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Notes on Investment Criteria

21 March 2016

Early January I read an interesting book called Charlie Munger, the complete investor by Tren Griffin. I think the book makes a lot of sense and of course the proof of the formula is in the tremendous successes experienced by Warren Buffett, Charlie Munger and all the shareholders of Berkshire Hathaway. Investment success will normally start out with a plan which you try to stick to. For this to be possible the plan needs to be rather general and simple so it can allow changes in the market place to harmonise with the long term plan. The plan should be more philosophical than sophisticated, i.e. take into account the broader parameters of investment policy. 

As it is very difficult to time highs and troughs the investment horizon needs to be sufficiently long that short term swings become unimportant. Warren Buffett and Charlie Munger have long held the view that the right investment horizon is forever. You may of course ultimately disinvest but it is important to focus on making your investment good, rather than consider when and how you can get out of it.

They are also saying that you should consider your investment as an investment in the company rather than in the shares as the financial instruments. For longer term success you need to have an understanding of the business and also have confidence that those who run the business can do so efficiently and profitably. If you revalue your investment too frequently the risk is that you consider market swings as gains or losses which they are not. A good purposeful company with competent management will do well over time and therefore you need to hang in there and not waste too much energy by daily worrying about it. 

Simplicity is a virtue in investing. If things look too complicated for you to get a clear view of what you are doing, stay back and don’t do it. Just because others seem to support a trend or an idea does not mean that you should as well. There is no replacing your own understanding of what you are doing and how value will be created. Try to avoid dealing with people you don’t know or don’t like. If we don’t like people it is often because we sense that we cannot trust them.

The investment plan needs to be preceded by a life plan which includes creating the life you wish to live with your family and friends. Looking for monetary returns only is too flat – you also need to have ideas of what makes you happy and how your investment activity contributes to a better society. As an example Charlie Munger says he and Warren spend a lot of time reading books and also allocate much time to thinking, rather than doing. A trap for many people and investors is that they are so busy and trying to do so much that they lose track of where they are going and also lose the ability to enjoy life. If you can smile and retain your composure and happiness you are also likely to become a better long term investor. A large part of anyone’s success is in the ability to interact with other people to build trust and friendship, increasing upside potential and reducing risk.

The book’s author suggests that Charlie Munger says you have to have the patience to sit and wait for the right opportunity to present itself and when it does you need to be prepared and able to act. This naturally suggests that you should be liquid and reasonably cashed up at all times. Cash is king. Cash gives you the ability to respond to unexpected opportunities. When there is a big crisis there are always great investment opportunities.

Another important aspect is to not over-leverage. It is well known that borrowings can and will support you in good times, but when times change, excessive debt can also wipe you out. Try not to be more indebted than being able to cope with your investment being a mistake such that you can survive a write off.

I much enjoyed the book and suggest it makes good reading for all trying to improve the way they approach investing.

 frank@olsson.co.nz 18, January 2016


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