I recently came across this awesome Tweet & Podcast from David Senra of Founders Podcast, wherein he captures learnings from his dinner with Charlie Munger, as well as his reading of The Tao of Charlier Munger.

Here are some insightful ideas & quotes from Munger that stayed with me from David’s experience:

1/ Buy wonderful businesses at fair prices

Before Munger joined Berkshire, Buffet used to invest in Ben Graham’s “cigar-butt” style – buying super-cheap stocks, often trading below book value.

Munger gave him a new blueprint: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices”. This is what led to Berkshire becoming the compounding machine it is today.

2/ Cash is king

Through a company called Blue Chip Stamp, Munger & Buffet learned about the value of “float”- excess cash that a business throws up due to the timing difference between receiving payments & settling payouts. This excess cash could then be re-invested in profitable companies.

Through his early investing experiences, Munger started seeing the advantages of investing in better businesses that didn’t have big capital requirements and did have lots of free cash that could be reinvested in expanding operations or buying new businesses.

Munger advises keeping enough cash at all times, in order to take advantage of stock market crashes.

We made so much money because when the great deals came during an economic crisis, we had cash and could move fast.

Charlie Munger

3/ Acting on the few big ideas that matter

Munger says that very few times, you will be presented with an opportunity to buy a great business run by a great manager. Not buying enough when presented with this opportunity is a big mistake.

You have to be willing to act when the right opportunity comes along. ‘Cos great opportunities don’t last very long in this world.

Good ideas are rare. When you find one, bet big.

Charlier Munger

4/ Portfolio concentration creates outlier outcomes

Real wealth is created via concentration. Or to put it in another way, over time, one should expect 1-2 outlier winners to constitute a majority of the portfolio.

When Munger wrapped up his pre-Berkshire fund, Blue Chip Stamp accounted for ~61% of his portfolio.

Worshipping at the altar of diversification is crazy. One truly great business will make your unborn grand children wealthy.

Charlie Munger

5/ Chase unfair advantage

Competition is for losers! Why would you want to compete with people?

Some quotes from Munger on this:

• “My idea of shooting fish in the barrel is to first drain the barrel”.
• “Only play games where you have an edge”.
• “Differentiation is survival”.
• “Aim for durability”.

Munger talks about how size and market domination has its own kind of competitive advantage. When a company is deeply entrenched with customers, it acts as a deterrent for other players to enter the space.

Sectors that are generally considered to be “bad businesses” (eg. retail, textile, airlines etc.) are intensely competitive. Players beat each other over price and drive down profit margins for everyone, killing cash flows and bringing down chances for long term survival.

That’s why Berskhire looks for great businesses that have a durable competitive advantage. 

Mimicking the herd invites regression to the mean. 

Charlier Munger

6/ The power of Compounding

Find an exceptional business where underlying economics are going to keep increasing its value, and then hold on to it over time.

Quoting Munger – “Time is the greatest friend of an exceptional business. It’s the greatest enemy of a mediocre business”.

Compounding also works in knowledge. Munger gives an example of how over 50 years of consistently reading Barrons, he found just 1 idea worth investing in but that made him $80Mn, which he then gave to Chinese fund manager Li Lu, who turned it into $400-500Mn!

7/ The value of Rationality

To quote Munger:

• “We don’t let other people’s opinions interfere with our rationality”.
• “Life is like poker. You have to be willing to fold a much loved hand when new info or facts come to light“.
• “It’s remarkable how much long term advantage people like us have got by trying to be consistently not-stupid, instead of being highly intelligent”.

8/ Focus is a super-power

Munger says:

• “I succeed because I have long attention spans. People who multi-task give up their advantage”.
• “You will always lose in a race to that one guy who sacrifices everything he has in service of one idea”.
• “Extreme specialization is the key to success”.
• “Intense interest in a subject matter is super powerful”.

He cites examples of how great companies tend to focus on optimizing one specific lever in their business:

• Costco – optimizes costs
• Geico – optimizes distribution via direct-to-consumer
• Nebraska Furniture Mart – optimizes price for the end customer

What’s the one thing that both Warren Buffet & Bill Gates said was the key to success? Focus!

9/ Frugality drives value

Munger cites one common quality amongst all Berkshire businesses – they will go to great lengths to keep operating costs low. Even Berkshire itself demonstrates the same behavior:

• It has no PR department.
• It has no investor relations office.
• For many years, its annual report was published on the cheapest possible paper & had no expensive color photos.

10/ Brands are magic

Munger says – “A great brand is a piece of magic”.

Brands like Coca Cola & See’s Candies have a piece of a consumer’s mind & therefore, have no competition. Charlie calls them “consumer monopolies”.

A lot changed the day Berkshire realized the power of brands.

11/ Business plans are useless

Munger says Berkshire has no master plan – “We always wants to be accounting for new information. We are individual-opportunity driven. Our acquisition style is driven by simplicity”.

He shares an interesting anecdote. When Mrs. B (Rose Blumkin), Founder of Nebraska Furniture Mart, was asked about having a business plan, she said – “yes, sell cheap & tell the truth”.

12/ Patience is rare

Human nature is all about being impatient. People just can’t sit around, waiting patiently. They want to feel useful. So they end up taking action and doing something stupid.

13/ Learning from mistakes is crucial

Learning from history is a big form of leverage. The biggest financial disasters get forgotten in a few years.

Munger says:

• “Wise people step on troubles early”.
• “Every missed chance is an opportunity to learn”.
• “Be willing to take life’s blows”. 

I love rubbing my nose in my mistakes. It’s an extremely smart thing to do.

Charlier Munger

14/ It takes many, many attempts to find your life’s work

For context, Munger started working on Berkshire in its current form only in his 40s.

15/ Finally, lots of life advice…

“Build relationships with A players”.

“Problems are a part of life. So why are you letting them bother you?”.

“The best way of reducing problems is to go for quality – Go for Great!”.

“It’s the strong swimmers who drown”.

“Envy has no utility. The key to living a well-lived life is killing envy”.

“The best armor for old age is a well spent life preceding it”.

PS: If you love Charlie Munger’s wisdom, you might enjoy my post capturing his musings from the 2o23 Daily Journal Shareholder’s Meeting.