Charlie Munger: The Complete Investor – Book Review by Jesse Koltes, Editor of TheCharlieton.com
Charlie Munger: The Complete Investor by Tren Griffin
Welcome to The Charlieton’s first book review. The aim of this review is to deeply understand the ideas of the book, and to compare them with related and competing ideas as they exist elsewhere in the world. The recitation of historical facts, narratives, and other trivialities will be minimized, except insofar as they support an interesting idea.
I will number each major idea in the book as I come across them in order to create an easily referenceable catalog of ideas. My hope is that this numerical system will be of growing use of as the number of book reviews piles up in the future.
I encourage the readers of this review to support the author of the original work by purchasing the book.
Charlie Munger: The Complete Investor is a well-organized and thorough survey of both the Ben Graham value investing system, and Charlie Munger’s contributions to the investing world. Griffin expertly displays how Munger’s own ideas both emerged from, and later departed with the intellectual foundations laid by Graham.
Griffin also makes a valiant attempt at summarizing Charlie Munger’s notoriously artful and qualitative approach with rigor and detail. I believe this effort was successful, with my only quibble being that several points of explanation seemed duplicative or redundant. As a management consultant would say, the ideas within the constructed framework were not always “mutually exclusive and collectively exhaustive.” Still, this may be the price of trying to detail a system so thoroughly dependent on personal rationality, grit, and temperament. I doubt I could do better.
I hope to see more work from Tren Griffin that detail his own thoughts on contemporary value investing. His chapter on factor versus value was his best, despite it being one of the shortest. Now that the author has so successfully catalogued many of the great ideas of Charlie Munger, I hope to read future works by Griffin that are focused on more controversial subjects at the margins of modern value investing.
The purpose of the book is to teach the reader how to think more like Charlie Munger, the legendary thinker, investor, and vice chairman of Berkshire Hathaway.
Griffin first explores the Ben Graham value investing system (the foundation and intellectual progenitor of the Berkshire system). Second, Griffin explores Munger’s complementary system using three elements: “principles, the right stuff, and variables.”
Chapter 1: The Basics of the Graham Value Investing System
Griffin explore the basic ideas of Ben Graham’s value investing system, citing it as the intellectual underpinning of Charlie Munger’s own system of thinking.
Idea #1: Simplicity
- Investing is simple but not easy. Complexity militates against an effective understanding of what is going on. Keep things as simple as possible.
Idea #2: Circle of competence
- Knowing what you don’t know is as important as what you do know
- “Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing.” – Munger, p. 11
Idea #3: Inversion
- Rather than trying to be smart, it's better to try to avoid being stupid.
- “It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, “It’s the strong swimmers who drown.”” – Munger, p. 13
Idea #4: Investing is a zero sum game
- It is an undeniable arithmetic fact that the average return of all active investors will equal the average return of all passive investors, less costs.
- “The idea that everyone can have wonderful results from stocks is inherently crazy, nobody expects everyone to succeed at poker.” – Munger, p. 15
Chapter 2: The Principles of the Graham Value Investing System
Griffin builds on the foundational work of chapter one by examining Graham’s principles of investing.
Idea #5: A share of stock is a partial ownership of a real business
- The value of the stock rests solely on an accurate total valuation of the business. Value investors are business analysts first, security analysts second. Following price momentum is a fool’s game.
- The monkey parable of speculation: A man and his assistant came to town and offered to pay $100 for every wild monkey. The townspeople captured many monkeys and were promptly paid $100. The man then raised the price to $200 and more monkeys were caught, and more people were paid. Finally, the man said he had to leave but would return later, and when he did, he would pay $500 per monkey. His assistant whispered to the townspeople that they could buy their monkeys back that day for $350, and earn $150 upon the man’s return. The townspeople promptly bought their monkeys back, but never saw the man again.
Idea #6: Buy with a margin of safety
- Graham cautioned investors to only buy at a significant discount to what something was worth (intrinsic value). By leaving a margin of safety for uncertainty, the investor protected himself from loss due to inaccurate forecasts, bad luck or other negative outcomes.
- “Confronted with the challenge to distill the secret of sound investment management into three words, we venture the following motto, MARGIN OF SAFTEY.” – Graham, The Intelligent Investor, p. 31*
- “The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.” – Klarman, p 32.
- Editor’s note: This idea and idea #52 are among the most important and bedeviling concepts in value investing. Without a firm yardstick for the appropriate size of the margin of safety, who is to say it a safe enough margin at all? Graham’s net net strategy was firm and clear it is rules for setting the margin. Buffett, Munger’s and other modern value investors have been less rigid, which in my opinion, has immensely complicated the true essence of this all important credo.
Idea #7: Make “Mr. Market” Work for You
- Mr. Market is perhaps the most enduring metaphor popularized by Graham. Graham thought intelligent investors should view the public equity markets as though it were a moody business partner in a private venture. On some days, Mr. Market would be overcome by fear, and would offer to sell you his share of the business for pennies. On other days, he would be overcome by optimism, and would demand a rich multiple on the very same share. Intelligent investors would realize these were both variations around a central point, intrinsic value. Graham thought the intelligent investor should capitalize on the fear by buying, as well as on the booms, by selling.
- The Graham view is a direct and lasting challenge to the efficient markets hypothesis, which states that neither technical or fundamental analysis can result in better long term risk adjusted returns than the market average.
- “To Graham, it was a blessing to be in business with a manic depressive who gave you this series of options all the time.” – Munger, p. 28
Idea #8: Be rational
- “Rationality is not just something you do so that you can make more money;? it’s a binding principle. Rationality is a really good idea. You must avoid the nonsense that is conventional in one’s own time. It requires