How the rich think: Lessons from an ex­pert

The Washington Post Sunday - - BUSINESS - MICHELLE SIN­GLE­TARY

The ar­chi­tect of in­vest­ment gi­ant Berk­shire Hath­away thinks too much di­ver­si­fi­ca­tion is nuts. Say what? That’s ac­tu­ally what I said to my­self after first read­ing that Char­lie Munger, War­ren Buf­fett’s long­time busi­ness part­ner and the vice chair­man of Berk­shire, isn’t a fan of spread­ing out your port­fo­lio.

Ex­perts have long told us it’s im­por­tant to di­ver­sify so you can mit­i­gate risk dur­ing mar­ket swings. If one stock or class of in­vest­ments is down, it’s likely that an­other is thriv­ing.

Yet Munger be­lieves that if you have a port­fo­lio of 50 or more stocks, the losers will can­cel out the win­ners. “This wor­ship­ing at the al­tar of di­ver­si­fi­ca­tion, I think that is re­ally crazy,” he says in a book about his phi­los­o­phy on in­vest­ing and life.

If you’re not a sea­soned in­vestor, you prob­a­bly haven’t heard of Munger. Yet the bet­ter-known Buf­fett says his part-

ner has been in­stru­men­tal in their com­pany’s suc­cess.

So let’s learn from Munger. This month’s Color of Money Book Club se­lec­tion is “The Tao of Char­lie Munger: A Com­pi­la­tion of Quotes from Berk­shire Hath­away’s Vice Chair­man on Life, Busi­ness and the Pur­suit of Wealth” ($24, Scrib­ner).

Munger’s quo­ta­tions are ac­com­pa­nied by com­men­tary from David Clark, who has writ­ten sev­eral best-sell­ing books break­ing down Buf­fett’s in­vest­ing shrewd­ness.

And after Clark ex­plains Munger’s per­spec­tive on di­ver­si­fy­ing, it makes more sense. Munger isn’t anti-di­ver­si­fi­ca­tion per se. He just warns against think­ing that it alone will pro­tect you from losses.

Clark gath­ered the book’s quotes from a num­ber of sources, in­clud­ing in­ter­views and share­holder meet­ings. I ap­pre­ci­ate the con­text on the thoughts of the 93-year-old Munger, who’s worth bil­lions but has lived a fru­gal life. The lat­ter is an im­por­tant point be­cause I’m more in­clined to heed the ad­vice of peo­ple who live well but don’t need to show their ex­cess.

This is a flip-through kind of book. You can start from the be­gin­ning or just skip around for in­spi­ra­tion. It’s di­vided into four parts, with the first three fo­cus­ing on in­vest­ing, bank­ing and busi­ness. The fi­nal sec­tion is Munger’s ad­vice on every­thing from mar­riage, suc­cess, ed­u­ca­tion and truth to the pur­suit of hap­pi­ness.

Fol­low­ing are five of my fa­vorite quotes from the book.

“Know­ing what you don’t know is more use­ful than be­ing bril­liant.”

Clark writes: “What Char­lie is say­ing is that we should be­come con­scious of what we don’t know and use that knowl­edge to stay away from in­vest­ing in busi­nesses we don’t un­der­stand.”

Munger didn’t in­vest in In­ter­net com­pa­nies in the 1990s be­cause he didn’t get it. He was later vin­di­cated for sit­ting out the mad rush to those types of stocks.

“Mim­ick­ing the herd in­vites re­gres­sion to the mean.”

This quote def­i­nitely needs some ex­plain­ing. Munger isn’t a fan of in­dex funds. In his mind, in­vest­ing in them gives you only av­er­age re­turns. “An av­er­age can also mean los­ing,” Clark says. “If we buy into an in­dex fund at the height of a bull mar­ket and the mar­ket tanks, it is pos­si­ble we might lose money for a num­ber of years. In Char­lie’s world, one buys as oth­ers are sell­ing, which is hard to do if one is run­ning with the herd.”

I should note that Buf­fett’s hot in­vest­ing tip is just the op­po­site of what Munger ad­vo­cates here. He says the av­er­age in­vestor is bet­ter off buy­ing low-cost in­dex funds. In his re­cent let­ter to share­hold­ers in Berk­shire’s an­nual re­port, Buf­fett says: “When tril­lions of dol­lars are man­aged by Wall Streeters charg­ing high fees, it will usu­ally be the man­agers who reap out­size prof­its, not the clients. Both large and small in­vestors should stick with low-cost in­dex funds.”

“It’s wait­ing that helps you as an in­vestor, and a lot of peo­ple just can’t stand to wait.”

Clark writes: “Char­lie and War­ren have never wor­ried about any­one mim­ick­ing their in­vest­ment style — be­cause no other in­sti­tu­tion or in­di­vid­ual has the dis­ci­pline or pa­tience to wait as long as they can.”

“Banks will not rein them­selves in vol­un­tar­ily. They need adult su­per­vi­sion.”

No in­ter­pre­ta­tion needed here.

“One of the great de­fenses — if

I ap­pre­ci­ate the thoughts of the 93-year-old Char­lie Munger, who’s worth bil­lions but has lived a fru­gal life. The lat­ter is an im­por­tant point be­cause I’m more in­clined to heed the ad­vice of peo­ple who live well but don’t need to show their ex­cess.

you’re wor­ried about in­fla­tion — is not to have a lot of silly needs in your life, if you don’t need a lot of ma­te­rial goods.” Enough said! You want to be pros­per­ous? Read how the rich think.

I’ll be host­ing an on­line dis­cus­sion about “The Tao of Char­lie Munger” on March 30 at wash­ing­ton­post.com/ dis­cus­sions. Clark will be join­ing me to take your ques­tions about one of the rich­est men in Amer­ica.

Write Sin­gle­tary at The Wash­ing­ton Post, 1301 K St. NW, Wash­ing­ton, D.C. 20071 or sin­gle­tarym@wash­post.com. To read more, go to wapo.st/michellesin­gle­tary.

Michelle Sin­gle­tary THE COLOR OF MONEY

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