Today’s headline may seem like an insulting question.
It’s not meant to be. It’s meant to be a wake-up call.
In Friday’s column, I talked a bit about the things I’ve learned from Warren Buffett over the last 30 years – not only about investing, but about life.
I promised to discuss today what I’ve learned from his partner Charlie Munger.
Although he graduated from Harvard Law School, Munger describes himself as self-educated.
The key to success in life, both financial and otherwise, he insists is “elementary, worldly wisdom.”
What is that, exactly?
Munger believes we should all strive for a liberal arts education by persistent reading of science, philosophy, religion, history and literature.
This allows you to think broadly and systematically and build a latticework in your head, a mental model of reality drawn from many disciplines.
Unfortunately, we live in a society that increasingly values specialization over breadth.
We study to learn how to make a living, not how to make a life. Yet the two are hardly exclusive.
In his commencement address at the USC Gould School of Law in 2007, Munger declared that…
Wisdom acquisition is a moral duty… I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than when they got up and boy does that help, particularly when you have a long run ahead of you… Nothing has served me better in my long life than continuous learning.
Few of us live surrounded by worldly philosophers and financial geniuses.
Moreover, newspapers and magazines are so full of fresh trivialities that the quest to become well-informed may actually prevent us from becoming educated.
And so we turn to books. The goal is not to collect information but to gain understanding.
As Munger says, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero.”
Good readers become better thinkers.
Good thinkers, in turn, make better investors, better workers, better spouses, better parents, better friends, better citizens, better human beings.
Let’s return for a moment to becoming a better investor, the raison d’être for these columns.
In a recent Wall Street Journal interview with Jason Zweig, Munger said…
Both Warren and I feel it’s our moral duty to be as rational as we can possibly be. A lot of people who are brilliant in some ways tend to make these utterly asinine decisions in other ways. We both tend to collect the asininities of the world in a kind of checklist. And we try to avoid everything on the checklist.
Not a bad idea.
Over the years, I’ve made my own checklist of investor asininities. (I’m sure there is substantial overlap with Munger’s.)
As a basic starting point, make sure you cannot truthfully check any of the boxes in “The Dangerous Dozen”:
- I’m completely out of the market because I’m scared about the future.
- I’m heavily leveraged because I’m excited about the future.
- I turned all my assets over to a commission-based stockbroker since I’m not qualified to manage my own money.
- I’m paying my mutual fund managers a ton of fees because they have promised serious outperformance.
- I’m buying stocks because the economic forecast is good. (Or I’m selling my stocks because the economic forecast is poor.)
- I’m selling stocks because the market is in a correction. (Or I’m buying stocks because the market is in an uptrend.)
- I’m loading up on one stock because I feel really good about it.
- I’m selling this stock because “you never get hurt taking a profit.”
- I’m selling this stock because it hit my broker’s price target.
- I’m holding this stock because it’s worth less than what I paid for it.
- I’m moving out of stocks and onto the sidelines until the investment outlook improves.
- I’m buying hundreds of stocks because I don’t want to be underdiversified.
We could talk about each of these in greater detail and most certainly will at a later date.
But the bottom line is this: If you’re invested in equities because of last quarter’s GDP growth, current market trends, likely Fed policy, changing political events, your own positive emotions or your advisor’s newfound bullishness, you’re not just making a mistake.
In Munger’s apt description, you’re being an asinine investor.
Your serious money deserves to be handled in a serious way. You need to know what you’re doing and why you’re doing it.
Financial markets distribute wealth to people who have a plan and can execute it from those who don’t or can’t.
That’s never changed. And it never will.