How do ordinary people make good investments?

In the morning of November 29, 2023, Charlie Munger passed away on Tuesday (November 28) local time. He was 99 years old, just one month shy of his 100th birthday.

Munger was born in Omaha, USA on January 1, 1924, 6 years older than Buffett. Munger was originally a lawyer. In 1959, the 35-year-old Munger met the 29-year-old Buffett. Six years later, Munger quit his job as a lawyer, thus starting a legend of cooperation in the history of investment. Before his death, Munger and Buffett worked together to create an investment myth of an average annual compound return of 20.3% for 45 years.

As Munger’s lifelong friend and partner, “Stock God” Buffett said: “Without Charlie’s inspiration, wisdom and participation, Berkshire Hathaway would not have developed to its current position.”

The legendary life of a generation of investment masters has come to an end, but his life wisdom will continue to influence generations of investors.

1. Munger: The man who turned Buffett from an ape into a human
   Buffett once described the help Munger brought to him: “Charlie expanded my horizons and allowed me to evolve from ape to human at an extraordinary speed.”

Buffett was originally a loyal fan of Graham’s “picking up cigarette butts” theory. When investing, he requires “an extremely wide safety margin”, which means choosing investment products whose prices are lower than their value. The core is to emphasize that the price is cheap enough.

Munger proposed not to buy ordinary companies at cheap prices, but to shift to an investment strategy that pays more attention to quality. It is not just about looking for bargains, but a discerning eye for looking for unpopular but high-quality targets.

Munger helped Buffett enter the deep value investment theory, gradually moving him away from Graham’s investment philosophy and leaning towards Fisher’s investment philosophy.

Buffett later recalled: “Charlie’s advice to me was simple: forget your past practice of buying ordinary companies at very cheap prices, and buy very good companies at ordinary prices.”

Charlie Munger left many golden quotes in his life:

Success is to find something worth repeating in your life and repeat it! If you don’t occupy your own brain, someone else will. Don’t wrestle with a pig because you’ll get all dirty and the other person will enjoy it. You don’t have to be brilliant, just be a little bit smarter than everyone else for a long, long time. Learning to take losses requires patience, discipline, and the ability to not go crazy despite losses and adversity.

When we say that someone has common sense, we actually mean that he has common sense that ordinary people do not have. People think that it is easy to have common sense, but it is actually very difficult.

Munger has brought new vitality to the concept of value investing. It can be said that Munger is the person who changed Buffett’s investment philosophy and then changed the destiny of Berkshire Hathaway.

Munger once said: “If I can stay optimistic when I’m dying, the rest of you will definitely be able to cope.” This positive attitude towards life not only helped him succeed in the investment field, but also brought positive change to those around him. energy.

2. What are the methods of value investing?
   Buffett said: “I am 85% Graham and 15% Fisher.” These two investment masters respectively represent two completely different value investment ideas, one is Graham-style value stock investment, and the other is Fisher-style growth stock investment.

Let me talk about the core ideas of these two investment methods.

1. Graham’s margin of safety concept

Graham’s core investment philosophy can be simply summarized into two points:

(1) Pursue the margin of safety, hoping to buy something worth 1 yuan for 4 cents, so that the probability of winning will be far greater than the probability of losing; (2) Take advantage of the irrational fluctuations in the market to find places that can provide low discounts. Timing and opportunities to sell at great value.

Graham’s most important contribution is the margin of safety concept he pioneered, which is “buying something worth 1 yuan for 4 cents.” Graham-style value investing does not consider value growth, but only considers whether the current price is lower than the value. Maybe the value of this stock is relatively low, but its price is lower, so you can still buy it.

This is just like when we buy things in real life. A new refrigerator is worth 5,000 yuan, and a second-hand refrigerator that is 80% new is worth 3,000. You go to the second-hand market to find treasures. If you buy this 80%-new refrigerator for 1,800 yuan, then you The buying price is 40% lower than the real value. This is Graham’s value investment.

2. Fisher’s growth stock investment philosophy

Philip Fisher pioneered the concept and theory of “growth stocks.”

Fisher’s core investment idea is to find a few high-quality stocks that are currently ignored by the market and will have substantial earnings per share growth in the next few years. Fisher placed great emphasis on company management.

In Fisher’s book “How to Choose Growth Stocks”, he gave a comprehensive and detailed explanation of a series of important issues such as the criteria for growth stocks, how to find growth stocks, and how to seize the opportunity to make profits. He also provided a comprehensive and detailed explanation of buying and selling. The most direct “gold standard” is given.

In terms of buying criteria, Fisher believes that the best buying point should be when “earnings are about to improve significantly, but the outlook for increased earnings has not yet pushed up the company’s stock price.” The basis for seizing the best buying point is to be able to correctly judge how the target company will perform relative to the overall economy. In addition, a sharp drop in stock prices due to market conditions is also a good time to buy high-quality stocks.

In contrast, Graham chose stocks with a high margin of safety, while Fisher chose stocks with room for growth. In the process of investment, the grasp of enterprise value and price is also different.

Why does Buffett want to absorb Fisher’s investment essence for his own use? Because the increase in the amount of money Buffett can invest determines that his investment method must be improved to the Fisher model.

At the beginning of 1964, Buffett already had $1.8 million, and the company’s capital was close to $17.5 million. As the market and Buffett’s investment funds continue to grow, Graham’s “cigarette butt investment method” becomes increasingly unsuitable for Buffett.

On the one hand, cheap cigarette butt stocks are becoming increasingly difficult to find in the market. On the other hand, those “cigarette butt stocks” are generally small companies, and if you invest a large amount of money, this method will not work. Buffett’s amount of funds at that time could already influence and control small and medium-sized enterprises at will, so the small pond of Graham’s investment method could no longer support the big fish Buffett.

3. How do ordinary people make good investments?
   As a preacher of value investing, the book “Poor Charlie’s Almanac” contains the content of Munger’s public speeches over the years and is regarded as the investment bible by countless investors. Many people have read many books by investment masters, but still cannot make investments well. Why is this?

In fact, many of the successful investors we see in the world are not from ordinary people. They are either born into aristocratic families with rich wealth, or they are surrounded by people with extraordinary knowledge. These people are born to be generals. For most people, they are just ordinary civilians who lack corresponding life experience and background. Most people cannot understand the essence of the book at all. Books written by investment masters like Buffett and Munger are no longer strictly investment books, but more like sociology or values books. Just like you are familiar with “Sun Tzu’s Art of War”, but you may not be able to lead troops to fight.

In the investment market, 90% of ordinary investors have been struggling for many years and have never made any money. How should we understand investment and make good investments?

There are actually several reasons why investors cannot make money in the market:

First, most investors have no concept of the market at all and do not understand how the market operates. Naturally, there is no reasonable method of operation.

We need to be able to judge the value of enterprises. Stocks have actual value. Often many people do not know how to judge value and still buy when the price is very high. Therefore, when the price drops, it can easily reach 30-50%, and it can easily last for a long time. 3. 5 years.

Suppose the true value of a stock is 10 billion, and now the market has reached 30 billion. Once you are trapped, how long will you want to hold it?

Secondly, many people cannot solve the problems of greed and fear at the bottom of human nature. Many people are eager to take action because they are afraid of missing the opportunity, but before taking action, they fail to understand the risks that may arise from this action, let alone plan the corresponding measures when the risk arrives. Therefore, when a risk arises, it cannot be solved. It will last for a while at first, but then it will break down.

The first point of the two points I just mentioned is at the level of laws, that is, the laws of the market. The second point is on the human level, that is, as traders ourselves, we face human psychological problems.

When we think about it, the market is actually nothing more than two sides. One is the trader himself who chooses the timing of the transaction, and the other is the market on the other side of the transaction. Whether the investment is done well or not depends solely on whether the relationship between the two is clear or not.

The relationship between the two is different from the relationship between us in daily life, because we are human beings and we have emotions. But the other party is not a person, it is the market, just like the natural world and our commercial society, it has its own rules of operation. It’s not like when we get along with each other, I’m nice to you, you’re nice to me, you treat me to dinner, I treat you to dinner. In this market, if you treat him well, he may still punish you; if you treat him badly, you may also get rewards.

Therefore, in this market, it is completely wrong to bring your emotions into it. What you have to do is to find its laws and use its laws to make profits.