Charlie Munger On How Do You Learn To Be A Great Investor

Charlie Munger On How Do You Learn To Be A Great Investor

One of our favorite investing books here at The Acquirer’s Multiple is – Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger. One of the best passages in the book covers Charlie Munger’s response to, “How Do You Learn To Be A Great Investor?”.

Here’s an excerpt from the book:

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Berkshire Hathaway and Wesco investors listen carefully to maxims about life, but they literally crowd the doorways to hear Munger and Buffett talk about investment issues. A frequently asked question is, how do you learn to be a great investor?

First of all, you have to understand your own nature, said Munger. “Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable-and some losses are inevitable-you might be wise to utilize a very conservative pattern of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.”’

Then, says Munger, you have to gather information. “I think both Warren and I learn more from the great business magazines than we do anywhere else,” said Charlie. “It’s such an easy, shorthand way of getting a vast variety of business experience just to riffle through issue after issue covering a great variety of businesses. And if you get into the mental habit of relating what you’re reading to the basic structure of the underlying ideas being demonstrated, you gradually accumulate some wisdom about investing. I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading. I don’t think any one book will do it for you.”

Each year at the Berkshire annual meeting Munger recommends a wide range of reading material. These include Value Line charts, Robert B. Cialdini’s book Influence on how people are persuaded to buy products and take other actions, and recently, Robert Hagstrom’s book, The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy.

Munger explained that a person’s reading should not be random: “.. . you have to have some idea of why you’re looking for the information. Don’t read annual reports the way Francis Bacon said you do science which, by the way, is not the way you do science-where you just collect endless data and then only later do you try to make sense of it. You have to start with some ideas about reality. And then you have to look to see whether what you’re seeing fits in with proven basic concepts.

“Frequently, you’ll look at a business having fabulous results. And the question is, `How long can this continue?’ Well, there’s only one way I know to answer that. And that’s to think about why the results are occurring now-and then to figure out the forces that could cause those results to stop occurring.”

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 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, 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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