Charlie Munger: How to Make Your First $1 Million (5 Steps)
Charlie Munger is currently a billionaire with an estimated net worth of 2.4 billion dollars as of 2022. However, that wasn't always the case. While Charlie didn't grow up poor by any means, he wasn't lucky enough to be born into a rich and prominent family. Born in Omaha, Nebraska, one of his first jobs is actually working in a grocery store that was owned by Warren Buffett's grandfather for 20 cents an hour. This is a far cry from his current fortune.
In this video, we are going to go over the lessons from Charlie Munger's life and what he has shared in his interviews and his writings that will help you progress towards reaching your first million dollars. I have been studying Charlie for years and have listened to probably every interview he has given and read every word he has written. This video will be filled with practical steps you can start taking today to get yourself closer to that first million-dollar goal. A ton of research went into making this video for you guys, and all I ask for in exchange is for you to hit the like button. It really helps out the channel a ton and encourages me to keep making these videos for you guys.
Now let's jump in. I think studying Munger's actions before he became super-rich would be the most relevant for us watching this video who are not yet billionaires. Relatively early on in life, Charlie learned the importance of owning equity, or put another way, having an ownership stake in a company. Owning equity is just a fancy way of saying you own a little piece of a business. Lesson number one from studying Charlie is to make sure you own equity. Before Munger was one of the world's most respected and accomplished investors, he got his start in the business world as a lawyer after graduating from Harvard Law School.
Working as a lawyer, many of Charlie's clients were local businesses. Typically, lawyers bill their clients on an hourly basis, and those clients pay that bill in cash. However, over time, Munger came to realize how wealthy a lot of his clients were as a direct result of owning a business. Charlie then started to change his fee structure, and instead of just being paid in cash for his legal services, he also began accepting equity in his clients' businesses as a form of payment. Such a brilliant idea!
Let me explain why. Let's say that as a lawyer, Charlie did ten thousand dollars of work and billed his client for that ten thousand dollars. If Charlie is paid in cash, that ten thousand dollars is all he will make from his work. However, if Charlie instead received ten thousand dollars in the form of equity in his client's business, he would make money for years to come because Charlie is now a part owner in his client's business. He is entitled to a cut of the profits that business makes every year.
Let's say Charlie owns three percent of the business. That means every year, Charlie gets three percent of the business's profits and doesn't have to do any more work. In theory, Charlie gets that three percent every year forever or until the business is sold. If that is the case, the business being sold, Munger would receive three percent of the price that the business sold for because, again, he owns three percent of the business. So in effect, Charlie is having his money work for him. He did work once by supplying the business with his legal services and will make that money from that work forever.
Now having this arrangement with one business is great, but imagine if over the years Charlie was able to get this arrangement with 5, 10, or even 20 businesses. You can see why this would make him pretty wealthy rather quickly. This example from Munger's life demonstrates the importance of owning equity. I think it should be a goal for all of us to own equity if we want to build wealth. This can come in many different forms.
One way to go about receiving equity is through your job. Personally, I work for a large financial services firm as an investment analyst. I'm only 24 years old, and I'm still a junior employee. However, in a couple of years, I will start receiving stock in the company I work for as part of my compensation package. This is very similar to the arrangement Charlie made with his clients. By receiving equity in the company as part of my pay, I am making money forever from work I did in the past, assuming I hold on to the stock.
Not a bad arrangement to still be getting paid on work you did years ago. Getting equity through your job is a great way to build wealth, but it's not the only way to get equity in a company. There is another way to get equity in a business besides just through your job or buying it. That way is starting your own business. Charlie Munger started multiple businesses throughout his career: a law firm, a real estate investment group, as well as an investment partnership.
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The next lesson to build wealth and reach the first million-dollar target is to invest in yourself. I know this sounds like some self-help cliché phrase or something out of a get-rich-quick scheme, but for Munger, these words take on a very practical meaning. When he was a young lawyer, Charlie saw just how much the law firm he was working for was receiving from clients for every hour he worked. Charlie's hourly rate that was charged to clients was the equivalent of hundreds of dollars per hour in today's money after adjusting for inflation.
This led Charlie to have a realization that will be helpful for you as you go about building wealth. This realization was that he needed to start selling his time back to his most valuable client: himself. Let me explain what I mean. Every day, Charlie was spending somewhere between 8 and 12 hours working for his clients as a lawyer. He then decided that each day he was going to work for himself for at least an hour. Charlie did this early each morning, working on various real estate deals and construction projects he was involved in.
Everyone should do this: be both your own client and bill yourself part of your time each day as well as work for other clients. Now, I'm sure being a successful lawyer like Charlie would be enough for most people, but if you want to get ahead and aren't satisfied with your current situation, why not work for yourself for an hour each day? This can come in many different forms. It could be learning about investing, doing real estate deals, or maybe even starting some sort of side business.
But whatever it is, it's important to spend some of your time working for yourself and making you money, and not just the company you work for. This concept sounds so simple, but pretty much nobody does it. Imagine if you spent an hour each day working for yourself for a month. What about 90 days? What about for a year? What about for five years? I'm confident that you would surprise yourself with what you are able to accomplish following this piece of advice from Charlie.
From a wealth-building standpoint, the reason why selling yourself back time each day is so powerful is because it will allow you to save more money faster. Let's say your job is able to cover all of your living expenses. This means that additional money you earn through this extra work you do for yourself can all be put towards building your wealth. Think about it like this: let's say you make fifty thousand dollars at your day job, and let's say each year you save and invest ten percent of that fifty thousand dollars. This means you will have five thousand dollars saved at the end of each year that you can put towards building wealth.
But let's say you're able to work for yourself in the mornings or after work at night and even a little bit on the weekends, and you are able to generate an additional twenty thousand dollars of income from working for yourself because your job covers all of your living expenses. The extra twenty thousand dollars you made can all be put towards building wealth. That means you can add this twenty thousand dollars to the five thousand dollars you are normally able to save and invest each year, bringing your total annual savings up to twenty-five thousand dollars a year.
This means the amount you were able to save each year just increased by a factor of five. By 5xing the amount of money you are able to save and invest each year, this is going to get you to your first million-dollar goal a lot quicker. This leads us into the next lesson from Charlie: get your first 100,000 saved and invested as quickly as possible. As Charlie puts it, “The first 100,000 is a bitch, but you gotta do it. I don't care what you have to do. If it means walking everywhere and not eating anything that wasn't purchased with a coupon, find a way to get your hands on one hundred thousand dollars. After that, you can ease off the gas a little bit.”
This quote from Charlie honestly changed the way I think about money. The math behind this comment from Charlie makes a ton of sense. Let's assume you're able to earn 10% on your investment portfolio each year. If you have one thousand dollars in your portfolio, that ten percent return is equivalent to a hundred dollars. If you have ten thousand dollars, that ten percent return is equivalent to one thousand dollars. But if you have one hundred thousand dollars in your investment portfolio, that ten percent return is equivalent to ten thousand dollars.
If that example is not convincing enough, think about it this way: if you have ten thousand dollars in an investment account that is earning you ten percent a year and you hold it in that account for ten years without even adding another dollar, you will have twenty-five thousand nine hundred and thirty-seven dollars at the end of ten years. However, if you raise that starting amount to one hundred thousand dollars instead, while still holding it for ten years at a ten percent annual return and not putting in another dollar, you would have two hundred and fifty-nine thousand three hundred and seventy-four dollars.
In the first example, you would have made around sixteen thousand dollars from your investment gains. But in the second example, starting with one hundred thousand dollars, your portfolio would have produced nearly 160 thousand dollars. This is why it's so important to hit that 100 thousand dollar mark as quickly as possible because, as this example illustrates, the more money you have, the harder that money works for you in terms of the amount of money you can expect to receive from your investment returns. This is why getting your first 100,000 saved is harder than getting your next 100,000.
This next piece of advice from studying Charlie's life definitely contradicts conventional investing wisdom, but hey, it's kind of hard to become as wealthy as Charlie by following conventional wisdom. This lesson is: don't over-diversify your investment portfolio. Charlie Munger and his business partner Warren Buffett are big believers in having a concentrated investment portfolio. As a side note, there was actually one point in time when Buffett was younger where he had 70% of his entire net worth in just one stock.
When it comes to diversification, Charlie likes to tell the example of a local businessman. Let's say in this example this local businessman is based in Atlanta, Georgia. He owns four different high-quality businesses throughout town: a 100-unit apartment building, the most popular car dealership in town, a well-known plumbing company with a great reputation, and a roofing company that repairs and replaces roofs. With those four businesses throughout the city, would you say this man is pretty well diversified?
Well, I know for a fact I would. Charlie says the same logic should apply to the stock market because, after all, stocks are just little pieces of businesses. But don't just take my word for it; listen to what Charlie had to say when asked if he was comfortable that he owned only three stocks in his portfolio: “Am I comfortable with a non-diversified portfolio? Of course. If you think the monkeys, I care about the monkeys. The mothers have three stocks. We've got a block of Berkshire, we've got a block of Costco, we have a block of the Lou's fund, and the rest is gribs and grabs. So am I comfortable? Am I securely rich? You're right, I am.”
However, there is an important disclaimer that needs to be made. If you aren't willing to put in the work to identify stocks and businesses to invest in, that is perfectly alright. But in this case, you should be super diversified, and that can be achieved by investing in an S&P 500 index fund, for example.
Now, no video about wealth building and Charlie Munger would be complete without talking about the power of compound interest. To demonstrate the power of compound interest, we are going to turn to Charlie's role model, Ben Franklin. Franklin had a pretty good definition of compound interest: "Money makes money, and the money that makes money makes money." When Ben Franklin passed away in 1780, he left the equivalent of 4,400 dollars each to the cities of Boston and Philadelphia in his will, under the condition that the money be loaned and invested to young apprentices that have proven worthy of a loan.
He stipulated that the cities would receive the funds after 200 years. When the cities received their balances after 200 years, the combined gift had grown to a staggering 6.5 million dollars. Now, of course, this is taking compound interest to the extreme, but it demonstrates one really important point: a dollar saved and invested is worth ten dollars, fifteen dollars, or even twenty dollars in the future. Once you learn this lesson, it's so much easier to save money. That fancy car you want to buy isn't costing you an extra 500 dollars a month; it's costing you thousands of dollars each month once you factor in the impact of lost compound interest.
Without a doubt, we can learn a ton about building wealth from studying Charlie Munger's life. Let's recap the main takeaways of this video:
Own equity in a company, whether that's through your work or by starting your own company. Owning equity is a key part of the wealth-building formula.
Work for yourself at least an hour each day. This can come in the form of your learning and improving your skills so you can make more money in your day job, or it can come in the form of generating additional income either from investing or some sort of side business.
Get to your first one hundred thousand dollars as quickly as possible. This will allow your investment returns to start to generate a meaningful amount of money. Remember: the more money you have in your portfolio, the harder that money can work for you in terms of total dollars of your investment returns.
Don't over-diversify your portfolio. Remember the story of the businessman in your local town that owns four great businesses throughout town. Important caveat: if you don't want to do the research and find these great investments, then you should be super diversified, and an S&P 500 index fund is a great way to achieve that.
Let compound interest work for you. Think of your wealth as rolling a snowball down a hill. That snowball starts out small and gets bigger and bigger with each roll.
So there we have it! I hope you enjoyed this video and learned something new. Make sure to like this video and subscribe to the Investor Center because it helps our channel out a ton. As always, thank you so much for watching, and I'm looking forward to speaking again soon.