Friday, December 4, 2015

Four Lessons from Buffett's & Munger's Biographies

Part of my plan to improve as an investor is to learn from the successes and failures of others. Who better to learn from than two of the most successful investors of our time? Earlier this week, I finished reading 'Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger'.  It was Alice Schroeder's 'The Snowball: Warren Buffett and the Business of Life' that prompted me to read Mr. Munger's biography.  Below are four key lessons from the biographies of Warren Buffett and Charlie Munger.

1. Patience

Reading about how Warren Buffett waits for "fat pitches" and advises others to limit the number of punches on their lifetime decision card to 20 made me question my own patience. Charlie Munger's credo of "Preparation. Discipline. Patience. Decisiveness" is representative of his and Buffett's practice of investing a large percentage of their funds into companies in which they had great confidence. Looking at my trading activity in 2014 and 2015 objectively, it seems I've become a less patient investor. During 2014, when I was making quarterly contributions to my investment account, I tended to save up my funds to make a couple of large purchases over the course of the year. In 2015, as I made monthly contributions to my investment accounts, it is rare that I make it through an entire month without adding shares to one of my holdings. Clearly, I need to do a better job of emulating Warren and Charlie and wait for "fat pitches" to swing at.

2. Long-term Horizon

One of my favorite investing quotes is from Buffett's mentor, Benjamin Graham who famously said "In the short run, the market is a voting machine but in the long run it is a weighing machine." Buffett echos this sentiment with his assertion that he buys with the assumption that the next day the the stock market could close for five years. Mr. Munger also focuses on the long-term, as evidenced by his quote "Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things." In the last couple weeks, witnessing the downward spiral of Kinder Morgan's stock price, I'm convinced that most investors are incapable of focusing on the long-term horizon. Instead of obsessing on the rising cost of capital and leverage of the firm, I've been asking myself if the market shut down for five or ten years, would I worry about Kinder Morgan being around when it re-opened? The answer to that question is evidenced by the fact that the company remains one of my investment holdings

3. Buying Wonderful Businesses at Fair Prices

Warren Buffett credits Charlie Munger for helping him see the benefits of buying wonderful businesses at fair prices instead of fair businesses at wonderful prices. Quite simply, paying fair prices for quality companies, instead of focusing on "cigar butt" type businesses helped the two build Berkshire Hathaway instead to the low maintenance, decentralized, cash generating machine it is today. I feel that dividend growth investors have an advantage in the area of identifying wonderful businesses - we know that cash is king. When we see a company that generates increasing amounts of cash each year, and has a history of paying out more cash to their shareholders, we get excited. Personally, I have a much harder time determining fair prices for wonderful businesses. Despite accounting and finance designations, my faith in dividend discount models, P/E multipliers, and peer comparisons is less than 100%. That said, when various valuation metrics all point toward the same conclusion, that a wonderful company's stock is below or near it's fair price, action is warranted.

4. The Value of a Supportive Partner

Buffett and Munger derive great value from using the other as an objective sounding board to discuss investment ideas. Neither gentleman is a 'yes man', and both seem totally comfortable critiquing and questioning the assumptions of the other. Although few formal partnerships exist in the blogging community, it's interesting to see how much constructive and informed dialogue occurs. Frankly, I find the feedback from other bloggers and commenters is much more civilized than on other platforms (i.e. Seeking Alpha). Regarding Warren and Charlie, one of the more eye-opening aspects of their biographies was learning how they both completely immersed themselves in their investment analysis. Reading how Mr. Buffett's life revolves around reading annual reports, papers, and trade journals, at the expense of spending time with his family, showed me how much work being a great investor takes. I don't think many marriages could survive having one spouse totally immersed in their own pursuits, and I give the wives of Warren and Charlie a lot of credit for tolerating their husbands' obsession.

Incorporating the four lessons above into my investment process can only help me improve as an investor. I yearn to be a "learning machine" like Warren and Charlie, but have to steer clear of immersing myself in investing at the expense of spending quality time with those I care about.  

Have you learned any important lessons from Warren Buffett, Charlie Munger, or other famous investors? 


  1. I really need to read more on both of them. There's so much investment wisdom that if I could just soak up 10% of it I'd do just fine.

    1. Soaking up 10% of their collective wisdom would be impactful. If you get around to reading The Snowball, let me know how you like it. It fell short of my high expectations.

      Thanks again for stopping by JC.

  2. Thanks for the good read DH. I need to work on my punches too. Merci!

    1. Je pense un de mes buts pour 2016 sera moins des trous sur ma carte.

      Thanks for the comment Monsieur!


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