Thursday, January 13, 2005

Reflections on Charlie Munger

by Asim Jalis

I was recently reading the speeches by Charlie Munger. Search Google for the links. I found them really interesting because it suggested to me that my previous position (that analytical thinking does not apply to the real world, except in extremely specialized fields like mathematics) might be wrong. Based on the last few lines from the speech he gave at Harvard, it seems to me that his approach is to keep a list of principles and then to go through them when he sees a new situation. Given that this is how he organizes his psychological insights, it is likely that this is also how he organizes his investing insights. The key criteria I see him and Buffett applying to stock are: (a) sustainable competitive advantage, (b) low or fair price. For some reason most people, including the fools pay much more attention to (b) than to (a). Essentially what (a) says is that you look for effective monopolies, and then buy some shares in them. The nice thing about companies with a sustainable competitive advantage is that a lot of things have to go wrong for the investment to go sour. If the company does not have barriers against competitors then the management has to be significantly better than the competition, which makes it a riskier bet.