5 of Charlie Munger's Most Important Principles for Investing (And Personal Finance)

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Money Wisdom focuses on the engine behind your investment portfolio: your income, spending, & savings habits. Money Wisdom shares top money strategies, principles, & frameworks to help you grow your investment portfolio and gain financial freedom.

Today, we're going to look at 5 of Charlie Munger's most important principles for investing and personal finance.

When a principle applies to both investing and your personal finances, you get a 2-for-1 deal:

Taking time to learn it enhances both your creator of wealth (your personal finances) and accelerator of wealth (investing portfolio).

When the principles come from Charlie Munger, well, you know you're in for a treat.

So, let's dive in.

1. Ego Is The Enemy

One of the most dangerous beliefs in investing and personal finance:

"This doesn't apply to me."

Call it ego. Overconfidence. Naivety. Whatever you want to call it, if we begin to think we aren't susceptible—this idea probably applies doubly to us.

From avoiding speculative investments to saving for retirement, there are certain irrefutable laws of finance that apply to everyone.

And ignoring these laws can be disastrous.

A good place to start?

Recognizing our limits:

And you can make this a visible part of your everyday life by creating an “Antilibrary”:

2. Complexity ≠ Valuable

A lot of people try to sell us on the idea that the more complex investment or finance strategy is more valuable.

And while complexity can offer value:

• A complex industry can be underfollowed and its accompanying stocks undervalued

• A complex annuity could precisely match your risk/reward preferences for retirement income

Oftentimes, complexity is more of an obstacle to building wealth.

From derivatives and option strategies to variable annuities and tax laws, building wealth can get complex pretty quickly.

The antidote:

Simplicity.

Or as Charlie Munger put it:

3. Caring About What Others Think Of You Is The Surest Route To Remain Poor

In our journey to build wealth, it's wise to first think about what NOT to do.

As Munger encourages: "Always invert."

One of the best places to start?

Worrying about what others think of us.

Worrying about what others think of us usually means we'll spend more money to impress them ("buy Ferraris"). Which means we'll have less to invest.

A double-negative.

How do we overcome this?

For investing, Warren Buffett recommends simply developing the ability to trust your own judgment. Giving yourself the time and space to think through ideas independently:

For the rest of your personal finances, you might consider an exercise from the ancient Roman stoic Cato. Cato used to build his ability to ignore others’ opinions by periodically and intentionally wearing out-of-fashion clothing.

By strengthening his ability to weather odd looks from passersby in trivial matters, he could do the same in more significant ones.

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4. The World Goes To The Curious

The world today is changing at an ever-accelerating pace.

The rise of artificial intelligence is producing mind-blowing developments almost hourly.

This requires committing to continuous learning:

Fortunately, you already have a trait to help you do this:

While formal education tells you what to study, always give yourself the time to follow your curiosity. It's one of your biggest assets—so, protect it.

5. Judgment Is The Ultimate Ability

Whether you're looking for where to invest or balancing saving and spending to budget for your needs today and in the future, these activities ultimately come down to one ability: judgment. Clarity of perception, analysis, and decision.

Charlie Munger touched on this:

How do you recognize good ideas? From developing good judgment.

Unfortunately, as the saying goes:

"Good judgment comes from experience, and experience comes from bad judgment."

So, how do you accelerate your judgment while minimizing the unwanted experiences that come from bad judgment?

Study where others go wrong:

Summary

Those are 5 of Charlie Munger's most important principles for investing (and personal finance).

Let’s recap:

1. Ego is the enemy (and acknowledging what you don’t know is the first step to wisdom)

2. Simplicity wins (and keeps you out of trouble)

3. Don't overvalue others' opinions (you can save & invest more)

4. Stay curious for a long, long time (get a bit wiser each day)

5. Prepare your mind to spot opportunities (judgment is the ultimate skill)

Well, that’s all for this week.

I hope you found it helpful.

See you next Saturday.

Two resources I think you might like:

1. Book Summaries: One of the most important lessons from Charlie Munger is to strive to become a little bit wiser each day. To accelerate my learning on everything from investing & decision-making to negotiating & habit-building, I use Blinkist (I don't receive any compensation from Blinkist currently). Blinkist offers easily readable book summaries to help you get the most valuable ideas from the most popular books. You can check out Blinkist here.

2. Mental Exercises: To paraphrase Morgan Housel, the common factor among elite investors is they have complete control over the space in between their ears. Financial news networks and social media can create a lot of "noise" for investors. To stay focused and calm, I like to use Headspace (I don't receive any compensation from Headspace currently). Headspace offers mindset and breathing exercises to help you keep control over the space between your ears. You can check out Headspace here.

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Disclaimers

This material is not investment advice. No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading this material can be accepted by the publisher. Additional disclaimers here.