Legendary investor Charlie Munger reveals his golden investment rule

Legendary investor, businessman and philanthropist Charlie Munger, who worked alongside the Oracle of Omaha, Warren Buffett, built Berkshire Hathaway into a global investing powerhouse. Blunt, witty and scholarly in his assessments, Munger was also a prolific armchair philosopher. His speeches and interviews have several nuggets of crucial advice on how to invest. Here are some of the principles and lessons to learn from Charlie Munger on making investments.

Focus on a ‘wide moat’

Munger emphasized on investing in businesses with durable competitive advantages, or in the language of Berkshire, “moats." Munger famously said, “We have to have a business with some inherent characteristics that give it a durable competitive advantage.”

Munger urged investors to look at companies like castes with the strength of the company being the "moat", according to a Fourth Capital blog. In his career, Munger was able to generate consistent returns over time by investing in companies with durable moats. 

Today, investors can opt for services where analysts assign Economic Moat scores to individual companies in different sectors.

Look for Value

Munger's approach to investing hinged on the strength of the value investing philosophy. He is known to have said, "Forget what you know about buying fair businesses at wonderful prices. Instead, buy wonderful businesses at fair prices."

He shunned stocks that other investors picked up because they seemed to be a good deal.  Thus, he always focused and opted for investments in companies he evaluated to be rock solid regardless of their stock price.

For common investors, buying into good companies and then planning to hold them for a long period can help them realize the intrinsic worth of the stock over many years.

Practice Patience 

One of Munger's famous quotes is, "The big money is not in the buying and selling but in the waiting." Both Munger and Buffett shared a belief that good investment opportunities are rare and worth holding on to.

For example, Munger held onto his investment in The Coca-Cola Company, which Berkshire Hathaway acquired in 1988 and for decades. Through challenges, controversies, and market volatility,  the two investors stayed firm, allowing Coca-Cola's business to prosper over time and generate massive returns. Thus, investors today can learn from the importance of patience in achieving long-term returns in the market.

Figure Out What Not to Do

Munger followed the theory of inversion in life. In his 2007 commencement speech, Munger shared his thoughts on it.

As per Bloomberg, Munger said to apply the principle, people need to ask, “What will fail in life? What do you want to avoid?”.

Munger believed that he had made many good choices in life by simply focusing on what not to do.  The theory is reflected in Berkshire Hathaway’s approach, as the company avoided making several bad investment frenzies such as the dot-com burst.

Practice Rationality 

Munger believed that objectivity and rationality require independence of thought. He urged investors to make decisions only based on thorough analysis and reason, without letting emotions and external influences get in the way.  He believed that maintaining a clear, rational mindset was essential for long-term success in the market.

Thus, his philosophy of rational thinking encourages investors to remain objective and disciplined by focusing on facts and analysis, to avoid common pitfalls in the stock market.