Investors can learn a lot by listening to Warren Buffett. I think they can learn even more by listening closely to Charles Munger. Unless Munger has something to add, he literally says “I have nothing to add.” If he does say something, you can assume it's worthwhile.
Rule number 1 - Buffett
Rule number one is, “Don’t lose money.”
Rule number two is, “Don’t forget rule number one.”
I must admit that I have always found this rule particularly uninspiring.
Yes, I understand the concept of “margin of safety.” I also know there’s nowhere to hide. There's risk in holding cash, bonds, gold, commodities and/or stocks. For me, stocks are easier to analyze. I prefer them to the alternatives. American stocks in particular are potentially less risky. There's more publicly available information about U.S. stocks than about any other asset class on the planet.
Thanks to the SEC, we know there are profitable companies out there that have more cash in the bank (after deducting all liabilities) than the stock sells for. That's as safe as it gets.
And then a tsunami comes along, 9/11 happens, Chavez or Kirchner nationalize something and/or management, aided by well-paid accountants, lies about the true state of the company.
Such events are somewhat unknowable and wholly unpredictable. More importantly, they can cause you to lose money regardless of your margin of safety.
That is why I find rule number one so uninspiring. There are many reasons investors lose money.Some of those reasons are within their control. “Don’t lose money” applies to the outcome. At best, the thoughtful investor is able to control the process.
Rule number 0 - Munger
Mozart became the most famous composer in the world but was utterly miserable most of the time, and one of the reasons was because he always overspent his income. If Mozart can’t get by with this kind of asinine conduct, I don’t think you should try.
Since I heard that, I have been taking it very seriously. I am now not spending 25% of my after-tax income. As Munger would say, I avoid a lot of dumb stuff by sitting on my hands. My friends and family haven’t noticed any lifestyle changes. They may or may not have noticed I smoke two cigars a month instead of two a week. I use my bike more often. My wife noticed our phones now accept inbound calls while she is calling outbound (Voipbuster/SIP). It's amazing how much money you cannot spend without anyone noticing.
In any case, next time you scoff at a company with a single-digit net margin, think of your own personal “net margin.” How much cash do you have left in the bank after taking care of your expenses ?
