Charlie Munger: How to Invest Small Amounts of Money

Summary

In a rare video clip, Charlie Munger, Berkshire Hathaway's vice chairman, shares his wisdom on achieving high returns with small investments. He emphasizes focusing on inefficient markets, taking big swings when opportunities arise, and not being afraid of a concentrated portfolio. Munger's advice challenges conventional diversification strategies, advocating for a deep understanding of a few exceptional businesses. His insights, along with examples like John Ariaga's concentrated real estate investments, encourage a patient and informed approach to investing for substantial wealth generation.

Takeaways

• 💡 Start Small: Charlie Munger suggests that you don't need a large sum of money to start generating high returns, contrary to the common belief that 'it takes money to make money'.
• 🔍 Focus on Inefficiencies: Munger advises looking for opportunities in inefficient markets where large investors are less likely to focus, leaving room for smaller investors to find mispriced assets.
• 📈 Leverage Technology: The script highlights how the internet has simplified the process of finding potential investments, making it easier to identify undervalued stocks compared to when Buffett and Munger started investing.
• 🚀 Take Big Swings: When a good opportunity arises, it's important to capitalize on it fully. Munger emphasizes the rarity of great opportunities and the need to act aggressively when they come.
• 🎯 Be Patient: Drawing an analogy from baseball, Munger suggests that investors should wait patiently for the right opportunity, much like a batter waits for the perfect pitch.
• 📚 Concentrate Your Investments: Munger argues against the conventional wisdom of diversification, advocating instead for a concentrated portfolio of a few outstanding businesses that one thoroughly understands.
• 💼 Real-Life Example: The story of John Ariaga, who became a billionaire by focusing his investments within a one-mile radius of Stanford University, illustrates the power of concentration and specialization.
• 🤔 Think Long-Term: Munger's approach suggests a long-term perspective, where investors should be prepared to wait for the right opportunities rather than chasing short-term gains.
• 🛡 Avoid Leverage: The script implies the importance of not relying heavily on debt, as demonstrated by Ariaga's strategy of buying during downturns and selling during euphoric times.
• 🌐 Global vs. Local: While diversification across different types of assets and locations is common, Munger's advice points to the potential benefits of focusing on what you know best, even within a single asset class like real estate.
• 📉 Embrace Market Downturns: The strategy of buying during panics and selling during market highs is a recurring theme, suggesting that downturns present some of the best opportunities for investors.

Q & A

What is the main theme of the video transcript featuring Charlie Munger?

The main theme of the video transcript is Charlie Munger's advice on how to generate high annual returns by investing small amounts of money, focusing on three key principles.

What does Charlie Munger suggest is the best approach to finding investment opportunities?

Charlie Munger suggests looking in inefficient markets where large investors are too busy to notice small opportunities, which can be mispriced and offer higher returns.

According to Munger, what is the impact of Berkshire Hathaway's size on its ability to generate high investment returns?

Munger and Warren Buffett have said that Berkshire Hathaway's size is an impediment to generating high investment returns because it forces them to focus only on large investment opportunities, which are less likely to be mispriced.

How did Warren Buffett and Charlie Munger find investment opportunities when they were investing small sums of money?

Warren Buffett and Charlie Munger spent thousands of hours pouring through financial reports to find potential mispriced stocks when they were investing small sums of money.

What tool can modern investors use to find potential mispriced stocks more easily than Buffett and Munger did in the past?

Modern investors can use stock screeners available on the internet to filter stocks by market cap and PE ratio, making it easier to find potential mispriced stocks.

What is the first principle Charlie Munger suggests for generating high returns on small sums of money?

The first principle is to look in inefficient markets where there is a higher probability of finding mispriced stocks that large investors overlook.

What is the second lesson that Charlie Munger emphasizes for successful investing?

The second lesson is to take big swings when a good opportunity comes along, as great opportunities are rare and should be fully capitalized on.

How does Charlie Munger view the conventional wisdom of having a highly diversified portfolio?

Munger believes that having a highly diversified portfolio is foolish if the goal is to generate high investment returns, advocating instead for a concentrated approach focusing on a few outstanding businesses that investors understand well.

What is the story of John Ariaga that Charlie Munger uses to illustrate his point about a concentrated portfolio?

John Ariaga made his fortune by being super concentrated in buying real estate located within one mile of the campus of Stanford University in California, ignoring all other investment opportunities to focus on what he knew best.

What advice does Charlie Munger give regarding the number of opportunities one should pursue in life?

Munger advises that there are just a few opportunities in life and that one should focus on those few opportunities and act aggressively when they present themselves.

What is the significance of the baseball analogy used by Charlie Munger to explain his investing philosophy?

The baseball analogy emphasizes the importance of patience and waiting for the right opportunity (or 'pitch') to invest in, similar to how a batter waits for the right pitch to hit in baseball.

Outlines

00:00

💼 Charlie Munger's Wealth Building Principles

In this paragraph, Charlie Munger, Vice Chairman of Berkshire Hathaway, discusses the concept of generating high annual returns with small amounts of capital. He emphasizes that building real wealth doesn't require a large starting sum and introduces the idea that a few well-chosen opportunities can lead to significant wealth accumulation. Munger shares a lesson from his maternal grandfather, who became the richest man in town by capitalizing on a few opportunities during economic panics. He also criticizes the modern approach of using computer algorithms to exploit market inefficiencies, likening it to leeching and suggesting that those who profit this way should be charitable with their gains. The paragraph concludes with Munger's assertion that there are three key principles to understand for generating high returns on small investments, hinting at the inefficiency of large markets and the opportunities presented by smaller ones.

05:01

🏞 Investing in Inefficient Markets and Capitalizing on Opportunities

The second paragraph delves into the first of Munger's three principles: looking for opportunities in inefficient markets. It explains that while Berkshire Hathaway's size is often seen as an advantage, Munger and Buffett view it as a hindrance to high investment returns due to the necessity of focusing on large, less mispriced opportunities. The narrator suggests that smaller investors can exploit inefficiencies that larger investors overlook. Warren Buffett's strategy of investing in undervalued companies with small capital is highlighted, illustrating how the internet has simplified the process of finding such opportunities. The paragraph advises using a stock screener to filter for small market cap and reasonable PE ratio companies, which are often under the radar of Wall Street analysts, thus increasing the likelihood of finding stocks trading below their intrinsic value.

10:02

🚀 Taking Big Swings and the Power of a Concentrated Portfolio

This paragraph presents the second and third principles from Munger's investing philosophy: taking big swings when a good opportunity arises and not being afraid of a concentrated portfolio. It uses the analogy of baseball and the strategy of the great player Ted Williams to illustrate the importance of patience and selectively investing in opportunities that are 'in the sweet spot.' Munger believes that waiting for the right opportunity and then investing aggressively can lead to high returns. The paragraph also challenges the conventional wisdom of diversification, advocating instead for a concentrated approach where investors focus on a few businesses they understand well. It tells the story of billionaire investor John Ariaga, who made his fortune by focusing exclusively on real estate near Stanford University, demonstrating the power of specialization and concentration in building wealth.

Keywords

💡Charlie Munger

Charlie Munger is the vice chairman of Berkshire Hathaway and a renowned investor known for his wisdom in generating wealth. In the video's theme, Munger's name is central as the script discusses his advice on investing small amounts of money to achieve high annual returns. The script mentions Munger's strategy of focusing on a few opportunities and acting aggressively when the right ones present themselves, which is a key part of his investment philosophy.

💡Annual Returns

Annual returns refer to the profit or loss made on an investment over one year. The video's theme revolves around generating high annual returns, specifically 50%, with small amounts of capital. Munger suggests that with the right strategy and opportunities, it's possible to achieve such high returns, contrary to the common belief that substantial capital is required for significant gains.

💡Inefficient Markets

Inefficient markets are areas where there is a lack of information or analysis, leading to potential mispricing of assets. The script highlights that Munger advises looking into such markets for opportunities because larger investors often overlook smaller, potentially mispriced investments. This concept is crucial to the video's message about finding high-return opportunities with limited capital.

💡Berkshire Hathaway

Berkshire Hathaway is a multinational conglomerate控股公司, headed by Warren Buffett and Charlie Munger, known for its size and investment prowess. The script uses Berkshire Hathaway as an example to illustrate the challenges of generating high returns due to its large size, which forces it to focus on fewer, larger investment opportunities, thus missing out on the inefficiencies available in smaller markets.

💡Market Cap

Market cap, short for market capitalization, is the total value of a company's shares of stock at their current market price. The script suggests using a stock screener to filter for companies with a market cap between 10 million to 200 million, which are often overlooked by larger investors and Wall Street analysts, increasing the chances of finding undervalued stocks.

💡PE Ratio

The PE Ratio, or price-to-earnings ratio, is a valuation ratio calculated by dividing the market value per share by the earnings per share. In the script, it's recommended to set a PE ratio range from 3 to 15 when using a stock screener, as this can help identify companies that are potentially undervalued and present good investment opportunities.

💡Concentrated Portfolio

A concentrated portfolio refers to an investment strategy where a smaller number of stocks are held, often because the investor has a high level of conviction in those particular companies. Munger advocates for this approach, as opposed to diversification, arguing that investors can achieve higher returns by focusing on a few businesses they understand well, as illustrated by his own investment in Berkshire Hathaway, Costco, and a fund managed by Lee Lou.

💡Diversification

Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, or other categories to mitigate risk. The script challenges the conventional wisdom of diversification by suggesting that concentrating investments in a few well-understood businesses can lead to higher returns, as demonstrated by Munger's own investment strategy.

💡Ted Williams

Ted Williams was one of the best baseball players of all time, known for his discipline in waiting for the right pitch to hit. The script uses Williams as an analogy to explain Munger's investment philosophy, emphasizing the importance of patience and waiting for the right opportunity before making a move, which can significantly increase the chances of success.

💡John Ariaga

John Ariaga is mentioned in the script as an example of someone who became a billionaire through a concentrated investment strategy in real estate near Stanford University. His story illustrates Munger's point about the benefits of focusing on a specific area of expertise and ignoring other opportunities to achieve exceptional results.

Highlights

Charlie Munger explains three strategies for generating high annual returns with small investments.

Munger emphasizes the importance of not needing a large capital to start generating high returns.

He suggests leaving some mystery to allow for individual discovery and learning.

Munger shares a lesson from his mother's grandfather about the rarity of significant opportunities in life.

He advises acting aggressively when few opportunities arise, as learned from his grandfather's success.

Munger criticizes computer algorithms that leech off others' trades, suggesting they lack social utility.

He recommends being charitable if one makes money through such methods.

Munger outlines three principles for generating high returns on small sums: looking in inefficient markets.

He explains Berkshire Hathaway's size as an impediment to finding mispriced investment opportunities.

Munger suggests using a stock screener to find small-cap stocks with potential inefficiencies.

He recommends setting a market cap range of 10 million to 200 million and a PE ratio of 3 to 15.

Munger's second lesson is to take big swings when a good opportunity presents itself, as they are rare.

He uses baseball analogies to illustrate the importance of patience and selective investing.

Munger's third lesson is not to fear a concentrated portfolio for higher potential returns.

He argues against conventional wisdom of diversification for the sake of generating high returns.

Munger cites his friend John Ariaga's success with a concentrated investment strategy in real estate.

Ariaga focused on real estate within one mile of Stanford University, demonstrating expertise and advantage.

Munger concludes by stating he would be much poorer if he followed conventional financial theory.

Transcripts

guess what I just came across a long

lost clip of Charlie Munger explaining

the three things he would do to generate

50 annual returns investing small

amounts of money this clip looks like it

was shot on an iPhone 4 but it is Monger

at his absolute best if you want to

build real wealth you need to see it

there's an old saying that it takes

money to make money this saying may be

true but the amount of money you need to

get started generating High returns is

not as much as many would believe

according to Munger now let's get into

the video I'm worn and you are known for

saying that if you work with a small sum

Capital namely you think being 10

million dollars Warren how we said that

you could guarantee that you compound

that a 50 a year so my question is can

you provide some examples and I would

ask kindly ask you to provide as many

examples as possible and be as specific

as possible thank you

well amen I hear somebody who really

wants to get rich

at a rapid rate in specifics

that is not what we're trying to do here

you

ought to leave some mystery so that you

can

give yourself finding your own way

you know they've got ideas but I've had

a driver quite feel

it's a lesson I can give you

is a few is all you need and don't be

disappointed and when you find the few

of course you've got to act aggressive

that's the Wonder sister

and I learned that indirectly from a man

I never met which was my mother's

maternal grandfather

he was a Pioneer and he came out to Iowa

and fought in the blackout Hawk Wars and

so on and and eventually after enormous

hardship he was the richest man in town

and he owned the bank and and so on and

he sat there in his old age one my

mother knew him because you'd go to

his Algona Iowa where he lived and had

the big house in the middle of town

iron fence capacious Lawns big Barns and

what Grandpa Ingham used to tell her is

there's just a few opportunities you get

in the whole life this guy took over

Iowa when the land was the black top

soil aisle was cheap

but he didn't get that many

opportunities it was just a few that

enabled him to become proud prosperous

he bought a few Farms every time there

was a panic you know and he released

them to Thrifty Germans he could lose

money policing a farm to a German in

Iowa and but he only did a few things

and and

I'm afraid that's the you're not going

to find a million wonderful ideas

these people the computer algorithm is

good but they have a computer that's

just in the whole world it's like Placer

mining

and and of course every end of somebody

else comes in the niche starts leeching

away

and I don't think it's that honorable

way to make a living by the way I would

rather

make my money in some other way to the

outsmarting the trading system so I have

a little computer algorithm that just

leeches or what everybody's trade I

always say that those people have all

the social utility of a bunch of rats

and a granary

create a way to make money

I would say that if you make your money

that way you should be very charitable

with it and you've done a lot to atone

for

and

so I don't think it's an ambition we

should encourage and the rest of us who

aren't just leeching a little off the

top because we're great at computer

science

and that's what this room was full of

and if you're not finding it harder now

you don't understand it

that's that's my lesson there are three

important principles you need to

understand if you want to follow

munger's advice on generating High

Returns on small sums of money the first

principle is to look in the inefficient

markets Monger is the vice chairman of

Berkshire Hathaway and as of the making

of this video Berkshire has a market cap

approaching 800 billion dollars that

makes Berkshire the ninth largest

company in the world by market cap and

the biggest non-tech US company in the

world to most people berkshire's massive

size would seem like a huge Advantage

when it comes to investing right well

actually that's not the case Charlie and

Warren have repeatedly said that

Berkshire size is an impediment to

generating High investment returns

because Berkshire has so much money

Warren and Charlie are forced to only

focus on large investment opportunities

the odds of these large investment

opportunities being mispriced or to use

an investing term inefficient or

extremely low on the other hand there is

a much higher probability of an

inefficiency occurring when the size of

the investment is much smaller large

investors like are too busy paying

attention to bigger opportunities to

even notice these small opportunities

this is where your opportunity comes in

listen to Charlie wunger's business

partner Warren Buffett explain this

concept I was working with a tiny tiny

tiny amount of money

and so I would pour through volumes of

businesses and I would find one or two

that I could put ten thousand dollars

into or fifteen thousand dollars into

that was just ridiculous they were

ridiculously cheap and obviously as the

money increased uh the the universe of

possible ideas started shrinking

dramatically when Warren and Charlie

were investing small sums of money

decades ago they had to spend thousands

of hours pouring through tens of

thousands of pages of financial reports

to find just one potential idea

thankfully for us the internet has made

sourcing potential mispriced stocks a

heck of a lot easier all you have to do

is jump to a stock screener like this

one here and you don't need anything

fancy a free screener like this will do

just fine all you need is a screen that

can filter by market cap and PE ratio

set the market cap range to 10 million

to 200 million and the p e ratio range

from 3 to 15. the companies that meet

this criteria will be small by Wall

Street standards most professional

investors have restrictions around

investing in stocks below a certain

market cap for example the fund I work

at in New York City has a rule in place

that makes it so you can invest in any

company below a 5 billion dollar market

cap this restriction means tons of

potentially great Investments slip by us

because these companies are simply too

small additionally companies of this

size likely are uncovered by Wall Street

analysts compare that to a company like

Apple Apple stock is covered by 31 Wall

Street analysts that monitor the

company's every move the fact that

virtually nobody is paying attention to

these small companies increases the

probability that you can find a stock

that is trading well below its intrinsic

value before we get to lesson number two

make sure to hit that subscribe button

because it is so important to get the

teachings from people like Charlie

Munger to as large of a group as

possible learning from monger and other

investing Legends really positively

impacted my life and I know it can do

the same for you so the next lesson for

Monger is take big swings when a good

opportunity comes along the logic being

that great opportunities are rare So

when they do come along you have to take

full advantage this point can be

demonstrated by using an analogy from

the sport baseball for my non-us viewers

baseball is a bad and ball sport played

on a field by two teams against each

other in baseball a play around 1 team

throws a small round ball at a player on

the other team who then tries to hit it

with a bat the goal of the batter is to

hit the ball in such a way that it will

allow his team to score runs AKA points

according to Munger there are some

lessons from the game of baseball that

can help you make money in the stock

market one of the best baseball players

of all time was a man named Ted Williams

Williams wrote a book called the science

of hitting it contains a compelling

illustration of him at bat with the

strike zone divided into 77 distinct

squares Williams recognized that by

waiting for a pitch in his sweet spot

significantly increased his chances of

getting a hit being patient and waiting

for the right opportunity offered a 40

hit rate impatience on the other hand

could lower his success rate to a mere

23 to 25 percent Williams understood

that average batters turned into great

ones if they waited for the right pitch

and even the best batters turned into

average ones if they swung at the wrong

pitch Monger is a big believer that this

concept also applies to investing as an

investor each day you are faced with

thousands of potential Investments think

of these as the pitches in baseball in

order to invest successfully you have to

be waiting to sit patiently with your

bat on your shoulder watching pitch by

pitch go by only when you see an

investing opportunity that is perfectly

in your sweet spot do you swing the

problem is though that these perfect

pitches aren't all that common in

investing it can be months or even years

before you finally get one that is why

when the perfect pitch does finally come

you better make the most of it and swing

for the fences this ties perfectly into

the third lesson for Monger don't be

afraid of a concentrated portfolio

conventional investing wisdom states

that investors should have highly

Diversified portfolios or put another

way people should have portfolios that

consist of dozens if not hundreds of

stocks Munger believes that's incredibly

foolish if your goal is to generate High

investment returns Munger has the vast

majority of his family's entire net

worth in just three Investments

Berkshire Hathaway stock Costco stock

and a fund managed by an investor named

Lee Lou instead of favoring

diversification Munger advocates for a

concentrated approach where investors

focus on a handful of outstanding

businesses they thoroughly understand he

believes that by closely examining and

comprehending these businesses investors

can make more informed decisions

resulting in a higher likelihood of

achieving exceptional returns Munger

uses the story of his friend John Ariaga

to demonstrate the point John Ariaga is

a billionaire investor naturally it

would be fair to assume that since

Ariaga is a billionaire his net worth

would consist of many different types of

assets maybe he has a few businesses he

owns and a countless number of stocks

while this may be a natural assumption

it couldn't be further from the truth

and you'll see why in just a second John

Ariaga made his fortune in real estate

real estate in its own right is a very

broad asset class there are many

different types apartment office

industrial single-family houses Self

Storage additionally there's a near

infinite number of locations where this

real estate can be located the United

States is just one of these countries to

pick from just within the United States

there are 387 what are referred to as

Metropolitan statistical areas think of

this as different real estate markets

and then within each of these

Metropolitan statistical areas there are

countless numbers of neighborhoods from

which to choose from the point here

being that even within real estate there

are so many ways investors can diversify

a portfolio John Ariaga decided to take

a different approach he was going to be

super concentrated in building his

fortune he was only going to buy real

estate located within one mile of the

campus of Stanford University in

California over a 40-year period

allariaga did was never put down a lot

of debt and when things went down he

bought and when everyone got euphoric he

sold that's all he did I guarantee as

ariago was building his billion dollar

Fortune he was offered investments in

things outside of just that one mile

distance from Stanford's campus for all

intents and purposes Ariaga ignored all

other investment opportunities to focus

on what he knew best Arya willingness to

stick to what he knew best and as a

result have a massive advantage over the

competition led him to being one of the

wealthiest people in the world

as Monger says I would be a heck of a

lot poorer if I followed conventional

Financial Theory when it comes to

investing so there we have it make sure

to like this video And subscribe to the

channel because it's my goal to make you

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