3 Ways Charlie Munger Got Rich Investing Tiny Amounts of Money
Written by
David Nadelle
Edited by
Nicholas Morine
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A video posted this week on the Investor Center YouTube channel shows Charlie Munger extolling the virtues of generating high returns on small sum investing as only he can. It’s a common misconception that a large wad of savings is needed to begin investing, but building a solid portfolio is possible with less.
Munger, vice chairman of holding company Berkshire Hathaway and Warren Buffett’s trusted right-hand man, has built his own fortune pragmatically — largely by recognizing life’s limited opportunities and seizing them at the perfect time. Like his more famous boss, his insights are unique and he is a model of consistency and success, using a buy-and-hold investment strategy and trusting the power of compounding interest.
Optimistically, “a few is all you need,” according to Munger. By focusing your investing on a few good assets — and providing you follow Munger’s three principles to small investment success, as outlined by Investor Center — you can see significant growth.
1. “Look in the inefficient markets.”
Munger has repeatedly said that Berkshire’s size is a hindrance to generating high investment returns because the company can only focus on large-scale investment prospects, which are less likely to run ineffectively or misprice their value. By looking at inefficient and cheap, but potentially great, investment opportunities that no one is paying attention to, you’re more likely to uncover stock that is trading below its inherent value.
2. “Take big swings when a good opportunity comes along.”
For Munger, genuine opportunities come along infrequently, and you can either thrive or struggle depending upon your response to them. Investing successfully takes patience, the ability to recognize the perfect investment opportunity when it presents itself… and making the most of it when it does. Recognizing good opportunities and discarding bad ones is essential to building wealth for the long haul.
3. “Don’t be afraid of a concentrated portfolio.”
It’s a common belief that a portfolio should be diversified with stocks, bonds, cash or other securities that historically haven’t trended in the same direction and to the same measure. However, Munger has long preached that a concentrated portfolio can be the way ahead if your goal is to generate high returns. His $2.5 billion net worth is highly concentrated in three stock options: Berkshire Hathaway ($745 billion market cap), Costco ($232 billion) and Daily Journal Corporation ($0.4 billion), per The Motley Fool.
“The idea that very smart people with investment skills should have hugely diversified portfolios is madness,” Munger said. “It’s a very conventional madness, and it’s taught in all the business schools. But they’re wrong.”
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