The recent death of Warren Buffett’s right-hand man Charlie Munger at the age of 99 brought to an end the most successful double act the stock market has ever seen. On a positive note, he left this world with a shedload of wisdom for us to benefit from.
With this in mind, here are three lessons from one-half of investment’s greatest pairing that I intend to continue using in 2024.
Buy quality, not trash
In the early part of his career, Buffett focused on buying what he labelled ‘cigar butt companies’. These were weak businesses that were likely to fail but had one last ‘puff’ in them. It’s a testament to his tenacity that Munger convinced his friend to change his strategy.
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Munger believed that “a great business at a fair price is superior to a fair business at a great price“. In other words, it’s worth paying up for a stock that — based on its track record and growth prospects — stands a better chance of building wealth.
As a UK investor, I’m mindful of this at the current time. Despite the recovery seen in December, valuations still look depressed in many of our best-known companies. But this doesn’t mean everything is worth buying.
The key, according to Munger (and eventually Buffett) is to separate the wheat from the chaff by looking for firms with competitive advantages that can probably be exploited for decades to come. Ultimately, this is what helped them become billionaires.
No one is perfect
It’s easy to become disheartened when a particular investment doesn’t perform as hoped. Then again, Munger believed these experiences were generally good for the soul. As he put it: “There is no way you can live an adequate life without making mistakes.”
While it might seem odd given his wealth, Munger made his fair share of missteps over the years. He piled into Chinese e-commerce giant Alibaba just as other shareholders were leaving, for example. A sluggish post-pandemic economy did him no favours and he took a huge loss.
I’ve made similar investing mistakes. Most recently, my stubborn belief that fast fashion firm boohoo could quickly recover its mojo proved spectacularly wrong.
On the flip side, I’ve hopefully learned from these wobbles in judgement. It’s at least given me a healthy appreciation for how much risk I’m comfortable taking in the market.
That’s worth bearing in mind as we (hopefully) gear up for the next bull market.
Patience pays
One of Munger’s best-known quotes chimes nicely with the philosophy we adopt at The Motley Fool. As he put it: “The big money is not in the buying and selling but the waiting.”
With the advent of trading apps and 24/7 news coverage, it’s incredibly tempting to get into the habit of jumping in and out of the market.
But the only guarantee with this strategy is that it will incur costs. In reality, no one knows where share prices are going in the near term, regardless of their investing prowess.
As a team, however, Buffett and Munger were acutely aware of the magical effects of compounding. To become rich from the stock market, one of the key skills is knowing when to sit back and do nothing.
That’s what they did and it’s what I intend to keep doing next year.
