Tag Archives: Charlie Munger

The Wisdom of Charlie Munger: You Have a Moral Duty To Be Rational and Reasonable, and To Eliminate Your Own Ignorance

22 Friday Dec 2017

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Learning from the experiences of others will put you on the path to a successful life with fewer unpleasant detours. Charlie Munger is perhaps the wisest man alive. He is a man who has dedicated himself to understanding the world and figuring out what works. Pull up a chair and learn how to think and how to live.

A Conversation with Charlie Munger and Michigan Ross – December 20, 2017:

“What the pupil must learn, if he learns anything at all, is that the world will do most of the work for you, provided you cooperate with it by identifying how it really works and aligning with those realities. If we do not let the world teach us, it teaches us a lesson.”
— Joseph Tussman

Can You Handle The Truth About Your Flaws As An Investor?

24 Saturday May 2014

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All human beings are deeply flawed and are susceptible to a multitude of cognitive biases and irrational behaviors. To be a great investor, you must examine your flaws so you can seek to counter them. Three great guides on this journey are Charlie Munger, Jason Zweig, and Guy Spier.

Charlie Munger: The Psychology of Human Misjudgment

The following audio recording of a speech Charlie Munger gave to an audience at Harvard around 1995 is a great place to begin. It is an hour and 16 minutes long, but a great introduction to Munger. I devour everything I can from him.

The Pyschology of Human Misjudgment: Speech by Charlie Munger

Jason Zweig and Guy Spier

Jason Zweig is another great guide on this journey to knowing yourself and your flaws. His book Your Money and Your Brain is a classic and a must read for the serious investor.

Jason’s column in the Wall Street Journal is a great short-form introduction to his thinking. His latest column, Giving Yourself an Investing Makeover, introduces us to a great investor and courageous seeker of the truth, Guy Spier. I say courageous because his rigorous honesty in publicly naming his own flaws is amazing in this age of “experts” who pretend they have all of the answers all of the time.

From the article:

In a book to be published in September by Palgrave Macmillan, ‘The Education of a Value Investor,’ Mr. Spier describes his struggle to improve his decision-making hygiene.

Seldom has a successful money manager so painfully flagellated himself in public. In the book, Mr. Spier calls himself ‘blind,’ ‘dumb,’ ‘spectacularly foolish,’ ‘misguided,’ ‘stumbling,’ ‘wrong,’ ‘vulnerable’ and, over and over again, ‘irrational.’

‘We think we control our environment, but in fact it’s our environment that controls us,’ Mr. Spier told me. ‘We can’t change the world. The only thing we can change is ourselves, by trying to get a better understanding of our own messed-up wiring.’

The Courage to Seek and See the Truth About Yourself

Do you have the courage to see the truth about your flaws as a human being and an investor? To me, the really great investors are the ones who examine their own flaws and seek to correct for them.

The vices we scoff at in others laugh at us within ourselves.
— Sir Thomas Browne

Charlie Munger and The Miracle of Tax-Efficient Compounding

28 Thursday Nov 2013

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On this Thanksgiving, I’m thankful for the wisdom of Charlie Munger and the miracle of tax-efficient compounding. Charlie is Warren Buffett’s plainspoken and less-famous partner. This is his quote on the simple but stunning power of tax-efficient compounding:

Another very simple effect I very seldom see discussed either by investment managers or anybody else is the effect of taxes. If you’re going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15% or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening. If you sit back for long, long stretches in great companies, you can get a huge edge from nothing but the way that income taxes work.

This isn’t exciting to talk about, but it is where the rubber really meets the road in terms of investment success. 3.55% per year outperformance after taxes is incredible, and you don’t have to pay a hedge fund “2 and 20” to get it.

Wes Gray at the Turnkey Analyst does the math on how much difference this can make on an initial investment of $100 over 30 years:

Microsoft-Excel-mungertax11

Alpha is interesting; taxes are AMAZING.

You end up with $4,235.43 for the 13.3% strategy and $1629.81 for the 9.75% strategy.

Charlie Munger Translation: Taxes and Alpha Are the Shiznit!

This should be in neon lights. The tax-efficient strategy gives you a 4,235.43% return over 30 years, while the tax-inefficient strategy gives you a 1,629.81% return over 30 years. That’s up more than 42 times versus up more than 16 times. On a $10,000 initial investment, that’s a 30 year total of $423,543 versus $162,981. Stunning results.

Alpha is investment-speak for risk-adjusted outperformance of a benchmark. It is the Holy Grail for which all investment managers aim. But the impact of taxes is more important and less talked about. Turn off the noise on CNBC and focus on maximizing your after-tax return. It may not make for exciting dinner-party conversation, but what matters is not what you earn, it’s what you keep.