Charlie Munger, the right-hand man and investment partner of Warren Buffett at Berkshire Hathaway, gave an interview in January about the importance of Worldly Wisdom and Consistently Not Being Stupid. What a great way to look at investing.
Wisdom is gained over the years. It is not knowing a series of facts: it is knowing how to put together the facts from both living it and observation. Wise people don’t simply regurgitate facts, they know how to make things work. You have to put the facts in a usable form.
Too much has been put on the shoulders of computer programs and algorithms to point the way. What a shame. We have seen time and time again a “new system” or hear that “it’s different this time” only to see these systems fall apart and find that it is not different this time.
Many of the problems we have had in the markets over time is from people stupidly putting all their eggs in a basket that they believe is proven by statistics and algorithms only to result in tears. We can all think of destructive trends and companies that blew up from this thought pattern.
The loss of Worldly Wisdom
Today many investors are going to an institution and filling out a questionnaire, which is promptly scored by a computer. They then receive a computer driven financial plan.
The computer also spits out a portfolio for you to invest in. The investment advisor in this case has been devalued down to being a clerk and keypunch employee. Worst of all is that this is how you are treated. No one gets to know you outside of filling out the forms. I can tell you that the institution has protected itself with all these programs. What have they done for you?
Weathered wisdom is required to craft what you need.
Consistently Not Being Stupid
The second point Mr. Munger makes in his statement is don’t make ongoing stupid decisions. I wish this was my quote as I have long worked with this reasoning. This is an incredibly important statement. He is quoted as saying” I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick. It’s not brilliance. It’s avoiding stupidity”
This is achieved by taking emotions out of the decision making process. More money has been lost chasing emotional decisions. Working with proper models, common sense and Worldly Wisdom will help avoid the pitfalls so many fall in to.
We have long known that many of the great portfolio managers in the investment world have an investment advisor to keep them on track with their own portfolio. They can handle billions of dollars for their clients in proper fashion, but have to have someone oversee their own investing. If it’s good enough for them, why are so many happy to let a computer be their advisor. What often happens when a computer is making your investment decision is that after years of underperformance, many will then make emotional decisions on their own and pay dearly.
You must have a well-defined process. A process that allows you to have the information you need to make well informed, non-emotional decisions. The ability to use the facts wisely.
I’ll never forget during the tech run in the late 90’s, there was article after article stating that Berkshire Hathaway was a dinosaur by not chasing the tech stocks and recognizing the new dynamics of the market. As always when emotions take over, common sense goes out the window and it ends in tears. By consistently not being stupid Berkshire Hathaway did not follow an ill-advised trend, stuck to their collective wisdom and won.
A lesson to be learned.