I had the privilege of meeting Charlie Munger twice, on both occasions at the Berkshire AGMs — once in the mid-90s and the second in the early 2000s. The first encounter remains a faint memory, a short 15-minute exchange. However, the second meeting left an indelible mark on me.
At that time, my formal experience in investing had spanned a little over a decade. It was just before 2001 when the markets were in a frenzy, valuations soaring inexplicably, while distress signals loomed large. I struggled to comprehend what seemed to be irrational behaviour of the markets, at that point in time, especially with the responsibility of managing clients' money. I wasn’t sure about the irrationality part, therefore there were many self-doubts and inner demons.
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Charlie Munger generously granted me 40 minutes on the sidelines of a Berkshire AGM. Our conversation ventured into the depths of investing—ideas, principles, business moats, and the enduring concept of compounding over chasing short-term gains. Investment philosophy and psychology were at the centre of our discussion.
Those 40 minutes helped me in calming down the pangs of self-doubt and concerns. Munger's wisdom that day and my decades-long experience have taught me that markets are devoid of illusions, emotions and biases, over a long period. Even if, they can be quite irrational at points of time. Markets are almost always right, in a prescient way. Therefore, I always carry a reverential attitude towards markets and the wisdom of Mr.Market over the long run.
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1) Behavioural Coping: He emphasised that in investing, one encounters phases of pleasure, pain, and self-doubt. Understanding that these emotions are transient and acknowledging that markets, over time, tend to be more rational due to their innate nature as data analysis machines is crucial.
The essence lies in avoiding prejudices and illusions, finding the balance between self-doubt and conviction, and fostering resilience, adaptability, and self-confidence, duly tempered with adequate self-criticism and agility, to intelligently revise one’s own opinion.
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2) Quality of Management and Businesses: While Warren Buffett in the initial phase leaned more towards Grahamian principles of valuation, seeking mathematical cheapness in investments, Charlie Munger and Philip Fischer nudged him towards appreciating the essence of the quality of businesses and the impact of quality on valuation.
Munger's insights extended beyond the cursory, rather primary, understanding of valuation. To evaluate a business, one should look at its innate character, moats, resilience, durability, predictability and capital efficiency. To evaluate management, one should look at its competence as well as character, vision as well as execution, efficient capital allocation and distribution, fire in the belly, skin-in-the-game, adaptability and intelligent risk-taking capabilities.
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I have now deduced that Return on Equity (ROE) is a pretty good substitute for the quality of management, and Return on Capital Employed (ROCE) for the inherent quality of a business.
Charlie Munger was a man of sparkling intellect. His articulation, while razor-sharp, could be perceived as savage at times, bearing strong opinions and biases, yet always thought-provoking. But I think, then and now, behind that brutally forthright persona lay a very fine human being. Munger stood out as a colossal intellect.
He came across as a happy individual, at complete peace with himself and with a great zest for life. The world of investment has suffered a very significant loss.
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