10 Timeless Investment Principles From Warren Buffett’s Right-Hand Man

Warren Buffett’s empire wouldn’t be where it is today if it wasn’t for Charlie Munger.

Sure, Buffett gets all the headlines. But Munger has been instrumental in Buffett — and their company Berkshire Hathaway’s — success.

I’ve written about Munger before — but we haven’t spent a ton of time talking about what makes him unique. After all, it was Munger who taught Buffett that “owning a non-controlling portion of a wonderful business is more profitable, more enjoyable, and far less work than struggling with 100% of a marginal enterprise.”

Munger might fly under the radar compared with Buffett, but his 10 Investment Principles helped Berkshire Hathaway generate compounded annual returns of 20% since 1965. And turn it into the $700 billion behemoth that it is today.

Today, I want to walk you through Munger’s Investment Principles Checklist. This is a wonderful checklist to keep handy as you make any investment decisions.

Charlie Munger’s 10 Investment Principles

Charlie Munger
Vice chairman of Berkshire Hathaway
Photo credit: Caltech

Munger Principal No. 1: Risk

It shouldn’t come as a surprise that topping the list is risk. Anytime you are going to part ways with your hard-earned money, you better have a good idea of the risks. And you better be properly compensated for the risks assumed.

But Munger isn’t just talking about the risk of capital loss — of course, his top priority is to avoid big mistakes and “shun permanent capital loss.”

But he is also talking about the risk to your reputation as well. Don’t make questionable investments that could come back and harm your reputation. As Buffett is credited with saying, “It takes 20 years to build a reputation and five minutes to ruin it.”

Avoid dealing with people of questionable character.

Munger Principal No. 2: Independence

It’s okay if people don’t agree with you or your investment thesis. The only thing that matters is the correctness of your analysis and judgment. If you’ve done your due diligence, then it shouldn’t matter what other people think.

Independent thinking and confidence to stand with your decisions are essential for outperformance.

But if you always follow the herd, then you’ll regress to the mean. Your performance will be merely average, nothing more.

Munger Principal No. 3: Preparation

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

Don’t think you can get skate by without getting your hands dirty. You need to roll up your sleeves and dive in. You have to love the process.

Become a voracious reader. Cultivate curiosity. And strive to become a little wiser every day. Keep asking, “why?”

Munger believes that more important than the will to win is the will to prepare.

Munger Principal No. 4: Intellectual Humility

You won’t know everything, and you won’t have or even find the answers to everything. And that’s okay. The beauty of investing is that you don’t need to understand everything.

If something doesn’t fit your circle of competence, move on.

Resist the craving for false precision and certainties. Nothing in life is certain (outside of death and taxes). Don’t trick yourself into thinking you know something you don’t.

Remember, the easiest person to fool is yourself.

Munger Principal No. 5: Analytic Rigor

You don’t have to be the best at projecting future cash flows and revenues. You just have to be good at being a business analyst. Focus on the basics and see what the business really has to offer.

As Buffett always says about his Sees Candy and Coca-Cola investments… he might not know what the future might look like, but he’s darn sure that people will still be eating chocolates and drinking a Coke (preferably Cherry Coke, Buffett’s favorite).

Munger Principal No. 6: Allocation

Proper allocation of capital is an investor’s number one job. Instead of relying on stable discount rates or economic outlooks, investors should focus on opportunity costs.

The best investment is always found in comparison to other options.

Good ideas are rare, and when you come across one where the odds are greatly in your favor, bet (allocate) heavily.

Finally, don’t “fall in love” with an investment — be situation-dependent and opportunity-driven.

Munger Principal No. 7: Patience

This is probably the easiest one for us to implement but the hardest for us to enforce. That’s because we feel like we are missing something if we’re not doing something.

But you have to resist the natural human bias to act. Never take action for its own sake.

Allow the eighth wonder of the world — compound interest — to do its job. Never interrupt it unnecessarily.

And enjoy the process along with the proceeds, because the process is where you live.

Munger Principal No. 8: Decisiveness

When proper circumstances present themselves, act with decisiveness and conviction. Following this checklist, along with other criteria, will make you say no to most investments. So, the ones that “survive” this process deserve significant investment.

When opportunity meets the prepared mind, that’s the game you want to be in.

This is also where Munger throws in one of his and Buffett’s mantras: “Be fearful when others are greedy, and greedy when others are fearful.”

Munger Principal No. 9: Change

To some degree, your analysis is always dependent on some estimates about the future. Things will happen that you simply couldn’t have foreseen.

Recognize reality even when you don’t like it — especially when you don’t like it. And live with change and accept unremovable complexity.

You have to recognize and adapt to the true nature of the world around you. Don’t expect the world to adapt to you. And you have to continually challenge and willingly amend your “best-loved ideas.”

Munger Principal No. 10: Focus

Keep things simple, and remember what you set out to do.

Don’t get stuck in the weeds (the small details) and miss the bigger picture. And don’t push aside what you might deem unneeded information. Far more often, small changes will impact the course of the company.

Face your big troubles. Don’t just sweep them under the rug. And finally, remember that reputation and integrity are your most valuable assets — and can be lost in a heartbeat.

In the end, it comes down to Munger’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness.

Action To Take

Keep Munger’s 10 Investment Principles close by. Review them often. And anytime you’re about to make an investment (doesn’t always have to be stocks), run through this checklist. It could help save you from disaster or help you pounce on a wonderful opportunity.

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