But what caused the financial success was not extreme ability. You know, I have a good mind, but I I'm way short of prodigy. And I've had results in life that are prodigious. And that came from tricks. I just learned a few basic tricks from people like my grandfather. What were those kind of Now everybody's leaning in wanting to know. This guy is one of my investing idols. I even have his bust on my desk. His name is Charlie Munger. Charlie passed away about a year and a half ago at age 99 with a net worth of around 2.7 billion. And while he was always known as Warren Buffett's right-hand man, he was an exceptional investor in his own right. So, in this video, we're going to look at five or six investing lessons from Charlie Mugger that still apply to this day that are going to help improve our returns and make us better investors. [Music] Hey everybody, I just want to invite you to the live in-person workshop with me this September near Atlanta. The dates are 12 to 14 September. And you are going to have the opportunity to learn from my team and me as we teach you how to guess what? Invest in wonderful companies rule one style. This link is in the description. But don't wait, spots are limited. If you're not familiar with Charlie Munger, he was Warren Buffett's right-hand man for over 50 years and one of the most influential voices in shaping Buffett's entire investing philosophy. In fact, Warren said that it was Charlie who convinced him to move away from buying fair companies at really wonderful prices and instead focused on buying wonderful companies at fair prices. But Charlie's influence didn't stop there. One of the most profound mental models Charlie gave Buffett and really the whole investing world is the idea of inversion. Instead of always asking, "How can I succeed?" Charlie would ask, "How can I fail?" and then he would work backwards to avoid that failure. That way of thinking is what led Buffett to coin one of his most famous rules. Rule number one, don't lose money. And rule number two, never forget rule number one. And to really understand where Charlie got that mindset from, let's take a listen to this story from one of his final interviews. There are all kinds of tricks that I just got into by accident in life. One I invert all the time. I was a weather forecaster when I was in the air. And so I figured out the minute I was actually making weather forecasts for real pilots, I said, "How can I kill these pilots?" Now, that's not the question that most people would ask. But I wanted to know what the easiest way to kill them would be so I could avoid it. And so I thought it through in reverse that way. And I finally figured out I said, "There only two ways I'm going to kill pilot. I'm going to get him at an icing his plane can't handle and that will kill him. Or I'm going to get him someplace where he's going to run out of gas before he can land because all the airports are sucked in. And I just was fanatic about avoiding those two hazards. That story perfectly captures how Charlie thought. So instead of asking what's the best case scenario, he'd ask how would I go about creating the very outcome I'm trying to avoid? And that principle became core to how both he and Buffett and plenty of others for that matter, including me, approached investing. Avoid the biggest mistakes by asking what the best way would be to make them. And the upside will take care of itself. And that's exactly what we do at rule number one investing. Remember Buffett's rule number one is don't lose money. So we ask, what would we do if we wanted to lose this money and then do the opposite? And this is a big part of why Birkshshire Hathaway has been so successful for so long because we obsess over how to screw up before we ever think about succeeding. We know if you do that obsessively, we will continue to grow great wealth and you can too. Now just listen to the masters. Most people would say, "How can you save India?" And of course I would approach it differently. I'd say what could I do which would most easily hurt India and approaching it in reverse that way I got better results. You look at the vulnerabilities. Yeah. Yes. And and I have a whole bag of tricks like that. So here's another one of those tricks which is arguably the most important trick of all. It's the ability to stay very very calm in the face of market turbulence, the ups and downs that are going to happen. And this is really something that separates the great winning investors from the losers. Absolutely. Because investing temperament is something that both Warren and Charlie are absolute masters of and it is a necessary skill to work on as a long-term investor. So it's a kind of zen thing I think and I think it's a little bit kind of a stoic thing too. So have a listen to this. How worried are you by the declines in the share price of Buckshire Haway? the difficulty in this is the third time that Warren and I have seen our holdings in Berkshire go down top tick to bottom tick by 50%. I think it's in the nature of long-term shareholding with the normal vicissitudes in in worldly outcomes and in markets that the long-term holder has his quoted value of his stock go down and then by say 50% Heck, you can argue that if you're not willing to react with equanmity to a market price decline of 50% two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get compared to the people who do have the temperament who can be more philosophical about these market fluctuations. That mindset right there, that calm in the face of a big drop in the portfolio is an example of what really sets rule one investors apart. Most investors get scared naturally when the market goes down hard. They're losing sleep. They're checking their brokerage accounts every day. I mean, they're trying to decide whether to get out or to ride it out. But to us, and Charlie taught us this, it is just business as usual. These kinds of ups and downs are not only expected by us, they are necessary. If you want to enjoy the rewards of rule one investing, you want the market moving around. And really, that's what makes this strategy even more remarkable. It keeps us levelheaded when everyone else on Wall Street is freaking out. That equinimity comes from our philosophy of when to act in the market. We buy when everybody's irrationally afraid, and we're ready to sell when everybody is irrationally exuberant. But I've had my Bergkshire stock declined by 50% three times. It doesn't bother me that much. I regard that as just a natural consequence of adult life properly lived. If you have my attitude, it doesn't really matter. I I always like Kipling's expression in that poem called if and he said success and failure. He says treat those two impostors just the same. He's just roll with it. Sometimes it's going for you and some against. It's all part of the same game. I really love this poem, If by Kipling. I even read it at my dad's funeral and I hope somebody read it at Charlie's. It's a philosophy for life. Very stoic, I think. Very zen. And it is our philosophy of investing. Success and failure. Treat those two impostors just the same. Now, you can try to make yourself feel that way, but unless you've learned how to invest by intentionally using these two impostors to help your investing, you're going to feel it when your future retirement gets cut in half by the inevitable big market drop. What we know at rule number one is that the direction of the market only creates opportunity for us. There are advantages for us in both directions, market up or market down. So either way it's going is good. All right. In this next clip, you're going to see Charlie talking about one of his most underrated traits, humility. Not in the modest and polite sense of humility. Charlie could be anything but polite sometimes. I had just written a New York Times best-selling book, Rule Number One, and I asked him if we could take a picture together, and he said no. And looked away. Warren once said he was walking down the street in New York and he was talking to Charlie and he looked over and Charlie wasn't there. Warren looked back and Charlie was getting in a cab and driving away. He is not the polite kind of humble. Charlie's humbleness was in the rational sense. He was humble in the sense of knowing exactly rationally where the limit of his knowledge was and refusing to cross it. So knowing our circle of competence like that is a huge part of our comfort with the ups and downs in the market. Humility means that you know the edge of your own competency. Yes. And you aren't arrogantly stepping over the boundary. I'm very good at that. Yeah. Well, I'd redefine humility as knowing what you don't know. Yes. Well, both Warren and I are very good at that. One of these guys at the Bergkshire meeting from one of the foreign publications said,"Wh do a couple of guys in a little place in Omaha do so much better than all these powerful minds and great institutions?" And I said, "Well, I think Warren and I know the edge of our competency better than other people do." Warren frequently says, "I'd rather deal with a guy with an IQ of 130 who thinks it's 125 than a guy with an IQ of 180 that thinks it's 200. That that second guy will kill you." That deep kind of Charlie humility, the awareness of where your edge is, isn't just a nice character trait. In fact, doesn't matter about the character trait at all. It's actually a huge competitive advantage as an investor because when you're honest and humble about what you don't know, you avoid the big mistakes. And that discipline, sticking to what you understand, is a key part of rule number one investing. And I'll give you an example about why we teach it. So imagine you just bought into the ABC company because you heard the stock was on a roll, but then the day after you bought it, the stock dropped 20%. And what would you do? How would you feel? The answer is you don't know. Did this great deal that I just wanted to do, did that just get better and you should buy more, load up the truck? Well, man, is there something fundamentally wrong with this business you didn't understand? Meaning, you really ought to be selling right now. Or did you just pay too much? Who knows? Certainly not you. So figuring out what your circle of competence covers and what it doesn't cover is critically important. And it's the core reason why rule one investors have outperformed so many other investors over the years. Circle of competence. When it comes to picking businesses, you just got to understand the principle. Know what you know. Stay in your circle of competence. And don't kid yourself that you know what you don't know. In fact, our ideal investments are never some complex cuttingedge company. We buy the kind of businesses that are so good and so simple even an idiot could run it at least for a while. So here's Charlie explaining that in classic munger fashion. We have a very peculiar way of looking at things. We want to buy something that's intrinsically a very good business. Meaning that an idiot could run it and it would do all right. And then we want that business which an idiot could run successfully to have a wonderful person in it running it. And if we have a wonderful business with a wonderful person running it, that really turns us on. Warren sometimes says you have to choose good person or good business. And you know what he says? This is not politically correct. He says good business. He wants something that has such tremendous strength that I had a friend when I would practice law and he said if it won't stand a little mismanagement, it's not much of a business. And we like businesses that stand a lot of mismanagement but don't get it. Okay, now that might sound just a bit harsh by a business so good that an idiot could run it. But Charlie's point here is really that a great business is resilient. They're not dependent on one genius at the top or perfect execution year after year. They have built-in strength, what we would call a big fat moat. Moes produce things like pricing power, repeatable cash flow, protection from competition. Sometimes big moes also produce idiot management. But despite that happening occasionally, the business not only survives but thrives and can do so in almost any economic condition. And yes, ideally you've got a great person at the helm. We call that the third M, your management M. You got a great person there. That's great. But if you have to choose, Warren always says, "Choose the great business." Because a great business can endure a little mismanagement. A weak one, one mistake can take it down completely. That's the kind of cleareyed thinking, you guys, that just defines how Warren and Charlie built Birkshshire Hathaway. And it's exactly the kind of thinking we teach at Rule One Investing Workshops. By the way, before I sign off, if you're someone who's looking to take that next step in investing and learn proper rule one strategy from me and my team, oh man, I would absolutely love it if you join us at our upcoming workshop. I teach for 3 days entirely online. We go through everything you need to know. Become a rule one investor like Warren and Charlie and me. We have over 25,000 graduates who are going to tell you that this is simply the best investing education in the world. Number one in the world. and we have the NPS scores to prove it. Averaging 82, far better than Harvard or Yale's MBA program, far better than almost any business in the world. So, please check out the links in the description and then the pin comment to learn more. I'd love to see you guys there. So, apart from that, thanks for watching. Now go play.