Charlie Munger is Warren Buffett’s business partner at Berkshire Hathaway. He is a successful lawyer, and investor, who was instrumental in helping Warren expand his investing horizon. Charlie is credited with encouraging Buffett to invest in high quality businesses, which compound over time. Before that, Buffett spent most his attention to statistically cheap stocks.
Charlie Munger is not studied as well as Warren Buffett, which is a shame. It’s a shame because Charlie Munger has shared a lot of insightful lessons on investing, human nature and human biases, which could help many aspiring investors.
There are two good books I have read about Charlie Munger. The first one is “Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger”, and the second is “Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition”.
There is a passage from “Damn Right”, which really resonates with me:
Charlie Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth.
Making the first million was the next big hurdle. To do that a person must consistently underspend his income
Getting wealthy, he explains, is like rolling a snowball.
It helps to start on top of a long hill—start early and try to roll that snowball for a very long time.
It helps to live a long life.
There is another quote from him from a shareholder meeting, saying that
“The first $100,000 is a bitch, but you gotta do it.
I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.
After that, you can ease off the gas a little bit.”
Just for reference, $100,000 in 1960 has the same purchasing power as $1,026,653 today. Perhaps the modern version of this story is that the first million is the hardest.
In another reference, $100,000 invested in 1960 in the S&P 500 would be worth over $40 million today. This investment would be generating over $640,000 in annual dividend income.
These are some simple, but powerful lessons in these quotes.
The first lesson is that you need to spend less than what you earn, in order to be able to find the savings to make any successful investments. It makes sense that if you live paycheck to paycheck, you will never be able to accumulate any savings to invest for your long-term future.
The second lesson is that once you have savings, you need to invest them intelligently. Once you have a process in place, you stick to it, and keep adding money to your portfolio. You start small, and the efforts from the first few years are not very visible. After saving and investing for 5 – 10 years however, the power of compounding starts showing its true force. Once you accumulate a decent sized nest egg, it will grow net worth and investment income over time, without needing any additional capital from you. At this point, investment income will likely exceed your investment contributions.
I would personally keep adding, for as long as I can, because I enjoy the process of investing for the future. But it is nice to know that once you reach a certain amount of net worth, that is invested intelligently, you know that no matter how hard you mess up in life, you have a third worker quietly working for you, compounding your capital, income and sharing the fruits of its labor with you by working 24/7.
The third lesson is about the power of compounding. It is a small trickle at the beginning. Once you invest for a while, the power of compounding becomes a wonderful force, which keeps accelerating net worth and investment income. You investment capital snowballs into enormous amounts the longer you keep it invested, and do not interrupt the compounding process.
The largest effect of compounding is observed at the end of the financial independence journey. For example, if you invest $1 at 10%/year, you will have $2 in roughly 7 years. However, if you keep that dollar invested at 10%/year for 50 years, you end up with over $117.
For example, Warren Buffett became a billionaire in 1986. He is now worth over $112 billion. More than 99% of his net worth was generated in the past 35 years, long after he turned 56. That's also despite the fact that he has donated almost half of his Berkshire Hathaway shares that he owned in 2006.
If you manage to compound money at a high rate, and do it for a long period of time, you would end up with a very high amount.
Relevant Articles:
- How Warren Buffett built his fortune
- Charles Munger: A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business
- Simple Investing Principles to Follow