Munger’s Investing Principles Checklist

31 Dec 2016

 

 

 

1. Risk – All investment evaluations should begin by measuring risk, especially reputational.

  • Incorporate an appropriate margin of safety

  • Avoid dealing with people of questionable character

  • Insist upon proper compensation for risk assumed

  • Always beware of inflation and interest rate exposures

  • Avoid big mistakes; shun permanent capital loss

2. Independence – “Only in fairy tales are emperors told they are naked.”

  • Objectivity and rationality require independence of though

  • Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment

  • Mimicking the herd invites regression to the mean (merely average performance)

3. Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights.”

  • Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day

  • More important than the will to win is the will to prepare

  • Develop fluency in mental models from the major academic disciplines

  • If you want to get smart, the question you have to keep asking is “why, why, why?”

4. Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom.

  • Stay within a well-defined circle of competence

  • Identify and reconcile disconfirming evidence

  • Resist the craving for false precision, false certainties, etc.

  • Above all, never fool yourself, and remember that you are the easiest person to fool

  • “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

5. Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions.

  • Determine value apart from price; progress apart from activity; wealth apart from size

  • It is better to remember the obvious than to grasp the esoteric

  • Be a business analyst, not a market, macroeconomic, or security analyst

  • Consider totality of risk and effect; look always at potential second order and higher level impacts

  • Think forwards and backwards – Invert, always invert

6. Allocation – Proper allocation of capital is an investor’s number one job.

  • Remember that highest and best use is always measured by the next best use (opportunity cost)

  • Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily

  • Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven

7. Patience – Resist the natural human bias to act.

  • “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily

  • Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake

  • Be alert for the arrival of luck

  • Enjoy the process along with the proceeds, because the process is where you live

8. Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction.

  • Be fearful when others are greedy, and greedy when others are fearful

  • Opportunity doesn’t come often, so seize it when it comes

  • Opportunity meeting the prepared mind; that’s the game

9. Change – Live with change and accept unremovable complexity.

  • Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you

  • Continually challenge and willingly amend your “best-loved ideas”

  • Recognize reality even when you don’t like it – especially when you don’t like it

10. Focus – Keep things simple and remember what you set out to do.

  • Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat

  • Guard against the effects of hubris (arrogance) and boredom

  • Don’t overlook the obvious by drowning in minutiae (the small details)

  • Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”

  • Face your big troubles; don’t sweep them under the rug

 

 

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© 2016 by aTrader