‘Diworsification’ and lifelong learning: 3 quotes from Charlie Munger that will make you a better investor

Billionaire and investing legend Charlie Munger died on Tuesday at the age of 99. The longtime vice-chairman of Berkshire Hathaway was Warren Buffett’s right-hand man, and the Oracle of Omaha credits Munger with expanding his focus from investing in troubled companies at cheap prices to buying high-quality companies at fair prices.

“Berkshire Hathaway could not have been built to its present status without Charlie’s inspiration, wisdom and participation,” Buffett said in a statement.

Munger was already a wealthy man by the time he joined Buffett at Berkshire Hathaway, and went on to grow his fortune to an estimated $2.3 billion by early 2023. Each year, at Berkshire’s shareholder meeting, Munger sat alongside Buffett, amusing the audience and the Berkshire chairman alike with his wisdom, pragmatism and acerbic wit.

Here are three Mungerisms that are sure to make you a better investor.

‘Live within your income and save so that you can invest. Learn what you need to learn.’

Munger gives investors a twofer here, in a quote from “Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger.”

The idea of living within your means isn’t a new one, but it’s tried and true advice for anyone looking to build wealth. Giving yourself a surplus at the end of each month — even just a modest one — to put into investing accounts allows your money to compound over decades.

Munger and Buffett are famous for living well below their means, with both having lived in the same houses for decades rather than upgrading.

Munger’s second point about learning is one he returned to over and over in his career. He believed constant, lifelong learning was the key to success.

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines,” Munger said in a 2007 commencement address at the University of Southern California Law School. “They go to bed every night a little wiser than when they got up, and boy does that help — particularly when you have a long run ahead of you.”

‘A lot of people think that if they have a hundred stocks they’re investing more professionally than they are if they have four or five. I regard this as insanity.’

Buffett and Munger both got rich making concentrated investments in individual companies, and Munger, in particular, scoffed at financial professionals who spread their bets across an array of names. The quote above is from the 2021 shareholder meeting for the Daily Journal Corporation, where he would go on to mock the concept of diversification.

“I think it’s much easier to find five than it is to find 100,” Munger said. “By the way, I call it ‘diworsification,’ which I copied from somebody. And I’m way more comfortable owning two or three stocks, which I think I know something about and where I think I have an advantage.”

So should you sell your S&P 500 index fund in favor of a handful of stocks? Even Munger would probably tell you no, not unless you were willing to dedicate your life to investment research the way he did. Buffett has recommended novice investors buy index funds for years.

But Munger’s approach speaks to the idea that buying and holding a few high-conviction names can do wonders for your portfolio’s returns. Once you have a diversified core, consider dedicating a small portion of your portfolio — say, 5% — to companies you believe in over the long term.

‘I think you would understand any presentation using the word EBITDA, if every time you saw that word you just substituted the phrase, ‘bull—- earnings.”

The 2003 Berkshire shareholder meeting was one of the many occasions Munger called out what he saw as shady accounting practices, in this case EBITDA — a measure of corporate profitability short for earnings before interest, taxes, depreciation and amortization.

In short, Munger felt that companies often highlighted convoluted profitability metrics to obscure the fact that they were severely indebted or producing very little cash.

“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash,” Munger said at the same meeting. “It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.”

To invest like Munger and Buffett, don’t fall for the flashiest numbers in the firms’ investor presentations. Instead, dig into a company’s fundamentals in their totality. The more a company or an investment advisor tries to win you over with esoteric terms, the more skeptical you should likely be.

As Buffett put it in his 2008 letter to shareholders: “Beware of geeks bearing formulas.”

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