Charlie Munger passed away recently at 99 years of age. Munger is perhaps best known for his association with Warren Buffett but his influence over Buffett is underappreciated. Before meeting Munger, Buffett was a classic value investor.

Buffett practiced what was coined as cigar butt investing where he bought dirt cheap companies with ‘one puff’ left. He was able to profit off of these investments and earned enviable returns until the bull market of the 1960s started. As valuation levels steadily rose Buffett’s approach was no longer viable. He decided to give up and ended the Buffett Partnership telling his investors that he no longer understood what was happening with markets.

Buffett and Munger had been introduced at a dinner in Omaha in 1959. Munger was a lawyer who had graduated at the top of his Harvard Law School class but his attention slowly shifted to investing in shares and real estate. Soon Buffett and Munger were on the phone every day talking about investing. And Buffett credits Munger as the originator of the Berkshire Hathaway investment approach.

The new approach was no longer based on finding dirt cheap companies. Instead, Buffett and Munger focused on finding great businesses with sustainable competitive advantages and fair valuation levels. They would then aim to hold them forever.

There are five Munger quotes that stood out to us that reflected the wisdom and experience he gained over a lifetime of investing. Listen to the full episode below. Alternatively, read the full article here.

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You can find the transcript to the episode below.

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situations, circumstances, or needs.

Mark LaMonica: So, Shani has in big bold on the notes for this podcast. Mention that the resource page is up to date.

Jayamanne: It is.

LaMonica: And you've been slaving over this thing.

Jayamanne: I have. Well, we haven't updated it for a very long time because it was just Mark and I on the team and we didn't have, we had a lot of open positions, let's say. So, we now have Joseph on the team as we mentioned. So, we've been able to go through a bit of the backlog. We've got the resources page up to date and we're sending the transcripts again to our team in India to do. And I've gotten all these new transcripts that are coming onto the website. And I've realized that they've had to listen to all of our very strange conversations. They had to type out that whole conversation we had about Groundhog Day.

LaMonica: Okay. I don't want to burst your bubble here, but you know, they have software that writes the things and they check it over. It's not somebody in India listening to every word typing it.

Jayamanne: I hope that they're fans. I hope that they're listening because they want to listen.

LaMonica: I think they're doing this because they get paid. That's just me. But anyway.

Jayamanne: And they're very lucky because they get the episode before anyone else gets the episode.

LaMonica: Except for Will.

Jayamanne: Yeah.

LaMonica: Well, anyway, Shani's done no other work for two weeks, except for do this stuff. So, check out the resource page.

Jayamanne: Yes, please.

LaMonica: All right. Let's get into the episode. So, we always play the Warren Buffett drinking game, but we also talk about Charlie Munger quite a bit as well. And they are, of course, investment partners, were investment partners. Unfortunately, Charlie passed away last year. And they are the secret behind the success of Berkshire Hathaway.

Jayamanne: And as Mark said, he passed away recently at 99 years of age.

LaMonica: Which is just terrible, right? You want to make it to 100. If you get that close.

Jayamanne: I know. You want to get the ton.

LaMonica: It's not a problem that I will ever have.

Jayamanne: Okay. Munger has rarely been known independently. He's always been best known for his association with Warren Buffett. But if you've read Snowball by Alice Schroeder, it's easy to say that his influence over Buffett is underappreciated by most.

LaMonica: And Shani, we're also investment partners, right? So, who do you think you would be in this scenario? Would you be Buffett or Munger?

Jayamanne: I don't think I fit either of them, but I might take Buffett because he's still alive.

LaMonica: Okay. I mean, that's fair enough. I think I'd want to fly under the radar a little bit. So, I think maybe I would want to be Munger.

Jayamanne: Okay. This works out well. But when Buffett met Munger. He was a classic value investor.

LaMonica: And he practiced something that he called cigar butt investing, where he bought dirt cheap companies with one puff left. And he was able to profit off of these investments and earned enviable returns until the bull market of the 1960s started.

Jayamanne: As valuation levels steadily rose, Buffett's approach was no longer viable. He decided to give up and ended the Buffett partnership, telling his investors that he no longer understood what was happening with markets.

LaMonica: And that is much more sensible than what a lot of professional investors do. So, how did these two investment partners meet Shani?

Jayamanne: Us or Buffett and Munger?

LaMonica: Well, us, we met at work.

Jayamanne: Yeah, we met at my first day of work. You were arguing about franking credits with one of our colleagues.

LaMonica: Yes. And you've disliked me ever since. So, you did come over and you said, and now that I know you better, I know that this is like, really not something you generally do.

Jayamanne: No.

LaMonica: But you came over and said, sorry to interrupt. And told me I was speaking loud enough that everybody in the office heard my conversation.

Jayamanne: And so I could be invited in if I wanted to. But anyway, here we are today. Buffett and Munger had been introduced at a dinner in Omaha in 1959. And Munger was a lawyer who had graduated at the top of his Harvard Law School class, but his attention slowly shifted to investing in shares and real estate. Soon, Buffett and Munger were on the phone every day talking about investing.

LaMonica: And Buffett credits Munger as the originator of the Berkshire Hathaway investment approach.

Jayamanne: And the new approach was no longer based on finding dirt cheap companies. Instead, Buffett and Munger focused on finding great businesses with sustainable competitive advantages and fair valuation levels. They would then aim to hold them forever.

LaMonica: That sounds very familiar. So the point of this episode is to go through some of Munger's quotes, and these are my favorite Munger quotes. And then we'll go through our interpretation of the lessons investors can take from his quotes.

Jayamanne: All right. So the first quote is, the big money is not in the buying and selling, but in the waiting.

LaMonica: Yeah. And it doesn't really take a rocket scientist to work this one out. So humans are action-oriented. It's in our DNA. So when we face stressful situations, we have this innate need to do something. So in most endeavors in life, action yields the best results. With investing, it's a little different. When it is applied to investing, it means that in many cases, investors sell to relieve anxiety.

Jayamanne: And this usually happens at times of volatility, where the market will turn at a completely random and unpredictable time, and it'll turn when the newspaper headlines are full of negative stories about the economy and everything looks quite bleak.

LaMonica: And ultimately selling and trying to buy again is trying to time the market, which doesn't work. So what Munger is saying here is patience is the key to success.

Jayamanne: And again, it's easier said than done to be patient. It means going against our instincts and the situation is made worse by the news cycle and technology that bombards us with data and breaks down any friction to trading.

LaMonica: And simply understanding that patience is the key to success is likely not enough. Add your own friction by creating an investment policy statement. Putting structure around decision making will help you to profit from Munger's wisdom in your own portfolio. Start by defining your goals and an investment strategy, which includes criteria for selecting investments and trading.

Jayamanne: Okay, let's move on to the next quote. Munger has said, like Warren, I had a considerable passion to get rich, not because I wanted Ferraris, I wanted independence, I desperately wanted it.

LaMonica: So people always tell me, so I don't have any children, you don't have any children. But people always say this thing that they don't have a favorite child. And as an only child, and obviously with no children of my own, I'll have to take their word on it. There's nothing stopping anyone from having a favorite Munger quote.

Jayamanne: I was wondering where you were going with this.

LaMonica: I was just rambling along. But this is my favorite Munger quote. And so, Shani, you have a sister.

Jayamanne: Yes.

LaMonica: Do you think that your parents have a favorite child?

Jayamanne: I don't think they did, Mark. I think both of us were pretty good kids. Well behaved.

LaMonica: That seems to be the sanitized version for the podcast, but I guess we'll go with that. But do you have a favorite Munger quote?

Jayamanne: Okay, well, why don't we get to the end of the episode and I'll tell you which one is my favorite?

LaMonica: Sounds fair enough.

Jayamanne: All right. So Munger's fortune was recently estimated at $2.6 billion. That is a lot of independence.

LaMonica: It is, Shani. But what has always inspired me to save and invest was gaining independence. And it, of course, is a journey. At first, it was just having an emergency fund. So I knew I could cover unexpected expenses. Then I wanted to have more spending money to go out for a meal. And when I wanted to start traveling, my goal now is to get to the point where I'm not reliant on my fortnightly paycheck to pay for my life, whether I choose to stop working or not.

Jayamanne: Just so you know, Mark, we get paid monthly. So that's two less paychecks a year than you were expecting. So you've got a ways to go. Or maybe it means you're already there if you're not sure how often we get paid.

LaMonica: Okay.Well, I'm not the one that transfers my money into my investments a week and a half before our paycheck.

Jayamanne: I just get excited about it.

LaMonica: Yeah. There you go. So what we all have to ask ourselves is if we want to look rich to people we don't know or be independent to pursue the life we want, and Munger chose the latter.

Jayamanne: And I interpret the quote a little bit differently. Yes, choosing perceptions over spending money on what you choose to will make you unhappy. But to me, Munger was talking about choice. And choice to do what you want with your money and not be imprisoned by circumstance. And it's about being able to leave uncomfortable situations, whether that's relationships or jobs, living circumstances. It's about being able to choose what life you want, even if that is to look rich to people that you don't know, even if that is ridiculous, having the choice to do so is what independence means.

LaMonica: Thank you for putting the emphasis on uncomfortable situations when you put it on jobs. I enjoyed that. All right, we're going to move on to the next quote. And there's no better teacher than history in determining the future. There are answers worth billions of dollars in a history book.

Jayamanne: Is this why your head is always buried in history books, Mark? You're looking for a billion dollar?

LaMonica: I am. I unfortunately have not found it yet. But I'm looking. All right.

Jayamanne: Well, I recently asked Mark what he would like to do in retirement. And he said that he knows a little about a lot of history. So he wants to learn about certain periods in depth. And those periods were pre-World War I Europe, the 1848 Revolution, and the Civil Wars. Any in particular, Mark, or just Civil War in general?

LaMonica: Well, I was referring to the U.S. Civil War. But today we talked about the Sri Lankan Civil War.

Jayamanne: We did. Yeah.

LaMonica: So anyway. I'm already there.

Jayamanne: So let's get back to what Munger said. We all believe we live in a unique time, that the challenges we face as a society and on an individual level are distinct. In reality, the same patterns are repeated throughout history.

LaMonica: A starting point for an investor looking to navigate current market conditions is to look to the past. And what worked in the past is likely ignoring all the noise and just focusing on the things that can be controlled. Minimizing taxes, minimizing fees, and sticking with great companies over the long term.

Jayamanne: And we've put together an article that has all the lessons that you can learn from market history. We'll link that in the podcast notes. Okay. The next quote, a majority of life's errors are caused by forgetting what one is really trying to do.

LaMonica: And this is something we talk about all the time on here. So most investors don't know what they're trying to accomplish. And no, getting rich doesn't count. Figuring out what you are trying to accomplish is a requirement for understanding how to do it.

Jayamanne: We have more investment choices than we need. And each of these choices has an articulate advocate making a compelling case of why something is a great opportunity. It is no wonder that investors ping pong between different strategies and investment products.

LaMonica: And we see this all the time, especially with engaged investors that go to conferences and talks. It is completely commendable that you are engaged in what you are doing. But in most instances, what you're going to experience at conferences is a fund manager or professional investor getting up and talking about why what they invest in. So maybe emerging markets, for an example, is the best thing to invest in. The next speaker will get up and say it's Aussie equities because they invest in Aussie equities, then it will be bonds. So take a breath, spend some time thinking about your end goal and what is needed to accomplish it. You'll know you have a well-defined approach when you're able to ignore most of the pitches we are constantly bombarded with.

Jayamanne: Okay, we've reached the last quote. Munger says, envy is a really stupid sin because it's the only one that you could never possibly have any fun at. That's a lot of pain and no fun. Why would you want to get on that trolley?

LaMonica: And this is a great quote. And this one's pretty self-explanatory. Live a life on your own terms that other people can envy. Something that Charlie Munger accomplished. So we've reached the end, Shani. And now you promised that you would tell us your favorite Munger quote.

Jayamanne: All right, I actually have one to add. It wasn't any of those.

LaMonica: Wow, okay. There you go.

Jayamanne: It is 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.

LaMonica: That is a good one. And that's a good way to end this, right?

Jayamanne: Yeah, but I do have one more.

LaMonica: Okay, Shani.

Jayamanne: He said, all I want to know is where I'm going to die, so I'll never go there.

LaMonica: Well, that's a little bit sad.

Jayamanne: It is, but he went there.

LaMonica: He went there. Okay, well, there we have it. Lots of Munger quotes, a couple bonus ones from Shani at the end. So remember, go to our resource page that Shani slaved over. And of course, we would love any comments and ratings in your podcast app and share this podcast with your friends. Thank you.