Chuter Tvo: The Munger Arouch to Iife, Ieurning, und Iecision Muking 53

Munger`s Investment
Ivuuution Irocess
The number one idea is to view a stock as an ownership of the business and to judge the
staying qua|ity of the business in terms of its competitive advantage. Look for more va|ue
in terms of discounted future cash-ow than you are paying for. Move on|y when you have
an advantage. It's very basic. You have to understand the odds and have the discip|ine to
bet on|y when the odds are in your favor. We just keep our heads down and hand|e the
headwinds and tai|winds as best we can, and take the resu|t after a period of years."
As we`ve noteu, Clarlie uoesn`t make a lot of investments. His aroacl is
erlas lest simmarizeu ly Jlomas Watson Sr., tle foinuer of BM. h)M NO
GENIUS )M SMART IN SPOTS AND ) STAY AROUND THOSE SPOTSv f Clarlie knows anytling,
le knows lis sots. lis carefilly iuentifeu circles of cometence. Jo stay witlin
tlese circles, le frst alies a lasic, overall screen, uesigneu to limit lis investment
felu to only simle, inuerstanualle canuiuates. As le says, We lave
tlree laskets for investing. yes, no, anu too toigl to inuerstanu.
Jo iuentify otential yes canuiuates, Clarlie looks for an
easy to inuerstanu, uominant lisiness franclise tlat can
sistain itself anu tlrive in all market environments.
\nuerstanually, few comanies sirvive tlis frst cit.
Many investor favorites sicl as larmaceiticals anu
teclnology, for examle, go straiglt to tle too toigl
to inuerstanu lasket. Heavily romoteu ueals anu
POs earn immeuiate no`s. Jlose tlat uo sirvive
tlis frst winnowing are siljecteu to tle screens anu
flters of Clarlie`s mental mouel aroacl. Jle rocess
is intense anu Larwinian, lit also effcient. Clarlie uetests
lacer mining, tle rocess of sifting tlroigl iles of sanu
for secks of golu. nsteau, le alies lis Big ueas from tle
Big Liscilines to fnu tle large, inrecognizeu niggets of golu tlat
sometimes lie in lain siglt on tle groinu.
Jlroigloit lis exlaistive evaliation, Clarlie is no slave to a uatalase. He
takes into accoint all relevant asects, lotl internal anu external to tle comany
I'm no genius.
I'm smart in spots,
and I stay around those
spots."
-Thomas Watson Sr.
If you have competence,
you pretty much know its
boundaries a|ready. To ask
the question [of whether you
are past the boundary] is to
answer it."
-Munger
Circ|es of
Competence
If we have a strength, it is in
recognizing when we are operating
we|| within our circ|e of competence
and when we are approaching the
perimeter."
-Warren Buffett