Five Wealth Lessons from Charlie Munger

by Floyd Saunders, Founder at Really Simple Investing

Most investors know about the wisdom and wealth building success of

Warren Buffett.

But Buffett has a business partner who also has a lot of wisdom about building your wealth. In this post we are reviewing what Charlie Munger, the American billionaire investor, businessman, and former real estate attorney has to say about building wealth.

As Warren Buffett’s business partner and vice chairman of Berkshire Hathaway, Charlie often shares his own wisdom about investing. Munger’s insights on investing has proven to be nuggets of advice for anyone looking to build their wealth in the stock market.

Here are Five Wealth Lessons from Charlie Munger

Here are five wealth lessons from Charlie Munger that can help you get on a path that builds your wealth over time.

Lesson One: “Invest in Businesses That Idiots Can Run”

One of Charlie Munger”s famous quotes is:“Invest in a business any fool can run, because someday a fool will. If it won’t stand a little mismanagement, it’s not much of a business.”

As an investor you want to think of stocks as ownership of an actual business, rather than treating investing like buying lottery tickets that hopefully go up in value. That is not how millionaires and billionaires invest. One habit of successful investors is they save and invest their money in quality companies, often using passive index funds to own the entire market rather than a few risky stocks.

Self-made millionaires invest in index funds and dividend-paying stocks. They seek passive income from equity securities just like they do from the passive rental properties. Some of the best dividend paying stocks are those select few stocks who consistently return to investors an increasing dividend every years for 10, 25, even 50 years or more. These stocks can be found in lists of Dividend Champions, Dividend Aristocrats, and Dividend Kings.

Profitable investing isn’t about hoping your stocks go up, it’s about picking the highest-quality businesses with the highest degree of long-term success. And then holding those quality companies, while reinvesting dividends. These is how you benefit from compounding returns.

“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns,” says Munger.

Remember, in the long run, the value of a stock comes from the quality (growth and profitability) of the underlying business.

That’s why it’s essential to only invest in high-quality businesses with strong growth, high profit margins, and a simple business model. Not because a stock is trendy on the internet. Not because there’s a lot of hype around it. But simply because it’s a solid, profitable, high-quality business.

According to Vanguard, the typical millionaire has a portfolio of investments that is:

• 65% stocks

• 25% bonds

• 10% cash

As you get older, this division of investments between stocks and bonds is likely to change. If you are under 45 you could be 75% in stocks, but as past age 65 that allocation is likely to be reduced to around 60% in stocks and more in bonds.

Lesson Two: Develop Patience and Discipline

Patience and discipline are two skills you need to develop to be a successful investor. If you can consistently invest just $200 a month while earning a 10% average annual return you would have around a $1 million after around 40 years.

As Charlie Munger famously said, “The big money is not in the buying and selling… but in the waiting.”

Impatience leads to impulsive decision-making and hopping from trend to trend. This is usually the fastest path to losing your money and don’t get tempted by other people’s quick successes. As Munger said, “Someone will always be getting richer faster than you. This is not a tragedy.”

The average millionaire invests 20% of their income each year. Among non-millionaires, that figure is much less. Only 48% of Americans save less than 10% of their income each year, and investments are only part of that figure.

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You can learn more about Charlie Munger's quotes in the book, Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway's Vice Chairman on Life, Business, and the Pursuit of Wealth With Commentary by David Clark.

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The average millionaire is 57 years old. This is because it takes smart financial decisions, hard work, and wise investments to become a millionaire, most of which don’t fully pay off until around the age of 50 or 60.

• 42% of millionaires are baby boomers (between 57 and 75 years of age).

• 19% of millionaires are millennials (between 18 and 31 years of age).

• The world’s 100 richest individuals earned their first $1 million at age 37.

Self-made millionaires tend to investing in similar wealth-building strategies, like saving as much as they can and developing multiple income streams. For investing, millionaires love low-cost index funds, a strategy recommended by investing experts like Warren Buffett and John Bogle, the founder of Vanguard. They also tend to investing in real estate, often with a simple Real Estate Investment Trust.

• The overwhelming majority of millionaires own real estate,

• Over a third (35%) of millionaires invest in REITs.

Successful investing is long-term investing. It requires patience and discipline.

Rule Three: Stick to The Basics

A lot of people believe that there is some sort of secret knowledge or magic shortcuts to becoming wealthy. But building wealth is simple: stick to basic wealth principles for long enough until it pays off:

• Spend less than you earn and avoid over-consumption

• Invest a percentage (15% to 20%) of your income every month

• Invest in high-quality assets and avoid speculation

• Keep learning high-value skills so you can increase your income.

Millionaire Habits:

• 88% read every day to increase their knowledge about their job and their industry.

• 85% read a minimum of two books a month

• 63% of the wealthy listen to audio books during a commute to work exercising, or doing housework according to Tom Corley’s research.

As Munger once said, “Our ideas are so simple that people keep asking us for mysteries when all we have are the most elementary ideas.”

Building wealth isn’t rocket science. It’s about doing ordinary things right over a long enough timeframe.

Rule Four: Never Stop Learning

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines,” said Charlie Munger.

Learning doesn’t stop when you’ve finished formal education — that’s when it starts. Self-made millionaires are live-long learners.

As Munger said, “Those who keep learning, will keep rising in life.”

• Read books to gain more insights

• Follow courses to learn new skills

• Seek mentors to gain more wisdom

• Listen to podcasts to stay up-to-date on industry trends

• Practice your craft daily to reach mastery

No matter your preferred method, just keep learning.

Charlie Munger is especially fond of reading books. “In my whole life, I have known no wise people who didn’t read all the time — none, zero.” he said.

Lesson Five: Pursue A Multi-Disciplinary Approach

Munger is known for his multi-disciplinary approach to investing. He believes that developing expertise in multiple disciplines (such as psychology, economics, history, and technology), can help investors identify patterns and spot opportunities that most others would miss.

Munger once said, “If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands.”

The best investors don’t just focus on one area of expertise, but they do gain an understand the basics of various topics. This allows them to string together ideas and insights that most people would overlook.

To conclude with Munger’s words of wisdom, “Spend each day trying to be a little wiser than you were when you woke up.”

Floyd's bio:

Floyd Saunders has more than 35 years of experience in the financial services industry. Floyd’s diverse background includes experience in retail banking, investment banking, insurance, investments, annuities, financial planning, and tax preparation. He has authored the following books: Figuring Out Wall Street, Family Financial Freedom and Five Paths To Wealth.

He has been an adjunct faculty member for Baker University, St. Mary’s College, Moraga, California, and Community Colleges in California, teaching courses in personal money management, managerial finance, money and banking, and principles of banking.

He has worked for Bank of America, JP Morgan and JPMorgan Chase, TransAmerica, Wells Fargo, Citibank, WoltersKluwer/CCH, H.R. Block and as a consultant in the financial services industry. He has prior experience as a registered representative and has published several articles on personal financial planning, investing and personal money management. Learn more at floydsaunders.com.