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Warren Buffett: What I Learned From Charlie Munger

- By Stepan Lavrouk

Warren Buffett (Trades, Portfolio) is considered to be the one of the greatest investors of all time, but at least half of that credit must also go to Charlie Munger (Trades, Portfolio), himself a legend in the value investing community. In a January 2017 interview with Charlie Rose, Buffett explained what Munger brought to the partnership and how he helped make Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) what it is today.

The interview, which also includes Bill Gates (Trades, Portfolio), is worth watching in full, as it is a great summary of Buffett's philosophy and investment style.

How Munger changed Buffett

"Charlie Munger changed my views - he refined them in a huge way, in terms of looking for the quality companies, and looking out for the ability to make an investment that will work out for five or 10 or 20 years as opposed to something where there might be one more puff left in the cigar. And that worked OK, but it was small-scale and it really doesn't build anything satisfying. So he kept forcing me in the direction of saying 'is this really a business that we want to own for forever?'"

Buffett's move away from "cigar-butt investing" has been written about extensively, but often inaccurately. A lot of commentary on the subject implies the method does not work, when, in fact, deep-value investing is a tried and tested strategy that has paid off in many different environments. The main reason why Berkshire pivoted away from this type of investing is simply that it does not scale particularly well. Without Munger's influence, it is possible that Berkshire would never have grown to the proportions it has today.

Why long-term investing is easier than short-term investing

"I've spent my entire life trying to convince people to invest in the long term. Listen, if I knew how to double my money tomorrow, I would probably invest in the short term too. It's much easier to invest for the long term because you know with a very high probability what's going to happen 10 and 20 years from now in a major way. And I don't have the faintest idea what's going to happen tomorrow or next week."

While it may seem counterintuitive to claim the far future is easier to forecast than the near future, it actually makes a lot of sense. The reason for this is that when thinking in the long term, you are not tying your prediction to a specific day and are, therefore, leaving yourself a larger margin for error than someone who gives a specific price target for the Dow Jones on May 22, 2022. It is easier to forecast generalities than specifics.

Why investing is like baseball

"I don't have the ability to predict with a high probability the success of most companies. So I'm looking for the exception. But the nice thing is, if there are thousands of companies out there, you only need to be right on a couple. It's exactly the opposite of baseball, where you have called strikes. The pitcher is trying to throw it at the worst part of the strike zone for you, and if he succeeds in getting into that corner three times and you don't swing, then you're out. In investing, there are are no called strikes. I can sit there all day and somebody can throw me one company after another and, finally, I'm gonna get one in my sweet spot."

It is one of the puzzling aspects of human nature that investors find it so hard to sit still and wait for the perfect pitch to come their way. Usually, the combination of the urge to get involved in the game and the fear of missing out proves too strong to overcome. Whether through natural talent or learned skill, Buffett is able to wait on the sidelines for the perfect moment, as he did in the run-up to the 2008 financial crash.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.