Charlie Munger: The Complete Investor (By Tren Griffin)

charlie munger is the chairman of berkshire hathaway and the closest partner and right hand of warren buffett what strategies does charlie munger use to pick stocks and what made him one of the greatest investors of all time to answer those questions we will go over the top five lessons from the book charlie munger the complete investor by tren griffin the first lesson is to treat a share of stock as an ownership of a business a stock is not just a ticker symbol or an electronic blip it's an ownership interest in an actual business with an underlying value that does not depend on its share price in buying a business monger believes the place to start is at the bottom with business fundamentals and work up what does the company sell and who are its customers and competitors what are the key numbers that represent the value the business generates if you do not understand the actual business of the company you cannot understand the value of assets related to that business value investors are focused on the present value of the cash that will flow from the business during its lifetime and whether the business generates high sustained and consistent returns on capital you should not spend time with top-down factors like monetary policy consumer confidence durable goods orders and market sentiment in doing a business valuation or investing if you focus on the value of the business you don't need to predict short-term changes in the economy because that takes care of itself if you do not follow the business to value the stock approach in the view of charlie munger you are a speculator and not an investor if you are an investor you are trying to understand the value of the asset by contrast a speculator is trying to guess the price of the asset by predicting the behavior of others in the future the financial performance of speculators is in a word dismal especially after fees costs and taxes so to be an investor instead of a speculator you need to focus on the business behind the ticker symbol the second lesson is to be rational objective and dispassionate over the years monker has repeatedly said that the most important quality that makes anyone a successful investor is the ability to make rational thoughts and decisions rationality is the best antidote to making psychological and emotional errors during an interview monger once recalled that a person sitting next to him at a dinner party asked him tell me what one quality accounts for your enormous success monger replied i'm rational that's the answer i'm rational you should try to keep your behavior from getting in the way of being rational objective and dispassionate there are behavioral biases that trick your brain into making bad investment decisions later in this video we will go over some of them if you think things through from the simplest building blocks in a step-by-step process and employ techniques like checklists you can avoid making most mistakes charlie munger once said rationality is not just something you do so that you can make more money it is a binding principle rationality is a really good idea you must avoid the nonsense that is conventional in one's own time it requires developing systems of thought that improve your batting average over time the third lesson is worldly wisdom you must know the big ideas in the big disciplines and use all of them routinely most people are trained in one model economics for example and try to solve all problems in one way to the man with a hammer the world looks like a nail this is a dumb way of handling problems monger has adopted an approach to business and life that he refers to as worldly wisdom monger believes that by using a range of different models from many different disciplines psychology history mathematics physics philosophy biology and so on a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts no one can know everything but you can work to understand the big important models in each discipline at a basic level so they can collectively add value in a decision-making process simply put monger believes that people who think very broadly and understand many different models from many different disciplines make better decisions and are therefore better investors monger argued persuasively that activities like reading great books can help someone become a better investor the theory of modern education is that you need a general education before you specialize and i think to some extent before you're going to be a great stock picker you need some general education the fourth lesson is the psychology of human misjudgment humans have developed simple rules of thumb called heuristics which enable them to efficiently make decisions heuristics are essential without them it would be impossible to make the decisions required to get through a normal day unfortunately when we talk about investing these heuristics can sometimes result in tendencies to do certain things that are dysfunctional you can get marginally better at avoiding mistakes and have an edge in the market over people who do not understand monger's tendencies and other aspects of behavioral economics we are going over five important tendencies that you have to pay attention to the first is the pain avoiding psychological denial people hate to hear bad news or anything inconsistent with their existing opinions and conclusions for this reason if something is potentially painful the human brain often goes to work trying to deny reality a common example of psychological denial happens when people make projections about a potential investment based on a story even when there are real facts that the story may not be correct people may continue to believe in their story the second is the excessive self-regard tendency part of being a genuine expert is to know the limits of your own competence unfortunately this is far too often not the case in responding to a survey 70 of students said they were above average in leadership ability this overconfidence can make people make bad decisions when investing the third is the liking and loving tendency people tend to ignore or deny the faults of people they love and also tend to distort facts to facilitate that love you may like or even love your friend or relative but that does not mean you should trust him or her with your money one example of this tendency is when people fall in love with a company and make investing mistakes about the company as a result of that love the fourth heuristic is the super reaction tendency the deprival super reaction tendency is more commonly called loss aversion and it can cause investors to irrationally avoid risk when they face potential for gain but irrationally secrets when there is a potential for loss in other words people tend to be too conservative in seeking gains and too aggressive in seeking to avoid losses the fifth is the social proof tendency humans have a natural tendency to follow a herd of other humans one means we use to determine what is correct is to find out what other people think is correct one example is that many people buy stocks like gamestop only because a lot of people were buying them the social proof tendency is one major cause of financial bubbles i only listed a few examples of the tendencies in the book there are a total of 25 tendencies you can read the full book by buying it with the link in the description the fifth lesson is to buy wonderful businesses a wonderful business is a business that has a durable competitive advantage the analogy they use at berkshire is that the business itself should be viewed as the equivalent of a castle and the value of that castle will be determined by the strength of the protective moat charlie munger said that it is far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price monger believes the greater the quality of a company the greater the strength of the wind at your back over the long term what are the moats that monger looks for in a company let's check some of them the first is the power of the brand which can be a huge moat for a company as it is very difficult to replicate how do you try to create a brand that competes with disney coke is a brand associated with people being happy around the world that is what you want to have in a business that is the moat you want that moat to widen brands of course can fail over time a very important test for buffett and monger in determining the strength of a brand-based moat is whether a competitor can replicate or weaken the moat with a massive checkbook as just one example here's what buffett said about coke at the 2012 berkshire meeting if you gave me 10 20 30 billion dollars to knock off coca-cola i couldn't do it the second mode is the scale if a company's average costs fall when more of a product or service is produced there are supply-side economies of scale in other words the company increases revenue at a faster rate than costs scale is a great competitive advantage as it allows a company to sell more with lower costs and obviously the lower the cost the more money the company will make to check if a company is scaling you can check in the annual report if the revenue is growing more than the cost the third mode is patents and intellectual property a patent trademark or any other type of intellectual property is like a legal monopoly this barrier to entry can create a substantial moat for the owner of the intellectual property look at disney for example they have the rights to movies and stories that people love like star wars the lion king frozen marvel superheroes and many others this allows disney to sell products of these movies and no one can copy them if you want to sell a shirt of star wars you will probably have to pay disney when it comes to moats durability matters monger wants to avoid a business that has a moat today but loses it tomorrow frequently you'll look at a business having fabulous results and the question is how long can this continue well for monger there's only one way to answer that and that's to think about why the results are occurring now and then to figure out what could cause those results to stop occurring for monger making rational decisions is crucial to being a successful investor you can learn seven behavior biases that will help you to make better investment decisions by clicking on this video on the screen or in the link in the description if you like this video please click on the like button and subscribe to receive more videos about investing bye

Channel: The holder investor

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Keywords: The Complete Investor, Charlie Munger, Tren Griffin, Investing in your 20s, Stock market, Invest, How to start investing, Warren Buffett, Benjamin Graham, Book summary, Online investing, Wall Street, ETFs, Money, how to make money, passive income, how to invest, personal finance, investing, investing for beginners, how to invest in stocks, investing strategies, The Holder Investor

Id: LAYXm1DQCUY

Length: 11min 7sec (667 seconds)

Published: Wed Mar 16 2022