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Five Charlie Munger Quotes That Can Make You A Better Investor

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via Tim McAleenan on SeekingAlpha

Warren Buffett’s sidekick at Berkshire Hathaway (BRK.A), Charlie Munger, has been described by Microsoft (MSFT) co-founder Bill Gates as, “The broadest thinker I’ve ever encountered.” Munger’s own personal story is one of triumph over significant adversity—at the age of 31, Munger was divorced, broke, grieving the loss of his nine-year old son, living in a dingy apartment, and driving a cruddy yellow Pontiac that doubled in value if he filled it up with gas. But yet, over the next fifty years of his life, Munger was to remarry (and enjoy a 40+ year marriage), have nine children, and amass a billion dollar fortune. Munger was able to accomplish such extreme success after such profound hardship through relentless discipline, independent thinking, and a long-term mentality. While Warren Buffett, Phil Fisher, David Dodd, and Benjamin Graham are normally the go-to guys for investing wisdom, Charlie Munger offers investors quite a lot to learn from. Here’s a collection of my five favorite quotes from Charlie Munger that I believe can make you a better investor today.

1. “Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

Although Munger said this about a decade ago, this seems to be the perfect justification for Buffett’s recent investment in tech stalwart (IBM). Although IBM has traded in the $70-$120 range for much of the past decade, Buffett didn’t begin purchasing shares until the price was over $150, and most likely, he paid $160-$175 for the bulk of his IBM shares. Getting past Buffett’s previous aversion to tech, it struck many as particularly uncharacteristic of Buffett that he would buy shares of a company that was trading at an all-time high. But I think it’s good to remember that Buffett paid a steep premium when he bought out See’s Candies and GEICO Insurance because he liked the ability of the businesses to generate significant returns on capital that required little reinvestment. Buffett read IBM’s five-year plan that aims to get earnings up from $12 per share to $25 per share within five years, and believed that management has a suitable strategy in place to make that happen. Even if shares are trading at an all-time high, Buffett still believes that great growth lies ahead.

2. “All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”

Munger famously looks at a business, examines its earnings power, finds out how many shares of the company exist, and then determines how much each share should be trading for. After bringing up the price of the company, Charlie Munger then compares it to his own analysis, and if the price is noticeably lower than Munger’s calculation, he has the self-confidence to make big bets. If Munger sees that Kraft (KFT) is earning $3.2 billion per year, he will look at the quality of the earnings (What is the competitive advantage? Are these earnings sustainable? Do they require significant reinvestment?), and then determine what he would pay for the entirety of the company. After seeing how many shares outstanding there are, he comes up with his own price before even looking at what Mr. Market happens to offer.

3. “Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group then to hell with them.”

Munger has never been one afraid to go against the crowd and be the object of ridicule when his particular investing strategy is out of favor with his peers. Like Buffett, Munger loaded up on shares of Wells Fargo (WFC) in 1991-1992 for his firm, Wesco, which was widely derided by Barron’s, The Wall Street Journal, and analysts covering both companies. We see the same thing today—while the popular sentiment is against the banking sector, Buffett has been adding billions of dollars to his Wells Fargo holding this year, and he does not care whether or not you approve of it. Once you have your own rationale for doing something and believe in it, stay the course no matter what those around you have to say about it—after all, it’s your money that is on the line.

4. “Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”

Although Munger personally has over 100 holdings that vary from commercial real estate to publicly traded stocks, he has made several very large bets that have contributed to the financial success over the course of his lifetime. In addition to the stock of Berkshire Hathaway which contributed the lion’s share of Munger’s personal wealth, he has also made a small fortune in the stock of just seven companies—American Express (AXP), Johnson & Johnson (JNJ), Coca-Cola (KO), Kraft (KFT), US Bancorp (USB), Proctor & Gamble (PG), and Wells Fargo (WFC). Munger has gone as far as to say that the first thing every investor should do is buy a couple hundred shares of Coca-Cola as soon as they can to make sure that they have a little bit of insurance to get through life. By keeping a list of high-quality companies and ready cash on hand, you can pounce on significant opportunities when they arise—just two years ago, you could have bought Wells Fargo for $8 per share. If you had ample cash on hand to make an investment then and hold on for fifteen to twenty years, it’s easy to see how this could be the type of investment that makes a career.

5. “The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage.”

Munger has a fanatical focus on the competitive advantages of companies, and it’s easy to see why. Eastman Kodak (EK) was a storied century old firm that took care of shareholders for over ninety years, but the shares have fallen from $48 in 2000-2001 to penny-stock status today. Now, Eastman Kodak’s portfolio is worth little more than its lucrative patent portfolio, and even if you think it’s poised for a comeback, you have to concede that the company is a shell of what it what 15-20 years ago. Munger likes companies like Coca-Cola (KO) and Proctor&Gamble (PG) because he believes they have the strength in the brand names to be successful for decades on end. After all, it’s not likely that a start-up dish soap company will be able to produce a product cheaper than Colgate-Palmolive (CL) because of its vast economies of scale, and most likely, people are going to stick with the brand name they recognize and trust if all else is equal. While we do not know what the future holds, we can use our own common sense to recognize the likelihood for continued success for some businesses, invest heavily in them when the price is right, and diversify to the point that one wipe-out won’t significantly alter your standard of living.

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How to Choose a Career or College Major that matches your Personality and Interests

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In doing research on how to help my oldest son select a college major, I learned about Holland personality codes and their success in helping choose the right career path and college major.

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via Wikipedia:
The Holland Codes or the Holland Occupational Themes (RIASEC) represents a set of personality types described in a theory of careers and vocational choice formulated by the late psychologist John L. Holland beginning in the 1950s. Each letter or code stands for a particular “type”: Realistic (Doers), Investigative (Thinkers), Artistic (Creators), Social (Helpers), Enterprising (Persuaders), and Conventional (Organizers).”
The US Department of Labor/Employment and Training Administration (USDOL/ETA) has been using the RIASEC model in the “Interests” section of its free online database, The Occupational Information Network (O*NET) since its inception during the late 1990s.
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Choosing a major certainly is one of the most important decisions we will make in our lives.I recommend that you,

Take a scientifically valid interest inventory or career test, that measures your Holland personality types. [I am liking the testing services offered at www.careerkey.org]
Use a valid list of majors organized by Holland personality types, to identify those most likely to fit your personality;
these are widely available, for example from the www.careerkey.org, or for free from the O*NET online service.

and then:

3. Research Colleges and Universities in your state that have successful programs within your area(s) of interest.

Given that where you finish matters more than where you start, you can then consider starting at a community college which transfers credits to the 4-year College or University of your choice.
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via Rogue Community College:
The Holland Codes is a system to classify your work personality.

The work personalities are:

Realistic people are usually assertive and competitive, and are interested in activities requiring motor coordination, skill and strength.  People with a realistic orientation usually prefer to work a problem through by doing something, rather than talking about it, or sitting and thinking about it.  They like concrete approaches to problem solving, rather than abstract theory.  They tend to be interested in scientific or mechanical rather than cultural and aesthetic areas.  They like to work with THINGS.
Investigative people like to think and observe rather than act, to organize and understand information rather than to persuade.  They tend to prefer individual rather than people oriented activities.  They like to work with DATA.
Artistic people are usually creative, open, inventive, original, perceptive, sensitive, independent and emotional. .  They do not like structure and rules, like tasks involving people or physical skills, and are more likely to express their emotions than others.  They like to think, organize and understand artistic and cultural areas.  They like to work with IDEAS and THINGS.
Social people seem to satisfy their needs in teaching or helping situations.  They are different than R and I Types because they are drawn more to seek close relationships with other people and are less apt to want to be really intellectual or physical.  They like to work with PEOPLE.
Enterprising people are good talkers, and use this skill to lead or persuade others.  They also value reputation, power, money and status, and will usually go after it.  They like to work with PEOPLE and DATA
Conventional people like rules and regulations and emphasize self-control.  They like structure and order, and dislike unstructured or unclear work and interpersonal situations.  They place value on  reputation, power, or status.  They like to work with DATA.
Reference: John Holland (1985) Making Vocational Choices

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Below is via www.CareerKey.org
By choosing a college major that matches your personality you are more likely to,

Earn higher grades,

Stick with your choice of major through to graduation,
Graduate on time, and
Be more satisfied and successful in your career.
That’s what major research studies show. It’s common sense really. You do best when doing — what interests you, and working with professors and students who share your interests, values, and abilities.

It’s based on the respected Holland theory of career choice.

According to the studies, the closer students choose a major or career that matches their Holland personality type, the more likely they are to succeed. The farther apart they are, the more likely students will do poorly.

For example, most students with a dominant Investigative personality type will do best in an Investigative major like Engineering or Microbiology, and not do well in an Enterprising major like Accounting.

And, second, choosing a college major is one of the most important decisions you will ever make.

A recent government study found that only 36 percent of 4-year college students graduated in four years, 57 percent in six — about 40 percent dropout.

The cost of dropping out, changing majors, or not graduating on time is high. For example, a recent study showed that students who are working toward a bachelor’s degree lose in earnings, on average, $46,000 (in 2008 dollars) for each additional year it takes to finish their degree. And, this does not include other possible costs like, additional loans to pay off, or the psychological costs.

Research also shows that after graduation, the major you choose affects your future job satisfaction, career opportunities and rewards.

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The Perfect Grilled Salmon

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I’ll be grilling a lot more fresh salmon now that I found out how to grill it with the skin on.

Summary: On a very hot grill, grill skin side UP for 2 minutes; then grill skin side DOWN for 5 more minutes.

I adjust these times +/- a minute depending on thickness of filet. After cooking, the skin is removed easily with a spatula.

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When the Trend is at the End: Quick Profits on BGZ using Demark Sequential

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I recently made a quick and easy 15% profit using the Demark Sequential indicator.  Below I’ll graphically show how the trade happened.

With the Demark trading system, it’s important to look at multiple timeframes to be sure you know the direction of the primary trend.

On a monthly timeframe, BGZ (Direxion Russell 1000 Bearish 3X ETF) completed the 9-count Setup phase in May 2011, confirming a bearish trend (cell O36)

BGZ, demark Setup

Moving to a weekly timeframe, BGZ completed a Sequential indicator the week of October 31st (cell AE160).

bgz, demark sequential

Now for the daily timeframe, BGZ completed a Sequential indication on November 16, 2011 (cell AE760).

BGZ, demark sequential

To summarize, BGZ completed a monthly Buy Setup in May 2011, then completed a weekly Buy ‘Aggressive Sequential’ week of Oct. 31st, and then completed a Daily Buy ‘Aggressive Sequential’ on Nov. 16th. Thus, all 3 timeframes were in agreement. It was the end of the downtrend for BGZ.
The monthly in May completed at $34.56
The Weekly completed at $31.71
The Daily completed at $32.45

Any of those dates may have been a good entry price but I felt more confident seeing that all timeframes had exhausted their downtrend. In anticipation of the daily signal, I bought BGZ on the 12th day of Sequential – November 15th – at $31.25

Setting the Stop-Loss: To set the stop-loss on Sequential, we find the lowest low of the Sequential phase and subtract the true range of that bar from the low of the bar.  The lowest low (daily timeframe) occurred on October 27th, and gave me a Stop-loss price of $25.18

The Stop-loss was never in danger because BGZ catapulted higher immediately on completion of the daily Sequential indicator.  Because BGZ is such a highly volatile fund – capable of large price swings on any day – I was looking for any of a number of short-term oversold indicators to tell me when to sell out of the trade.  One of my favorites – Demark Camouflage – triggered on November 25th.  I sold on the open of Monday the 28th at $35.95 for a very nice 15% gain in less than 2 weeks.

Below is a graphic illustrating the trade:

BGZ, Demark Sequential

If you’d like to monitor your own stocks, ETF’s and mutual funds using trend exhaustion indicators try my Excel ‘Trend Exhaustion’ spreadsheet available on the Research Offers page.

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Doug Casey suggests a modern Depression is upon us, and gives us the Hard Answers to our very Hard Times..

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“It’s going to be much worse than what happened in the 1930’s….
The dollar is going to be destroyed in the next decade.. and all these people [the middle class] are going to be destroyed with it. …So these radical measures that I’m advocating that sound outrageous to most people, are necessary and are the best thing that can be done.. because the depression is happening… it’s going to happen.  The best thing that you can do is to as quickly as possible – is to abolish the source of the Depression – which is Government intervention in the economy.”  If we did what I’m advocating [the depression] would be sharp, but it would be short.  And we’d set the basis for a new and sound boom.  But as it stands with the government doing not just the wrong thing but the complete opposite of the right thing, it’s going to drag on for many many years.”  …  Doug Casey

And some investing advice..

“One of the best one-way speculations right now –  you can make a fortune being short bonds at this point.”

Full must-watch interview, said to be Mr. Casey’s best interview in decades:

Doug Casey is an American-born free market economist, financial author, founder of Casey Research, a provider of subscription financial analysis about specific markets that he has focused his investing career around, including natural resources/metals/mining, energy, commodities, and technology.

Put me in a Dylan mood…

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PtheGreat Advice

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Below are notes from a successful trader on the Worden forums:

May 13, 2010:

Hi Kubiaks,

Yes I do have pretty good results.
I only take the trade on the long side if the TD-setup triggers within 15% of TDST-support.
and on the short side, if the TD-setup triggers within 15% of TDST-resistance.\
I prefer trading of the hourly chart, and take either naked calls or puts.
I do want to see a reasonable distance between TDST-support and resistance lines.
this tends to scan out stocks that are channeling.
I run my scans against a watchlist of about 200 stocks that have options with penny spreads.I excluded the ones with 5cent and higher spreads. this gives me a quick move on the options, and in most cases I’m out of the trades in a matter of a days. most have returned close to 100% return.  my exits are either when it hits the opposite TDST line, or on a TD-seq buy setup, in case of a short, or seq-setup in case of a long.

oh forgot, I have daily and 5min charts, also with TDST lines, and TD-seq setup indicator. I like to fine tune my entries using the 5min chart. and use a TDseq on daily chart as confirmation.
so when I get a trigger on the hourly, I look at the daily chart, to see (in case of a long entry) if price is closer to support then resistance, and if I see a TDseq buy setup completed, then even better. vice versa for shorts.

July 26, 2010:
although humbled by your remarks, I don’t feel that I’m much in any league. I’ve been trading now for a year or two, and about 3/4 on the way to use it as a full-time income replacement. I think there are many traders here on this forum that are anywhere between the first step and the highest step on the ladder. I just like to post, share, and read about ideas, strategies, etc..

due to problems with the latest SF5 upgrade I haven’t been able to do much today. Yes I do have a “green candle low” scan. hopefully tomorrow will be a better day.
As far as a “trend change” indicator, candle formations can be good. SF has quite a few already built in. one of my methods is to scan on TD0-sequential buy or sell setups, and then wait for confirmation from the other indicators on my chart. TD-sequential, a “DeMark” indicator anticipates trend-changes. many times the signals ar a bit pre-mature, therefore I like the combination with the bollinger band beakout, DPO, and Tema indicator.  The spread between CCI50, CCI20, and CCI5, as well as divergences between price highs and lows and CCI levels, gives some interesting clues.

***
The CCI indicator was developed by Donald Lambert who traded commodities.(so the name stuck)
Its not required that you use it to trade only commodities.
You can use it on anything.

TEMA stands for triple exponential moving average.
Its a more complex type of moving average.

DPO stands for Detrended Price Oscillator.
Its calculated by subtracting a past moving average value from today’s close.

If you Google these you can probably find much more info.

***

June 10, 2011

I used to have a huge watchlist of about 2000 optionable stocks, and run my scans on them continuously.
Recently I have reduced my watchlist to about 20 stocks that are all highly liquid and trade weekly options. My profit average has gone up, my indicators act better on these stocks, and it’s easier to manage. I prefer the intraday trades on the weekly options. Makes me sleep better at night, and I usually don’t make more then 2 or 3 trades a day.

[I only trade] long call and long put plays on the weeklies.

June 28, 2011

something that makes a stock move on a short period. then hop on the calls or puts,  Iprefer the ones that are over $80.00 , the higher the stock price, the larger the moves on the options.
Keep your money management strict, and you’ll make tons…

June 29, 2011
QUOTE (Jpetesmith)

I Could you give me an idea on your statement of, “Keep your money management strict.”

As you probably know, you need at least $25k in order to daytrade. Or if below 25k a maximum of 3 daytrades in any period of 5 days.

my rules : use 10 to 15% of capital per trade. don’t hold more then 2 trades at any time. 40% stop loss on the option, or if the pattern of the trade is broken (for example a stop loss below a support line on the stock), whichever comes first.
profits add up quick, but so do losses as well. so you have to be very disciplined.  Whatever plan you have, you have to stick to it. with weekly options there is no time for “it will bounce back” thinking.

I don’t usually go lower then 5min charts.

August 2, 2011:

I usually only trade options on stocks/etf’s that trade higher then $80.  more bang 4 ur buck.
I always look at daily first, then hourly, then 15min or 5min.

November 14, 2011:

Trading the weeklys is Technical Analysis on steroids. I’m very happy to have discovered them some time ago. It goes very well with my personality; not much patience, and want to see results as quickly as possible, good or bad. For trading just long calls and long puts, Thursday and Fridays before the OEX are the best, although I do trade em starting Mondays, but just a little smaller positions. If you like to trade option strategies, straddles, calendars, and what have you.. you might be doing better starting at the beginning of the week. I said “might”, cause I dont do those trades, for me its pure long calls and puts. Try your favorite indicator on hourly/15min and 5min charts, on both the stock as well as the option data.

I don’t know what your level of expertise is, but trading weeklys can lead to massive gains (or losses, if you’re not disciplined with a well thought out money management plan) in short period of time. You can apply the same TA as you use on your weekly and daily stock charts as you can on 5min charts.So why wait around so long? we, as opposed to fund managers, can get in/out positions in a second.
papertrade them for a while, and you’ll see you’ll like em. 
have a good one.