Investing Advice from Warren Buffetts Right-Hand Man

Words of wisdom from Charlie Munger, vice chairman of Berkshire Hathaway.There arent many iron rules of investing, but one of them is When Charlie Munger speaks, drop everything and listen.Munger, the 91-year-old billionaire vice chairman of Berkshire Hathaway, has two amazing traits: Hes brilliant, which gives him authority, and hes rich and old, which amplifies freedom of speech to a level most of us couldnt get away with. He says whats on his mind without fear of offending anyone. It makes him one of the most quotable investors of all time.Munger gave a talk this week at the Daily Journal, where hes chairman. InvestorAlex Rubalcavatook notes. Here are some great things Munger said (my comments below).I did not succeed in life by intelligence. I succeeded because I have a long attention span.Time is the individual investorslast remaining edge on professionals. If you can think about the next five years while most are focused on the next five months, you have an advantage over everyone who tries to outperform based on sheer intellect.The finance industry is 5% rational people and 95% shamans and faith healers.There are few other industries in which people are paid so much to be so consistently wrong while clients come back for more without demanding any change.I think that someone my age has lived through the best and easiest period in the history of the world.People ignore the really important news because it happens slowly, but obsess over trivial news because it happens all day long. News headlines will forever be dominated by pessimism, but by almost any metric we areliving through the greatest period in world history.When things are damn near impossible, maybe you should stop trying.Related: Everyone should know the difference between patience and stubbornness. Patience is the willingness to wait a long time while remaining open to changing your mind when the facts change. Stubbornness is the willingness to wait a long time while ignoring and dismissing evidence that youre wrong.Other people are trying to act smarter. Im just trying to be non-idiotic.Napoleons definition of a military genius was The man who can do the average thing when all those around him are going crazy. Its the same with investing: You dont have to be brilliant, you just have to consistentlybe not stupid.If the incentives are wrong, the behavior will be wrong. I guarantee it.Anyone criticizing the behavior of greedy Wall Street bankers underestimates their tendency to do the same thing if offered an eight-figure salary.I dont spend too much time thinking about what is almost certain never to happen.This likely includes: accurate economic forecasts, stable markets, consistent outperformance, reasonable politicians, and hyperinflation.I dont think anything that any average person can do easily is likely to be worthwhile.Good investing hurts.Its not any fun. It requires the ability to endure things most people arent, such as bear markets that last for years and times when you perform worse than average.The way to get rich is to keep $10 million in your checking account in case a good deal comes along.You dont need $10 million, but cash in the bank will be thebest friend youve ever hadwhen stocks fall. If youre upset that your cash is earning a dismal interest rate right now, youre doing it wrong. Cashs value isnt its ability to earn interest. Providing flexibility and options is how it earns its keep.Nobody survives open heart surgery better than the guy who didnt need the procedure in the first place.Avoid debt. Spend less than you earn. Advocate humility. Learn from your mistakes. If you can manage to not screw up too many times in investing youll probably do just fine over time.Buffett (about Munger): Hes given me a lot more advice than Ive given him. He lives a very rational life. Ive never heard him say a word that expressed envy of anyone. He doesnt waste time on senseless emotions.Munger: Theres an old saying, What good is envy? Its the one sin you cant have any fun at. Its 100% destructive. Resentment is crazy. Revenge is crazy. Envy is crazy. If you get those things out of your life early, life works a lot better.Buffett: It so clearly makes sense.Munger: Weve learned how to outsmart people who are clearly smarter [than we are.]Buffett: Temperament is more important than IQ. You need reasonable intelligence, but you absolutely have to have the right temperament. Otherwise, something will snap you.Munger: The other big secret is that were good at lifelong learning. Warren is better in his 70s and 80s, in many ways, that he was when he was younger. If you keep learning all the time, you have a wonderful advantage.

Make Money Like Munger: 4 Tips from Warren Buffett's Right-Hand Man

Charlie Munger is best known as the second-in-command behind Warren Buffett at Berkshire Hathaway (BRK.A)(BRK.B). He's also a world-class billionaire investor in his own right, capable of similar market-trouncing results as Buffett himself.

As a successful investor and all around nice guy, Munger often shares his investing wisdom with those who care to listen. Paying attention to what he says and acting upon his best advice should help you make yourself financially comfortable -- maybe even rich.

With that in mind, here are some of his most pertinent words of wisdom for those who want to invest.

1. The No-Brainer Secret to Getting Rich

If you're looking to do more with your money than just stick it in a CD or savings account, perhaps the most important Munger quote of all time is this one:"Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer."

Becauseyou need to spend less than you earn in order to properly invest, and because investing defers your ability to spend money from today to sometime in the future,even lousy investing beats not investing at all.

Following Munger's advice throughout your career is just about the closest thing you'll find to a guaranteed way for you to wind up financially comfortable during your retirement.

2. The Key Financial Lesson for Those Not Yet Able to Invest

For those not yet able to regularly sock away cash for their futures, Munger has these words of wisdom:"Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't get ahead paying 18 percent."

Once again, Munger is absolutely correct. He and his partner Buffett may be among a handful of investors in the world with a legitimate chance of outrunning credit card debt with investment earnings. We mere mortals don't have a prayer.

The long-run returns from investing in stocks is somewhere around the 8 percent to 10 percent annualized range -- and even that isn't guaranteed. When compared to the 13 percent or more interest rates that typical credit cards charge, the importance of always paying off that credit card bill -- and the futility of trying to beat that rate investing -- becomes abundantly clear.The most important instructions for those who do invest

Finally, for those who are ready to invest, Munger has two critically important pieces of advice. The first:"The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage."

And Munger's second key piece of investing advice:"There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn't awash in cash -- and I don't want to go back."

Taken together, they form the foundation of the value-investing strategy that made Munger and his partner Buffett two of the richest people on the planet. In essence, Munger's advice boils down to: Figure out why a company has a right to win (its staying quality/competitive advantage) Determine what that company is worth (the discounted future cash flow) Pay less than that amount to buy it, and It's a better idea to hold on to cash than to invest your money poorly.It's a pretty straightforward strategy, but it's the one that made Munger the billionaire he is today.

These Words of Wisdom Work in Good Times and Bad

Those straightforward bits of timeless advice from Charlie Munger contain the keys that will let anyone able to follow them throughout a career wind up comfortable, if not downright rich. Yet while his advice can work wonders, life does have a way of throwing us curve balls. Jobs get lost, health is not always with us, cars get wrecked, and roofs leak.

Don't let those curve balls dissuade you: Following Munger's advice gets you in a better position to hit them when they come flying past. For instance, it's a lot easier to deal with the costs of a wrecked car if you've got a pile of cash awaiting investment than if you're already in a hole from carrying credit card debt.

Even if you're not yet ready to invest, structuring your financial life around Munger's advice can set you up for success once you're able to get started.Charlie Mungers Investing PrinciplesPosted onSeptember 1, 2014If you can get good at destroying your own wrong ideas, that is a great gift. Charlie MungerWarren Buffett famously ran a partnership for a small group of investors before turning Berkshire Hathaway into his investment vehicle of choice. He produced extraordinary results for himself and his investors.Many dont realize this but his business partner Charlie Munger actually ran his own investment partnership as well. Here are Mungersannual returns measured against the Dow and S&P 500 from inception until the fund was closed down:

The funds performance was stellar but youll notice it ran intosome trouble in the 1973-74 bear market when the partnership was down over 53% while the Dow fell around 33%. Heres Mungers take on losses from the Janet Lowes bookDamn Right: Behind the Scenes with Berkshire Hathaway Billionaire CharlieMunger:Ive been through a number of down periods. If you live a long time, youre going to be out of investment fashion some of the time.The volatility in the fund, as measured by the standard deviation of returns, was roughly double that of the market. Should that matter as long as the results were superior? Munger doesnt think so:This great emphasis on volatility in corporate finance we regard as nonsense. Let me put it this way; as long as the odds are in our favor and were not risking the whole company on one throw of the dice or anything close to it, we dont mind volatility in results.What we want are favorable odds.My take on volatility is that its only a risk if it causes an investor to forgo their process in favor of investing based on an emotional state of fear or greed. Otherwise volatility creates opportunities for patient investors.Many in the investment industry tout their strategyas the only way to invest successfully. Munger would be on the short list of investors that could legitimately make this claim based on histrack record. Instead he has a more nuancedtake for finding a process that suits each individuals unique tolerance for risk and their own personality:Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable and some losses are inevitable you might be wise to utilizea very conservative patternsof investment and saving all your life.So you have to adapt your strategy to your own nature and your own talents. I dont think theres a one-size-fits-all investment strategy that I can give you.There are no easy answers in the financial markets. There will never be a single technique that suits every individual. You must be willingandable to follow any specific approach.Investing can be hard work. This is especially true for those that try to beat the market. Its not impossible, but its not easy. Munger shared his thoughts on whether that means most investors should simply use index funds:Does that mean you should be in an index fund? Well, that depends on whether or not you can invest money way better than average or you can find someone who almost surely will invest money way better than average.And those are the questions that make life interesting.Regardless of your strategy, Munger makes it clear that having a long-term orientation with minimal activity can bea huge advantage:There are huge advantages for an individual to get into position where you make a few great investments and just sit back. Youre paying less to brokers.Youre listening to less nonsenseIf it works, the governmental tax system gives you an extra one, two, or three percentage points per annum with compound effects.A relentless reader, Munger believes that any good investor should spend the bulk of their time in the pursuit of knowledge and understanding:I dont think you can get to be a really good investor over a broad range withoutdoing a massive amount of reading.Finally, Munger is a fan of putting long-term systems and processes in place at Berkshire Hathaway that dont require constant oversight by himself or Buffett:Berkshires assets have been lovingly put together so as not to require continuing intelligence at headquarters.Its simple, but never easy.The Expensive Antics of Chinas Gaudiest Billionaire

Liu Yiqian has conspicuously ignored the official kibosh on ostentatious shows of wealthPresident Xi Jinpings austerity drive has sent Chinas high rollers running for cover, emptying casinos and golf courses as vin ordinaire becomes the new Chateau Lafite. Billionaire art collector Liu Yiqian doesnt seem to have gotten the memo.The Shanghai-based former taxi driver is on a buying binge that has left rivals gasping at auctions as he outbids all comers for ancient scrolls, Tibetan silk embroideries and imperial porcelain. Hes built and filled two museums with more than 2,300 works, including contemporary pieces by Jeff Koons and Yayoi Kusama. In the past year hes spent more than $115 million picking up such treasures.Liu, 52, is a classic rags-to-riches story of new China, a high school dropout who made his fortune in the countrys nascent stock trading of the 1980s and 90s. What sets him apart is the delight he takes in behaving like a Chinese Beverly Hillbilly who has no idea about designer labels (his wife buys his clothes) and still does the grocery shopping when shes too busy.

Billionaire art collector Liu Yiqian holds the 15th century Ming dynasty ceramic nicknamed the Chicken Cup, which was bought for $36 million at a Hong Kong auction.Source: Sotheby's via BloombergIn July he caused an online furor in China for drinking tea from a 500-year-old ceramic bowl that once belonged to revered Emperor Qianlong. A photo went viral showing him dressed in a short-sleeved, plaid shirt, with an incipient smirk as he raised the precious, palm-size Chicken Cup to his lips.Chinas netizens couldnt decide which was more outrageous, his treatment of the historic artifact or the record $36 million he paid for it at a Sothebys sale in Hong Kong. Even his settlement for the bowl was theatrical: 24 separate swipes of his American Express Centurion card. He said he didnt even realize that he qualified for hundreds ofmillionsof reward points.Conspicuous consumption isnt new among the billionaires minted during Chinas economic boom. But shows of wealth are considerably rarer since Xi came to power in 2012 and began a corruption crackdown thats netted thousands of officials, some from the top echelons of power. Ten days after Lius tea-drinking stunt, the Communist Party said it wasinvestigatingformer internal security chief Zhou Yongkang.Im not nervous at all, because all my wealth is out in the open and there is nothing to worry about, Liu says in an interview in one of his Shanghai museums. Every country has experienced an anti-corruption campaign at some time.Tibetan SilkAs if to prove the point, theAmEx cardwas out again last month for a Tibetan embroidered silk thangka hed won for $45 million at an auction in November.In the last year and a half he has asserted himself as the greatest force in the Chinese market, says Nicolas Chow, deputy chairman of Sothebys Asia. He also has a knack for self-promotion and wild publicity stunts.

An 11th/12th century Tibetan bronze seated yogi that Liu bought for $4.9 million at Christies New York on March 17.Source: Christies Images Ltd. via BloombergA few days after paying for his thangka, Liu flew with his wife, Wang Wei, and daughter Betty to New York and checked into the St. Regis, all on the reward points hed amassed. He was soon up to his old antics, stripping down to his underwear one night in his room and mimicking the lotus position of an antique Tibetan bronze yogi he was in town to bid for, while Betty captured the moment on her cell phone.After Betty took that photo, I thought it was fun and decided to share it, saysLiu, who juxtaposed the image with a photo of the yogi and sent it to friends on Chinese social media service WeChat. I was holding my breath the whole time, he saysin Chinese as he attempts to demonstrate the pose during the March 28 interview in Shanghai. Its really, really hard! You should try it yourself!Cheeky ChappyBy the time of the Christies auction, the image had been widely shared within the tightly knit Chinese art community. Most other collectors are quite dull. Hes a cheeky chappy, its refreshing, says London-based art dealer William Qian. Look at the pictures he posts, how cool is that? Hes a self-made man and can do what he wants.As usual, Liu made thewinningbid: $4.9 million.When hes bidding, if he wants it, he gets it, says James Hennessy, a Hong Kong-based dealer. That becomes his quest.Its a quest that started 36 years ago, when he dropped out of school at 16 to make leather bags, around the time that Chinese leader Deng Xiaoping was opening the country up and extolling the virtues of being rich.Learning at school was useless to me, says Liu, pointing out how years of wielding shears left his right thumb permanently larger than his left.Within six years he had saved enough money to buy a taxi, becoming one of the early owner-operators in Shanghai after the state monopoly was dismantled.His big break came in the late 1980s, when Chinas state-owned companies began issuing shares that were often privately traded. Liu says he hit pay dirt in his first trade, buying about 60,000 yuan (about $15,000 at the time) of stock at 200 yuan a share in retailer Cheng Huang Miao, now listed on the Shanghai exchange as Shanghai Yuyuan Tourist Mart Co.Liu sold his holding when the price soared to 10,000 yuan. I think I have an exceptional nose for the market, he says.Following BidsAs his trading profits grew, Liu started buying art, making up for what he lacked in knowledge by watching other collectors. Whenever I saw others bidding, I just competed, and after I made the buy I would ask them, Why is this piece good?

A painting measuring 200 by 180 centimeters, completed in 1996 by Chinese artist Zeng Fanzhi, belonging to the permanent collection of the Shanghai Long Museum. Liu Yiqian, together with his wife, Wang Wei, an avid collector of revolutionary and contemporary art, would like to build something to rival the Guggenheim or the Metropolitan Museum of Art.Source: Long Museum via BloombergToday his holding company Sunline Group has a finance unit, a commercial and residential property developer and an insurance arm that has a joint venture with Paris-based AXA SA. He is also the majority shareholder in Hubei Biocause Pharmaceutical Co. He even has his own auction house, Beijing Council International Auction Co. Those assets make Liu worth at least $1.5 billion, according to theBloomberg Billionaires Index.And that doesnt include his art stash, and Liu says he has no idea how much its worth. It must be a very, very huge figure, but I dont give it much thought, because I wont be selling the collection, says Liu, who dreams of creating a Chinese equivalent of the Guggenheim or the Museum of Modern Art. I dont care about the value, nor do I care about the money I spent buying it in the first place.That makes him hard to compete with. Earlier this month, seven other bidders at Sothebys Hong Kong dropped out as Liu raised the stakes on a southern Song Dynasty vase to more than $15 million.Princely CupYet, behind the free-spending, genial image, Liu is still the savvy 16-year-old looking for a new opportunity.After the Chicken Cup controversy, he commissioned replica versions in three qualities, priced from 288 yuan ($46) to 6,900 yuan, generating 5 million yuan in sales so far. He got more publicity out of the bowl, named after the bird images glazed on the outside, by presenting one of the replicas to Britains Prince William during a royal visit to the museum on March 3.He also saves millions of dollars in import tariffs by keeping someof his imported artworks in duty-free zones set up by the government. He gets a temporary import license when he wants to exhibit one of them.Liu remains unruffled as week by week, more cases of fraud, corruption and tax evasion are announced by the state. Some targets are officials who flouted expensive lifestyles, with Rolex watches, lavish dinners and even Ferraris acquisitions beyond their official salaries.Private business owners, who invariably have to deal with state companies and officials, have also mostly scaled back on public displays of wealth, even when, as in Lius case, there havent been any allegations that it was misgotten. In 2012, Liu was investigated as part of a nationwide probe into tax evasion connected with art imports, but wasnt charged or fined, according to Zoe Zhu, head of public relations at his museum.It doesnt hurt that he enjoys excellent relations with the Shanghai municipal government, which sold him subsidized land in order to build his second art repository, Long Museum West Bund, which opened last year.

It may also help that Chinese authorities and the public have tended to be supportive of collectors like Liu who spend millions onrepatriatingcultural artifacts from abroad. Thousands of sculptures, Imperial ceramics and jade carvings were looted by foreign troops, or removed to Taiwan and Hong Kong by Chinese fleeing the communists during the last century.And for all the ire generated by Lius irreverence, for many, he still represents a Chinese ideal, the self-made man who hasnt forgotten his roots.I never felt that my wealth has risen to a level that makes me no longer a normal person, Liu says over a box lunch of rice, vegetables and pork cutlet at the museum. If buying a cup and drinking tea makes one nouveau riche, and opening a museum makes one a gentleman, it would be too easy to differentiate one from the other. You shouldnt care what people call you. With assistance from Emma Dong in Shanghai