Charlie Munger: Do This 1 Thing to be a Great Investor

You shouldn't be trying to guess whether you know one drug company has a better drug pipeline than another. You want to go, when you're young, someplace that's very inefficient, and you shouldn't be trying to guess whether the stock market is going to go up or whether long-term bonds are going to change in yield. I mean, you don't have anything to earn in that kind of a game.

Matthew Monahan from Palo Alto, California:

"Mr. Buffett, Mr. Munger, first of all, I want to thank both of you for so freely sharing your wisdom and knowledge over the years. Even though we've never met in person, I consider you both to be close personal mentors, and I attribute your teachings and philosophies to any success I've had in business so far. So thank you.

Here's my question: For a 23-year-old with high ambitions, some initial working capital, and a genetic wiring, as you call it, for disciplines like investments, mathematics, and technology, what do you foresee as the significant areas of opportunity over the next 50, even 100 years? And if you were in my shoes, what would be your approach and methodology for really learning, tackling, and mastering these areas of opportunity for the purpose of massive value creation?"

Well, I remain very optimistic. Frankly, when you get the chance to talk to somebody like Lorum or Davidson, as I did when I was 20 years old, I probably learned more from Lorum or Davidson in those four or five hours than I learned in college, with the exception of learning some accounting or one or two subjects like that.

So, you just want to soak it up. If you have those qualities you talked about, you'll see the areas as you go along. I mean, Charlie and I probably made money in a lot of different ways, some of which we didn't anticipate. You know, when we were 30 or 40 years ago, but we did have the ability to recognize some. We didn't have the ability to recognize others, but we did know when we knew what we were doing and when we didn't.

We just kept looking; we had a curiosity about things. You would know, at a time like the long-term capital management crisis, for example, that there were going to be ways to make money. I mean, they were going to be out there, and all you had to do was just read and think eight or ten hours a day, and you were going to cover a lot of possibilities, probably a very high percentage of them good and some of them sensational.

So, you can't really lay it out ahead of time. You can't have a defined roadmap, but you can have a reservoir of thinking, looking at different kinds of businesses, looking at different kinds of securities, and looking at markets in different places. You will then spot a reasonable number of things that come along. You won't spot every one of them; we've missed all kinds of things.

But the biggest thing, too, is to have something in the way you're programmed so that you don't ever do anything where you can lose a lot. I mean, our best ideas have not been better than other people's best ideas, but we've never had a lot of things that pulled us way back. We never went two steps forward and one step back; we probably went two steps forward and a fraction of a step back.

But avoiding the catastrophes is a very important thing, and it will be important in the future. I mean, you will have your chance to participate in catastrophes.

Charlie:

"Yeah, and of course, the place to look when you're young is in the inefficient markets. You shouldn't be trying to guess whether one drug company has a better drug pipeline than another. You want to go, when you're young, someplace that's very inefficient, and you shouldn't be trying to guess whether the stock market is going to go up or whether long-term bonds are going to change in yield.

I mean, you don't have anything to gain in that kind of a game, but you can have a lot going in games that very few people are playing, and maybe they haven't even got their heads screwed on wrong in terms of how they're thinking about the subject.

The RTC was a great example of a chance to make a lot of money. I mean, here was a seller of hundreds of billions of dollars worth of real estate where the people that were selling it had no economic interest in it, were eager to wind up the thing, you know, and they were selling at a terrible time when the people who had been venturesome in lending were no longer lending.

The people who had been venturesome in the equity end of real estate had gotten cleaned out. So, you had a great background environment, and then you had an imbalance of intensity in terms of analyzing situations between the seller, which was the government, with a bunch of people who had no economic interest in it, who were probably eager to wind up the job, and buyers on the other side who were of the generally cautious type.

So, and there were huge amounts of property. So, you get these opportunities, and you'll get more. I mean, there won't be any scarcity of opportunities in your life, although there will be days when you feel that way."