those who went before him.
Munger's Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger is one such book for the investor. For Munger is an investment giant and a bloody funny one too, to use some Munger-style English. Buffett wrote the book's foreword.
In trying to bring you a review of this extraordinary book, I find it difficult to know where to start - there are 480 pages, and every page has a mind-numbingly brilliant line. Almost every page has a sidebar commentary, for instance the few lines on Sir Isaac to illustrate Munger's point.
In reading the book, a particular question ran through my mind - why do some equally brilliant stock analysts succeed at long-term wealth building and some fail dismally? I give Munger's answer at the end of this review.
Munger's three great lessons of investing - the "three where he expanded my horizons", according to Warren Buffett - are:
1. A great business at a fair price is superior to a fair business at a great price.
2. Refer to 1.
3. Refer to 2.
Some other key points include:
1. Stay within "your circle of competence". For Bill Gates, his circle would include technology stocks. For Munger and Buffett, their circle of competence does not include technology stocks. It's a further extension of that first rule of investing: only invest in what you understand.
2. Over a long period of time - 20 to 30 years - he relates the performance of the company to the return on shareholders' funds, exampling a 6 per cent return on equity (ROE) to a long-term return of 6 per cent a year and a 15 per cent ROE to a 15 per cent a year return. This is a different way of putting rules 1, 2 and 3. The book explains many of the methods Munger uses to check that ROE is sustainable over a long period of time.
3. Buy and hold for the long term - thus avoiding tax, which he suggests will add a 3.5 per cent compound a year rate of return to a stock returning 15 per cent against buying and selling it each year, assuming a 35 per cent tax rate. Relate this to "feebezzlement" in 6.
4. The quality of the underlying business is paramount: adding financial engineering, technology, or the Internet cannot change this. "When you mix raisins and turds, you still have turds," he says.
5. He espouses buying a few excellent investments, and quotes Buffett as recommending that the investor should simply have 25 opportunities to invest in their lifetime, and that such a limitation would greatly enhance their performance. Ten single investments had made the major contribution to Berkshire. Its style? Focus investing.
6. The "Feebezzle" - a word Munger coins and adapts from JK Galbraith's "the Bezzle". He estimates that many a foundation and investor wastes 3 per cent of assets a year to "feebezzlers" and that might be more like 5 per cent with mutual funds. He rated advice to constantly switch funds from lagging investment managers to new investment managers who have "high pressure, asset gaining hoses in their mouths and clients whose investment results will not be improved by the super-rapid injection of new funds".
Point 5 is well described in Robert Hagstrom's The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy, a book recommended by both Buffett and Munger. I would warn that most of us should remember we are mere investment mortals. And thus a slightly more diversified portfolio of quality stocks may be a better option, against the risk of us being wrong with a stock we have misjudged as being of pre-eminent quality.
I can't write a review that spells out the extraordinary amount of investment and human wisdom on each page of a magnificently presented book. I have never seen a publication like this.
And to try to answer that question, of what might just spell the difference between those two highly intelligent analysts. From the book, Munger's answer is the importance of temperament, patience and curiosity. He says most people are too fretful, they worry too much. His thoughts on this aspect are some of his most critical observations.
I can't recommend this book too much, having so far bought eight or nine copies for myself and close investor friends, mostly the autographed edition as it is so special. Having read it from cover to cover, I now intend to read it again, cover to cover.
