Charlie Munger: The Importance Of Planck Knowledge Or Knowledgeable Investing

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Warren Buffett has often been quoted on the importance of knowledgeable investing and equally important – knowing what you don’t know. Two of his most famous quotes on the subject are:

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“What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”

And:

“There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.”

But perhaps the best illustration of the importance of knowledgeable investing and staying within your circle of competence comes from Charlie Munger in his USC Gould School of Law Commencement Speech at the University of Southern California in 1997. Munger says:

“I frequently tell the story of a Max Planck. He won the Nobel Prize and went around Germany giving lectures on quantum mechanics, and the chauffeur gradually memorized the lecture. He said, “Would you mind professor Planck, just because it’s so boring to stay in our routines, would you mind if I gave the lecture this time and you just sat in front in my chauffeurs hat”. Planck said, “Sure”. The chauffeur got up and he gave this long lecture on quantum mechanics. After which a physics professor stood up in the rear and asked a perfectly ghastly question. The chauffeur said, “Well I’m surprised in an advanced city like Munich I get such an elementary question, I’m gonna ask my chauffeur to reply”.

“Well the reason I tell that story is not entirely to celebrate the quick-wittiness of the protagonist. In this world we have two kinds of knowledge. One is Planck knowledge, the people who really know. They’ve paid their dues. They have the aptitude. Then we’ve got chauffeur knowledge. They have learned to prattle the talk. They have a big head of hair. They may have fun timbre and the voice. They can make a hell of an impression. But in the end they’ve got chauffeur knowledge.”

You can watch the entire presentation here:

(Source: YouTube)

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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