Charlie Munger Emphasizes Self-Awareness And Strategy: 'I Don't Play In A Game Where The Other People Are Wise And I'm Stupid. I Look For A Place Where I'm Wise And They're Stupid'

At age 99, Charlie Munger, vice chairman of Berkshire Hathaway Inc. and a Daily Journal board member, is a man many are eager to listen to. 

People tend to hang on to his every word like gospel. His decades of experience in investing, governance and law have given him a unique perspective on business and life, making his insights invaluable to anyone seeking wisdom.

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Munger has often spoken about the importance of staying within one's "circle of competence" when it comes to investing. His viewpoint is that self-awareness is key in achieving long-term success. According to Munger, the objective is not to know everything but to recognize the perimeter of one's own knowledge and capability.

Munger urges people to think about their areas of expertise and to focus on investment opportunities that align with those areas. The idea is simple yet profound: Why compete in a space where you're at a disadvantage? Instead, find areas where you have an edge over others. If you're well-versed in the automotive sector, for instance, you're more likely to identify trends, disruptions or under valuations in that market more readily than someone with no background in it.

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In a question-and-answer session at the 2020 Daily Journal annual meeting, Munger clarified his approach to researching a new company. His advice is to know one's limitations. If a company is in a sector or has a business model that he finds too complicated or outside his circle of competence, he avoids it. His logic is compelling: If a company is in a complex technological field, and that is not your forte, then you're setting yourself up to compete against experts in that field, effectively putting yourself at a disadvantage.

If you have a background in technology, for instance, you might be better equipped to evaluate the potential of a tech startup than someone without that expertise. Your understanding of industry trends, customer needs and technological innovations would give you a discernible edge in assessing the startup's value and future prospects.

This wisdom also extends to the amount of time and resources Munger spends on researching a new investment opportunity. He states that if an initial intrinsic value estimate reveals that a company is expensive, then it may not be worth spending much more time on it. Here, Munger suggests that the valuation can often act as a filter to decide whether an opportunity merits more time and investigation.

Munger sums up the crux of his philosophy, saying, "I don't play in a game where the other people are wise and I'm stupid. I look for a place where I'm wise and they're stupid."

It's a methodology that aims to exploit the gaps in competence among market participants.

The takeaway from Munger's advice is simple: Always be aware of your own competencies and limitations. By choosing to invest in fields where you have an edge, you're more likely to make successful, profitable decisions. It's less about outsmarting everyone in every field and more about being the smartest person in specific rooms. This makes for a sustainable, long-term strategy that has made Munger, and by extension Berkshire Hathaway, incredibly successful over the years.

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