Editor’s note: This article was first published in May 2013, when Charlie Munger was 89 and still vice-chairman of Berkshire Hathaway. He died in November 2023, aged 99, so the present tense used for him no longer applies.
Charlie Munger is known as Berkshire Hathaway’s number two and Warren Buffett’s right-hand man. He is a 90-year-old billionaire investor who started from nothing. What’s more, his life in general has been no walk on a bed of roses: he went broke when he divorced his wife, who left him with little more than the clothes on his back; he lost his son to illness; and he himself had serious eyesight problems, to the point of losing the sight in one eye completely.
After these blows, Charlie Munger fell back on his philosophy of life: “Once you have discovered that life is very hard, ask yourself whether you will be able to bear it. If your answer is yes, then smile and carry on.” And that is what he did. Today he is one of the most efficient and respected investors on Wall Street, so when he gives us advice about our financial education, it is worth getting out a pen and paper. Even if what he tells us is nothing new, and we have said it before on other occasions, perhaps coming from him is what will convince us that there is no other way to manage our money when we pursue that longed-for wealth or financial freedom.
1. There are no secrets to getting rich: it all starts with saving
You have to spend less than you earn, and whenever you save something, put it in an account that pays interest on your money (interest-bearing accounts, deposits, savings accounts…). Over time, and with steady saving, your money grows. That much is obvious.
2. Even a terrible investment beats not investing
Because investing the money we have saved (whether in fixed income or equities) stops us from spending it, even a terrible investment that barely earns us any interest is always better than not investing and spending the money. At least we begin to educate ourselves financially.
WATCH OUT: When Munger talks about a terrible investment, he doesn’t mean going crazy with our money, because we know some people’s capacity for self-sabotage when it comes to investing can be enormous. For Munger, a terrible investment could be one whose annual return falls below inflation.
3. Debt is hell
Once you take on debt, getting out of it is sheer hell, especially credit card debt. Nobody can achieve financial stability while paying interest of 13% or 21%.
Suppose we earn annual returns on our investments of around 10% (not bad at all): we won’t make money if we have to pay 15% on our credit cards. That is why, before putting money into investments, you should use your savings to clear any debt with an abusive interest rate. It will be the most profitable thing you can do.
4. Choosing carefully where we invest
Charlie Munger belongs to the old school of investing, the school that keeps beating today’s so-called “gurus” on returns, so his investment advice is identical to Warren Buffett’s advice. Look for shares in companies with a competitive advantage at undervalued prices. Set a very long-term investment horizon and reinvest profits and dividends. (Read: The best investors in history and their returns)
Munger is aware that retail or individual investors don’t have access to many of the investment opportunities or share-price discounts that he and Buffett are constantly offered, so he advises studying some capital increases very carefully as a way to take positions at a discount to the share price.
5. Patience while we keep doing the same thing
People’s biggest problem, according to Munger, is a lack of patience. Everyone wants to make money quickly. Nobody wants to wait 10 years to see results. Yet many of these people are even worse off 10 years later, and then they regret not having followed a “calmer” strategy over the past decade.
The secret to getting rich is letting your money mature. Our investments generate a return that we add to the initial capital while we keep saving and investing the new money we put aside. Compound interest is magic, but you don’t see the magic in the first year, and probably not in the second either. From the fifth year on, though, we will notice how much more money we have. In 15 years, if you have saved and invested wisely without taking on toxic debt, you could say you already have a sizeable investment portfolio that gives you both financial stability and peace of mind. Munger once again used a well-known example from the world of mathematics when talking about compound interest:
“If Christopher Columbus had put 1 cent in an account at 6% interest, with instructions to withdraw the earnings as they were generated, 513 years later that account would hold 31 cents.
If, on the other hand, he had left that cent at 6% in an interest-bearing account where the earnings are added to the principal, after 513 years the result would be a gain of more than 95 billion.” The maths checks out.
Further reading
Featured image: Nick Webb, CC BY 2.0, via Wikimedia Commons.
