Charles T. Munger is vice president of Berkshire Hathaway, the same company of which Warren Buffett is president. Born in 1920, he is five years older than the most famous president. Although he does not have a bachelor’s degree, he does have a degree from Harvard Law School and was a successful attorney for several years before joining Buffett many decades ago.

If you ask people who really know both of them, they will probably tell you and it will surprise you that Munger is the smarter of the two, while Buffett is the better investor. They would also tell you that Munger made Buffett a better investor than Buffett was, before he met Charlie Munger.

When Charlie Munger is pressed on this issue, his response is that Warren Buffett would have come up with this way of investing anyway; It was only a matter of time. Charlie helped him get there earlier. What is this way of investing that Munger is famous for? After all, Munger is an investment billionaire in his own right. It can be summed up in a few sentences.

“The number one idea is to view a stock as owned by the company and judge the quality of permanence of the company in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you are paying for. Move only when you have an advantage. It’s very basic. You need to understand the odds and have the discipline to bet only when the odds are in your favor. “

Let’s tear this philosophy apart and see where it takes us. “View a share as owned by the company.” Charlie Munger says he doesn’t like to trade stocks. You buy and hold, but you want to keep the right stocks for the right reasons. I’ve seen people buy stocks in seconds that, if they were buying a car, would take days of intense reasoning back and forth. Let’s say you’re going to buy a car, end up going to different dealerships, do test drives. You read about the car in the consumer report, you look at the JD Powers surveys. You probably look at other car magazines. You can even go out and test other cars in the same price range as the car you have in mind to do a value comparison. Meanwhile, you buy a stock, you know little more than the symbol, and you are there investing, and you want to know why some people lose money in the market. As far as these gentlemen are concerned, trading stocks is pointless

These people are bringing out their gambling instincts in the market. Charlie Munger wouldn’t do that. Charlie talks about “maintaining the quality of the business in terms of its competitive advantage.” What is a competitive advantage for him? It’s what we call that quality that keeps you consistently ahead of your competitors, so you can charge a premium price. It is the value of the franchise. Is there anyone in the world who does not know the name of Pepsi-Cola or Disney?

You put the Coca-Cola name on a soda bottle, guess what, it sells. It has been sold for the past fifty years and will be sold for the next fifty years. This represents the competitive advantage of a company. It’s what Munger loves to see and invest in. You want to nurture that competitive advantage and do everything you can to improve it. This is why ethics is so important to him. Do not do anything that puts the franchise at risk.

“Look for more value in terms of discounted future cash flow than you are paying for.” Buy the stock at the correct price. You don’t have to buy cheap, cheap, cheap. This is something Munger has criticized Buffett about. He believes that Buffett before meeting him would only buy what is really cheap, what Buffett used to call cigarette butts. Charlie has taught Warrem that it’s okay to pay for a stock, as long as he believes that, over time, he has a money machine with a large franchise that has predictable staying power.

Wait, there’s more!

“Move only when you have an advantage. You must understand the odds and have the discipline to bet only when the odds are in your favor.” This is brilliant, absolutely brilliant. There are great companies out there, sometimes they fail, but the basic business is intact. When they falter, and institutions are bailing out because they don’t want to be associated with an incumbent at the end of the quarter, you can sometimes buy a fabulous company at a BARGAIN PRICE. “Move only when you have the advantage.” Now you know what Munger is talking about.

“Bet only when the odds are in your favor.” You don’t become a billionaire from scratch by buying different stocks every day, or even every month. It’s like a batter standing at the plate. Only in this case, you wait; You just keep waiting for the perfect pitch to come down the plate, and then boom, home run. Wait for the odds to be in your favor. Wait till you hear the next one, it’s fabulous!

Both Warren and Charlie have discussed an interesting concept. If you’ve ever ridden a commuter train, most people buy what’s called a commuter ticket. In other words, the traveler realizes that he is going to travel to and from work all month, so he buys a monthly ticket, because it saves him money. There are 31 numbers on the ticket and the ticket changes every month.

When the passenger boards the train, the conductor at some point punctures the ticket indicating that the day in question has been used. Munger likes to say, and Buffett agrees with this, “Wouldn’t it be nice if at birth you were given a stock purchase ticket that would allow you to buy no more than, say, 15 or 20 stocks in your entire life?” Investors would be much more careful in their choices if they knew that they are limited to a certain number. It would end daily or even monthly trading. Most likely, your performance will benefit greatly on the upside.

We love Charlie Munger, because much of what he says is very appropriate for our own work at StocksAtBottom.com. We do not have stock every day or every week. We constantly research to find the ideas that are going to work. Then we wait for the correct price, waiting until the stock arrives. Sometimes they drop to our buy levels, and when they do, the price movements are big, dramatic, and beautiful. If you want to know more about our work, just click the button below and start reading.

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