Charlie Munger says you must have 5 Qualities for being an investor. Do you have it?

 

6^th January 2021

Charlie Munger says you must have 5 Qualities for being an investor. Do you have it?

Dear Fellow Travelers,

Namaste! Today I am taking you all to the master of the master – Charlie Munger. He recently gave an interview to CalTech alumni that have a lot to teach us about investing. There were many insights for investors in that interview, but I want to focus on one segment, where a viewer asks Charlie:

“How would you encourage mentees to take big bets on big edges, and how should this be taught at CalTech?”

To which Charlie Munger replied:

“I don't think CalTech can make great investors out of most people. That's because to some extent they are like great chess players - they are almost born to be investors.

Obviously, you have to know a lot. But partly it is temperament. Partly it's deferred gratification. You have to be willing to wait.

Good investing requires a weird combination of patience and aggression. And not many people have it.

It also requires a big amount of self-awareness about how much you know and how much you don't know. You have to know the edge of your own competence.”

Let’s deconstruct Charlie’s response:

Some people are born to be investors: –

Everybody is born to do something. Most realize the same thing when they are on death bed or when they retire from their work. Lucky are those who come to know their purpose while they are alive, young, and working. 

Charlie is pointing out that not everything can be learned in investing. Yes, you can read about investing and try your hand practicing it. You can study all the prior great investors. And you should. However, that is a necessary but not sufficient condition to make you an investor. You also need certain qualities that some people have and others… just don’t.

Temperament: –

What are these qualities? Well, it’s best described as temperament. What does that mean? Imagine a scenario where everything is going wrong for you as an investor. The stock market is marking your investments way down. Your peers disagree with you. Your clients are starting to doubt you. You haven’t had a good year in the market for some time. Can you still stick to your well-reasoned investment process? Or will you fall apart and give in to the pain and start to deviate in order to try to catch up sooner rather than later?

Average investors will sell their non-moving stocks for the moving stocks and they keep on doing like this. They have no logic / no system and no process. All they want is fast money. They lack the temperament. If the stocks are not moving – they will think – they are unlucky, the system is full of cheaters or something is wrong.

Patience: –

It seems so simple. Just do nothing when there is nothing worth doing. And yet, this seems so elusive to most investors. As a consultant – if I tell my clients not to trade even for a day – they feel as if they are missing something. They want to do something every day.

There is a belief going on for their behavior - that if only they were smart enough, work hard enough, that there is always something intelligent to do.

They forget that market is collective intelligence and if it is not indicating something to do – your single mind will not be able to find something worthwhile.

Aggression: –

Despite all their activity when patience is required, when it is actually time to act, most investors are… not active enough! Once Peter Lynch told the audience of portfolio managers that when they find a great idea they should, triple-, quadruple-weight it. Not just have a small “overweight” position vs. their benchmark. There was silence. Nobody disagreed with the legendary investor. And yet when the portfolio managers went back to their offices the next day, they didn’t change their approach or their portfolios, which typically contained hundreds of small, individually-insignificant investments.

Just see an average portfolio. It will have a stock 20% of the stocks which will command 80% of the value and 80% of the stocks which will have 20% of the value. As per the above advice – you should find out the best stock among your lot or from the market and take as big positions as you can take.

Self-awareness about the edge of your own competence: –

Our last post was on Self Knowledge only. Did you read it? The above 4 steps are nothing but the specific area of Self Knowledge as Temperament / Patience and Aggression. According to me – without Self Knowledge – you will not come to know about the above 4 qualities also.

How good you are in any particular area and how far you can go for it – are you aware of it? Mostly, from generation to generation – we have lived in a kind of security. Thanks to that we have not experienced the edge of positive or negative sides.

I was lucky to see Harshad Mehta Scam in my early career / 3 lower circuits – 2004 /2006 and 2008. I really feel blessed that I started with a big fall in the market. I have seen the negative edge of the market and thanks to the situations – I was forced to find out my own edge or my own survival in that kind of situation.

First-timers who have seen March 2020 fall for the first time, should remember their thoughts and behaviour in those days to find their own edge from within.

What NEXT?

The year 2021 has just started. Work on yourself to make tons of money. If you need our help, please approach us.

Have a Great 2021.

Follow me on Twitter @hiteshmparikh / WhatsApp – +91-9869425399.

Live With Passion…Invest With Passion.

Hitesh Parikh