Charlie Munger's Final Advice For 2024.

I basically believe in a soldier on system. Lots of hardship will come, and you got to handle it well. I soldering through Charlie Munger, sadly passed away in November 2023, one month shy of his 100th birthday. But in a big stroke of luck for us investors, just weeks before his passing, Becky Quick and the team at CNBC were able to sit down with Charlie for about 2 hours to discuss his 80 odd years of investing wisdom and how he believed investors should think in 2024.

In this video, we're looking at the most important points you need to know from Charlie's final TV interview and how that applies to investors over the next year.

Living to 100, everybody wants to know what's the secret. What is the secret for you? What did you? Don't know the secret. I avoided the standard ways of failing, because my game in life was always to avoid all standard ways of fail. You teach me the wrong way to play poker, and I will avoid it, and of course, I have had a lot because I'm so cautious.

Got to say a big shout out to the leaf blower in that clip, but there is a really good point in there: be cautious and avoid the common causes of failure. Time and time again, it's usually the investors that are extremely cautious and risk-averse that come out on top. People always look at the stock market and think the way to make it big is to live dangerously and take risks, but honestly, that couldn't be further from the truth. The best investors are all extremely risk-averse.

Charlie was always a big believer in the principle that it is more important not to do something dumb than it is to do something smart. Remember Buffett's rule number one of investing is don't lose money. It's all about protecting your downside risk. This will be very important in 2024 as speculation and euphoria creep back into the market. No doubt there will be some FOMO, but remember, with interest rates and debt levels high, we must be cautious and really scrutinize what companies we decide to put our hard-earned money into.

Remember, you don't have to swing at everything. I had some bad; everybody has some bad ones. The greatest tennis player goes out there someday to the center court and has a bad day. It happens. I think people learn more from their mistakes sometimes than bad days even, yes. But the real risk is knowing you can have a very bad day. Do not live your life in such a fashion that a bad day can kill you.

Which means what when it comes to investing? Well, the aim for the fences—it’s like a hitter at baseball which has to home run on every pitch. The great home run hitters do not remotely swing at every pitch. What's that? They wait for one that they can really handle, and that's what great stock pickers do too. Warren Buffett uses this analogy too.

Investing is this really interesting game of baseball where you get unlimited strikes. You can stand there at the plate and watch Nvidia go by at 1.2 trillion, you can watch Tesla go by at 600 billion, you can watch Google go by, JP Morgan goes by, Silicon Valley Bank—we definitely let that one through to the keeper. You can just keep letting these quota prices go until eventually, maybe in 6 months' time, you find that perfect pitch—Google or Microsoft at a 50% margin of safety.

And then once you get that perfect pitch, you can swing hard. What Charlie was talking about in that clip is that these days, there is a huge tendency for investors to swing at everything, and that's not a good trade. It's going to be particularly dangerous in 2024's high interest rate environment because if you just keep swinging, chances are you're eventually going to hit an obviously overhyped tech stock or, on the other hand, you'll hit a stock close to a crushing death under the newfound weight of their debt, and neither of those are conducive to great stock market returns.

So wait for the perfect pitches, because now more than ever, good opportunities are limited. So you think it's harder to make money now? Well, that's a very interesting question, and it's a very important question. And of course, it's harder—it's so much harder, you can't believe it. The people that have found it harder are the people that made Warren so rich.

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And of course, it's harder—it's so much harder, you can't believe it. The people that have found it harder are the people that made Warren so rich. Over the last few years of his life, Charlie stressed multiple times that investors now need to understand they are playing a totally different game, and it's a lot harder to do well. There's more scrutiny by investment professionals, analysis is far easier, and all this culminates in investment opportunities unfortunately being found faster and not lasting as long.

But it's not all hopeless, because on the flip side, he also notes that people that find it a lot harder today are generally those that provide investors like Warren Buffett the opportunities. What he means by this is that there are always opportunities for value investors out there thanks to the manic-depressive nature of the stock market. It's just that most people aren't patient enough to find them.

Take today's environment, for example—interest rates are high, inflation is persisting, consumers are running out of savings, but they haven't quite yet. There are signs that opportunities may pop up, but it's easy to see the S&P 500 charge ahead powered by the Magnificent 7 and give up and just make a silly overpriced investment. You know, conversely, when the market is falling like a brick, it's easy to just panic sell a good business. But this irrational behavior by the short-sighted is what ultimately gives value investors the opportunities.

Mass euphoria or mass panic always irrationally affects equity prices, and that's not going away anytime soon. Seth Klarman talks about this too. How even Meta, one of the world’s biggest and most analyzed companies, presented him a very enticing opportunity across 2022, but yes, generally speaking, Charlie is of the opinion that opportunities are much rarer now.

This is also attributable to the rise of value investing itself. What was so interesting is that he taught that you should find a few good things and stay with them for a very long, long time. But a long time to him was a few years; it wasn't a few decades. And he taught you could have a lousy business, but if they were cheap enough, they’re still right if they had enough assets for share. So you're getting at least twice as many assets as you were paying for—that was his system.

And he had worked for 50 years; his clients had good, good returns. Well, after he became so famous, partly with the help of Warren Buffett and Warren’s success, everybody tried to do the same thing. And of course, as everybody crowded in trying to be a little bit Graham, it got more and more competitive.

And that's what's happened now over time. As value investing took off and the world of investment analysis ramped up, it was naturally harder to buy these big baskets of cigar butt stocks, which made the strategy less viable and also made it riskier for those who persisted with less diversification. But that's where Charlie Munger changed the game and developed a new age method of value investing.

If you just ran float from one undervalued bad business into another and paid all the costs for it, it just doesn't work well enough for the people to actually put up the money to be worth bothering with. Well, your upgrade on that was to just look for good businesses. I saw immediately that Graham was wrong, right? And you look for—and you had the real money was in the really great companies, right? Which carried you up and up and up and up.

And this is the strategy that Buffett and Munger used to grow the vast majority of Berkshire's wealth, and it's still the best active investing strategy that exists today. Instead of looking for one last p by companies that may not be at bargain basement prices, but they do have characteristics of a very good business, and then hold on to these companies for a very long time. This is a principle that is particularly applicable today.

These days, it's rarer for decent businesses to end up with bargain basement prices, and especially in a high interest rate environment. A lot of the companies that have now been thrown into the bargain basement bin are on that pile for good reason. Last year, for example, the shares of Silicon Valley Bank weren't in the bargain basement because they had one last puff. They were in the bargain basement because the business had suffered irreparable damage and was going to die.

WeWork shares didn't end up in the bargain basement bin because it just had one bad year—the pandemic fundamentally destroyed its business model. FTX shares weren't in the bargain basement bin because they just had a down year. They were there because of gross mismanagement and fraud. Because there is so much more scrutiny over businesses and financial markets these days, more often than not, the bargain basement stocks are there for very good reason and may not even have one more puff.

It's rarer to find incredibly cheap stocks that have just had a few bad years. So keeping an eye on the financial health and thus the quality of the business is a very important factor, and it's what's led to Charlie and Warren becoming such successful investors.

I did not anticipate when Warren and I were starting with our little piddly start that we'd ever get to 100 million, much less several hundred billion. It was an amazing occurrence. What led to that success? Well, we got a little less crazy than most people and a little less stupid than most people, and that really helped us. Then in addition, we were given this much longer time to run than most people because something kept us alive into our 90s, and it gave us a long track from our little piddling start all the way to the '90s.

Those are the two things that really happened. And of course, we wised up over time; we got into better and better companies. We understood more and more of the bad things that could happen, and we avoided them even more assiduously when we were older than we did when we were young, and it all worked.

Three things in that clip: A. Control your temperament and never do crazy, sudden, stupid things with your portfolio. B. Learn from your mistakes and don't repeat them. And as basic as it sounds, C. Just let your investments compound over a long period of time.

Sure, there's the basic mantra of today: the best day to start and starting young is key, blah blah blah. But the deeper lesson from Charlie and from Warren is not only to invest over a long period of time but more specifically hold on to your investments for a long time period. Don't get caught chopping and changing. Find the long-term compounders and then stick with them.

The main trick that buyers show is the power of what I call the Wooden Effect. Wooden was the most famous basketball coach of a whole era, and you figure out what the hell he really did— which, of course, somebody like Warren and me, we just automatically do it. He concentrated about 90% of the playing time in seven players, and everybody else was just a sparring partner for the people.

Simple idea—that's what BG did. Of course, it worked better, and everybody's learned it, but in investment picking, people think anybody can learn it who just goes to Harvard or Columbia or something. And of course, anybody can't learn it. It's like chess or mechanical ability or a lot of other ability—it's somebody who does it a lot and has a natural aptitude for it who's the outlier who gets the big results. And that's what happens in the investment world; just a few outliers make the money.

And Charlie is spot on in this clip. Most active investors actually won't make money across their lifetimes. There are only a select few that will perform well—the ones that are analyzing businesses regularly and the ones with robust investing temperament. Why? Because, certainly from what I've seen, it's these people that have the ability to not only find the six or seven good businesses across their lifetime but also have the ability to stick with them over a long period of time.

I don't want to hop on about this too much because I have spoken about this at length over the past 12 months, but I will let Charlie explain it: if you take out of Warren Buffett's life the 10 most important trips to the pie counter, his whole record would look dung—it would be just worthless. You got to learn how to recognize them when they come and not make too many or a trip for the pie counter when the opportunity is available.

Warren Buffett himself boils Berkshire's success down to about 12 good investments that he just stuck with. Charlie is much the same. Kus Becker at Naspers made a bet on Tencent and stuck with it. Nick Sleep bet on Amazon and stuck with it. Even Ben Graham accidentally found his greatest success by buying half of GEICO and sticking with it. So time and time again, the stories of these wildly successful investors come down to identifying a winner, waiting to strike, and then once they do, holding on to it and allowing it to compound.

That's what I've been really focused on personally over the last 12 months—not so much getting caught up in the, you know, random flash in the pan opportunities being presented here or there in the stock market. Instead, sticking to my own knowledge and my own competencies, identifying those businesses that do have that long runway, and then just staying patient for a fair price in those long-term compounders.

And what I find interesting in this interview is that Charlie actually admits in hindsight that Berkshire could have been a much bigger company if he and Warren had just done things slightly differently. But listen to the reason as to why they opted not to go down this route:
Berkshire could easily be worth twice what it is now, and the extra risk we would have taken would have been practically nothing. All we had to do is a little more leverage that was easily available.

In hindsight, you’re glad you didn’t? Just well from the potential risk. It’s an interesting example. The reason we didn’t is the idea of disappointing a lot of people who had trusted us. When we were young, we thought if we lost three-quarters of our money, we were still very rich, right? That wasn’t true of every shareholder. Losing three-quarters of the money would have been a big letdown, so we were very cautious in dealing with our shareholders' money.

There it is again: caution. They could have used a little leverage, but at the end of the day, rule number one: don't lose money. It's an unnecessary risk in the chase of higher returns. Ultimately, it's not worth it.

So in summary, I think there are five key points from Charlie that we really need to factor in for the year ahead. Number one: there are unfortunately fewer opportunities today, so we need to stay patient for the good ones. Number two: while it's tempting to jump in head first, investors need to be cautious and really scrutinize what they're buying. You know, check the debts, check the interest expense, check the cash flows.

Then number three: remember it's better to buy a great business at a fair price than a fair business at a great price. Today, a lot of companies trading in the bargain basement bin are doing so for good reason. Then number four: once you’ve got a long-term compounder, hold on to it and let it compound. Remember what he said about Buffett—without him holding on to the big winners, his portfolio isn’t that special.

Finally, number five: remember to just hang in there. A lot of Charlie's success came from simply soldiering on. If you make a mistake, don't be disheartened. If you aren't finding good opportunities, don't give up. Just keep soldiering on.

Hanging in there for a long time is the most important factor to success in the stock market. We've just got to do it. Anyway, guys, that will do us for today. One last thing I just wanted to mention: if you're interested in learning the step-by-step process of Warren and Charlie's investment strategy, and you want to support the channel in the process, please feel free to check out New Money Education.

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