Charlie Munger’s Secret Investing Formula

Charlie Munger's Secret Investing FormulaOne of the questions asked at the 2015 Berkshire Hathaway Annual Meeting was in regards to what the secret investing formula Warren Buffett and Charlie Munger utilized to achieve such tremendous success over their careers. If you read that giant write up on our road trip to Omaha for the annual meeting, you would know that the answer that was given by Charlie Munger was that there was no specific formula. However, I was recently perusing Poor Charlie’s Almanack and Munger actually provided a specific formula! It’s such a no brainer. I really think Charlie outdid himself with this tremendous formula. Take a look. It will change your life.


 

In Poor Charlie’s Almanack, Munger states:

All kinds of people ask me for some foolproof system for achieving financial security or saving for their retirement. I try to dodge those questions.

However, the author pushes Charlie to provide an answer and this is his response:

Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. THIS IS SUCH A NO-BRAINER.

Pretty mind-blowing stuff, eh? Wait… what? You already knew this? Oh really?

It really is so simple. I think what makes it complicated to so many is the way most people seem to view goals in their life.

People tend to start looking at the final destination of some big goal and get daunted by how to get there (accumulate a million dollars, run marathons, lose 50 pounds, insert whatever big goal in life) rather than inverting the problem, planning how to realistically achieve their big goal, and start the small steps.

It’s why a cheesy quote like this:

A journey of a bajillion miles starts with a single step

While unbelievably corny contains so much wisdom in its brevity.

Let me give you an example: I used to have $54,000 in student loan debt. When I finished college, it seemed like an insurmountable mountain to climb. If $0 of net worth was the starting line in the race of life, I was starting somewhere in a different city. If I had focused on the impossibility of a bajillion miles, it would have been too frightening to start.

Instead, the single step was to find a job. That took a long time. The next step was to start allocating half of net income towards student loan debt repayment. The subsequent steps were to rinse and repeat until I was done. That took 3 years.

The habit of putting aside half of net income has carried over into saving money. And now the equity holdings are beginning to approach the value of what my total student loan debt used to be.

Charlie Munger’s secret investing formula really does work. It’s so shocking that I will quote it one more time, in case you missed it:

Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. THIS IS SUCH A NO-BRAINER.

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  • It’s really that simple eh? Sadly too many of us are making this investing thing way too complicated.

    • Us bloggers will be out of things to write about yesterday if the details were so simple! While the macro is incredibly simple, there are many, many ways to get there.

  • It’s interesting that you have the picture of the running medallion when Munger disparaged jogging and exercise in his recent remarks!

    • Well, while I would love to partake in the dietary and exercise lifestyle of Buffett (junk food and nil), I’d rather not role the dice on whether I have the genes to be able to handle that kind of abuse to the body. A healthy lifestyle – with healthy whole foods and exercise – should statistically increase my chances of survival into old age. I feel like Buffett and Munger got extremely lucky with genes that allowed them to not follow that type of regiment. And besides, I find incredible enjoyment from exercise so I couldn’t give a damn what Munger thought, ha!

      • Yup. It’s the right reaction. I suppose I can also imagine Mohnish Pabrai, for how much he idolizes Munger, nodding and smiling when Munger rants against exercise, and go ahead and biking and exercising anyways!

  • I think sometimes we really do try to make things so complicated with money. It happens to me as well, should I do this or that and then my answer usually ends up spend less, save more, keep doing this.

    • It seems most people don’t have the patience to rinse and repeat over and over again – there is too much temptation for the immediate gratification. Compounding and immediate gratification is explicitly mutually exclusive at the beginning stages of compounding.