Why You Should Take Charlie Munger's Secret To Success Seriously

Charlie Munger once described the secret of success as “take a simple idea and take it seriously.”

While that can be applied to many aspects of life, it is nowhere more important than in the stock market. The one simple rule to succeed in the markets doesn't involve fancy chart patterns or 42 factor financial models to implement.

It is not necessary to have an in-depth knowledge of quantum mechanics or advanced physics. It is the simple philosophy and approach that lies at the heart of many of the great fortunes made by the greatest of our time.

Buy Undervalued Securities And Sell Overvalued Ones.

It is a very simple idea that is often paraphrased as “Buy Low, Sell High.”

Many will point out that Mr. Munger is best known for getting Warren Buffett to start focusing on great companies at good prices as opposed to just buying "cigar butt" stocks. While this is true to a very great degree, it is important to understand that Buffett is still very much a price sensitive value investor.

Related Link: 7 Stocks Mined From The Bottom Decile

Munger recently told Mohnish Pabrai during a discussion at the Huntington Library that if we was managing less money he would be more of a classic value investor. According to Mr. Pabrai, he “asked Charlie if he would still promote buy and hold forever notion if he were running a small pool of capital. He said that he'd do it like he did when he ran his partnership -- buy at a discount; sell at full price and then go back. With their present situation he said that it makes no sense to do that. “

At a recent shareholder meeting, Munger also said he “stopped 'scrounging'" for net-nets, sought high quality businesses and managers instead, "and my returns didn't go down that much.” This is in agreement with a statement Warren Buffett gave a few years ago when talking to a group of Indian MBA students when he confessed that if managing smaller sums, he would engage in more Benjamin Graham-like investing, including net-nets.

Munger also likes to buy the great companies at bargains prices. He once said, “It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities.” Munger waits for his old friend Mr. Market to serve up opportunities on a silver platter.

In 2009, when investors were found hiding under the table, Munger put the excess cash of The Daily Journal into several stocks trading at ridiculous valuations. While he is not thought of as a "book value investor," all of the stocks appear to be have been purchased well below tangible book value. To say they have done well since is a gross understatement.

It Really Is A Very Simple Idea.

Buy cheap stocks and sell them when they are no longer cheap. Walter Schloss used this approach to rack up returns of 20 percent a year for almost 50 years. This simple idea is, of course, the heart of the Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) returns over the years. Investors like Bruce Berkowitz of Fairholme Funds and Seth Klarman of Baupost Group have used it to earn substantial returns for their shareholders and themselves. The partners at Tweedy Browne have taken this simple concept of buying cheap stocks and used it to build a wildly successful investment firm as well as pretty impressive fortunes for themselves.

Virtually every examination stock performance has determined that those stocks in the lower 10 percent of price-to-book value valuations have outperformed every other metric. On average, this simple “buy cheap stocks” approach has earned about a 50-percent premium to the market in a capitalization weighted portfolio.

Related Link: Value Investing Not 'Hot,' But Profitable

A recent study by Tobias Carlisle showed that if you evenly weighed the portfolios (as most individual investors do in practice) the average annual return jumps to more than 20 percent, or more than double the markets long-term rate of return. Buying cheap stocks works very well, but almost no one actually practices this approach.

Everyone Wants To Be The Great Trader And Crave The Action Of The Daily Noise Of The Market.

The truth is that like the bells and sirens of slot machines and sounds of excitement at the craps table all that noise is designed to remove money from your pockets on the most efficient manner possible and transfer it to Wall Streets. By focusing on the action and excitement they pretty much get you to hand over your cash voluntarily on a regular basis.

Buying cheap stocks and holding them for a period of years is much more profitable and is the best (and easiest) way to make a fortune in the markets.

Buy low, sell high. A simple idea that if taken seriously can change your results and your life.

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Original publication: September 24, 2014

Posted In: Bruce BerkowitzCharlie MungercommentsJavi’s PicksMohnish PabraiSeth KlarmanWalter SchlossWarren BuffettEducationEntrepreneurshipTop StoriesGeneral

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