Image source: The Motley Fool
The recent death of Warren Buffett's right-hand man Charlie Munger at the age of 99 brought an end to the most successful double act the stock market has ever seen. On a positive note, he left this world with a wealth of wisdom that we can benefit from.
With that in mind, here are three lessons from half of the biggest investment binomial that I intend to continue using in 2024.
Buy quality, not junk
In the early part of his career, Buffett focused on buying what he called “cigarette butt companies.” These were weak businesses that were likely to fail, but had one last “gasp” left in them. It's a testament to his tenacity that Munger convinced his friend to change his strategy.
Munger believed that “A great deal at a fair price is superior to a fair deal at a great price“. In other words, it's worth paying for a stock that, based on its track record and growth prospects, has the best chance of generating wealth.
As a UK investor, I am aware of this at the moment. Despite the recovery seen in December, valuations still appear depressed in many of our best-known companies. But this does not mean that everything is worth buying.
The key, according to Munger (and eventually Buffett) is to separate the wheat from the chaff by looking for companies with competitive advantages that can likely be exploited for decades to come. Ultimately, this is what helped them become billionaires.
Nobody is perfect
It's easy to get discouraged when a particular investment doesn't perform as expected. On the other hand, Munger believed that these experiences were generally good for the soul. As he himself put it: “There is no way to live a proper life without making mistakes..”
While it may seem strange given his wealth, Munger made his fair share of mistakes over the years. He pounced on the Chinese e-commerce giant Ali Baba just when other shareholders were leaving, for example. A sluggish post-pandemic economy did him no favors and he suffered a huge loss.
I have made similar investing mistakes. More recently, my stubborn belief that the fast fashion brand boohoo could quickly regain his charm turned out to be spectacularly wrong.
On the other hand, I hope I have learned from these wobbles in court. At least it has given me a healthy appreciation of how much risk I am comfortable taking on in the market.
This is worth keeping in mind as we (hopefully) prepare for the next bull market.
patience pays
One of Munger's best-known quotes fits very well with the philosophy we adopt at The Motley Fool. As he himself put it: “The big money is not in buying and selling but in waiting..”
With the advent of trading apps and 24/7 news coverage, it is incredibly tempting to get into the habit of jumping in and out of the market.
But the only guarantee of this strategy is that it will incur costs. No one really knows where stock prices will go in the short term, regardless of your investing prowess.
However, as a team, Buffett and Munger were well aware of the magical effects of compounding. To get rich in the stock market, one of the key skills is knowing when to sit back and do nothing.
That's what they did and that's what I intend to continue doing next year.
