Charlie Munger Explains How Warren Buffett Outperforms the Market

Charlie Munger Explains How Warren Buffett Outperforms the Market

Investing can seem like an intricate puzzle, a game where the brightest minds compete, each leveraging their unique strategies and insights. So, when it comes to consistently outperforming the market, few people could offer more valuable insights than Charlie Munger, the long-term business partner of Warren Buffett at Berkshire Hathaway. In an insightful question-and-answer interview, Munger dispels some common myths surrounding successful investing and explains how Buffett’s approach differs from the mainstream. He emphasizes the power of simplicity, the danger of the illusion of knowledge, and the importance of focused ambition. This article will dive into Munger’s thoughts on investment, revealing the key takeaways from Buffett’s extraordinary success.

“In the investment world, people felt an enormous amount of high IQ people trying to be more skillful than normal. One can hardly imagine another activity that gets so much attention and weird things have happened. Years ago, one of our local investment counseling shops, a very big one, yes, they were looking for a way to get an advantage over other investment counseling shops.” 

Warren Buffett’s Focus on His Circle of Competence

“They reasoned as follows: We’ve got all these brilliant young people from Wharton, from Harvard, and so forth, and they work so hard trying to understand business and market trends and everything else. And if we just ask each one of our most brilliant men for their single best idea, then create a formula with this collection of best ideas, we would outperform averages by a big amount. That seemed plausible to them because they were educated. That’s what happens when you go to Harvard and Wharton.” – Chalie Munger

“So, they tried it out, and of course, it failed utterly. They tried it again, and it failed utterly. They tried a third time; it also failed. What they were looking for is the equivalent of the alchemists of centuries ago who wanted to turn lead into gold. They thought if you could just wave a little magic wand to turn things into gold, that would be another way to make money. This counseling shop was looking for the equivalent of turning lead into gold. And, of course, it didn’t work. I could have told them, but they didn’t ask me.” – Chalie Munger

“The interesting thing about this situation is that this is a very intelligent group of people who come from all over the world. You’ve got a lot of great people from China where people tend to average out a little smarter. And the issue is very simple. There’s the question: why did that plausible idea fail?” – Chalie Munger

“Just think about it for a moment. You’ve all been to fantastic educational institutions. I bet there’s hardly one in the audience who knows why that thing failed. That’s a pretty ridiculous demonstration. You might wonder, ‘How could you not know that?’ But it shows how hard it is to be rational on something very simple, how hard it is how many kind of crazy ideas people have, and they don’t work. You don’t even know why they don’t work, even though it’s perfectly obvious if you’ve been properly educated.” – Chalie Munger

“Now, at a place like Berkshire Hathaway or even the Daily Journal, we’ve done better than average. Now there’s a question: why has that happened? Why has that happened? The answer is pretty simple. We tried to do less. We never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about canned soup, aerospace, utilities, and so on and so on. We never had that dream.” – Chalie Munger

“We never thought we could get really useful information on all subjects like Jim Cramer pretends to have. We always realized if we worked very hard, we can find a few things where we were right. And the few things were enough. That was a reasonable expectation. That is a very different way to approach the process.” – Chalie Munger

“If you had asked Warren Buffett the same thing that this investment counseling did, ‘Give me your best idea this year,’ and you just followed Warren’s best idea, you would find it worked beautifully. But he was not trying to know everything. He would give you one or two stocks. He had more limited ambitions.” – Chalie Munger

Seize Rare Opportunities

“I had a grandfather who was very useful to me, my mother’s grandfather. He was a pioneer. He came out to Iowa with no money but youth and health and took it away from the Indians. He fought in the Black Hawk Wars. He stayed there and bought cheap land. He was aggressive, intelligent, and so forth and eventually, he was the richest man in the town and on the bank.” – Chalie Munger

“He was highly regarded, had a huge family, and led a very happy life. He had the attitude that, having come out to Iowa when the land was not much more than a dollar an acre, and having stayed there until that black topsoil created a modern, rich civilization and some of the best land in the world. Yes, the attitude was to favored life like his. When you were located in the right place, you just got a few opportunities if you lived to be about 90. The trick in coming out well was seizing the few opportunities that were your fair share when they came along. He told that story over and over again to the grandchildren around him all summer. – Chalie Munger

“My mother, who had no interest in money, remembered the story and told it to me. But I’m not my mother’s natural imitator, and I knew grandpa was right. So, I always knew from the very first as a little boy that the opportunities that were important were going to come to me, were few, and that the trick was to prepare myself for seizing the few that came.” – Chalie Munger

The Power of Holding the Right Investments and Index Investing

“This is not the attitude they have at a big investment counseling firm. They think if they study a million things, they can know a million things. And that, of course, the result is almost nobody can outperform an index.” – Chalie Munger

“I sit here with my Daily Journal stock, my Berkshire Hathaway stock, my holdings of Lee Lewis Asian fund, my Costco stock, and of course, I’m outperforming everybody. At 95 years old, I presently never have a transaction. The answer is I’m right, and they’re wrong, and that’s why it’s worked for me and not for them.” – Chalie Munger

“Another issue, of course, that’s happened in the world of stock picking, where all this money and effort goes into trying to be right, trying to be rational, is that we’ve had a really horrible thing happen to the investment counseling class. The index funds have come along, and they basically beat everybody. Not only that, the amount by which they beat everybody is roughly the amount it costs to run the operation.” – Chalie Munger

“So, the whole profession is basically being paid for accomplishing practically nothing. This is very peculiar. This is not the case with bowel surgery or even the criminal defense bar of the law, or something. The whole profession, where the chosen activity they’ve selected, they can’t do anything.” – Chalie Munger

“Now, in the old days, the people in the profession always had some of this problem, and they rationalized as follows: ‘We are saving our clients from the insurance salesman and the stockbroker, the standard stockbroker that serves the active trader.’ They were saving people from the life insurance salesman and the hustling stockbroker who liked active trading.” – Chalie Munger

“I suppose, in the sense that the investing class is still saving those people from an even worse fate, but it’s a very peculiar profession that works so hard, is so admirable, and its members are delighted to let marry into our families, and they just can’t do what the profession is really trying to do, which is get above average results.” – Chalie Munger

“So, how is that profession handling this terrible situation as index investing gets more and more popular and, including at a lot of fancy places, it’s a very simple answer. They’re handling it with denial. They have a horrible problem they can’t fix, so they just deny its existence. This is a very stupid way to handle a problem.” – Chalie Munger

“Now, it may be good when thinking about your own death, what you can’t fix, just denial all the way to the end. But in all the practical fields of life, a problem thoroughly understood is half solved, or it’s better coped with. So, it’s wrong to have all these people in just a state of denial, doing what they’ve always did year after year and hoping the world will keep paying them for it, even though an unmanned index is virtually certain to do better.” – Chalie Munger

“I don’t have any solution for this problem. I do think that index investing if everybody did it, wouldn’t work. But for another considerable period, index investing is going to work better than active stock picking where you’re trying to know a lot.” – Chalie Munger [1]

Key Takeaways

  • Embrace the power of simplicity: Intelligent investing doesn’t necessarily involve complex strategies or possessing knowledge on an endless array of subjects. Instead, it often comes down to focusing on a few areas where one can develop deep expertise.
  • Avoid the “illusion of knowledge”: Often, investment firms believe they can hire a multitude of brilliant minds that will collectively know more than anyone about everything. This, however, can lead to an overload of information and an inability to discern what’s truly valuable.
  • Acknowledge the power of selectivity: Rather than trying to seize every opportunity or idea, success in investing often involves patiently waiting for the right opportunities and making the most of them when they arise.
  • Question the plausible ideas: Even the most intelligent and educated individuals may fail because they don’t question plausible theories. Understanding why something might not work is crucial, even if it’s a popular or commonly accepted idea in the industry.
  • Recognize the value of limited ambition: Instead of striving to know everything or have the best idea every time, it can be more beneficial to have limited but focused ambitions, like Warren Buffett.
  • Recognize and Seize Opportunities: Success in investing involves identifying and leveraging key opportunities that fit your knowledge and capabilities as they arise in real-time. Opportunities are rare and must be taken as they arise.
  • Patience in Investments: Long-term success is often achieved by holding the right investments over time, rather than active trading when there is no edge.
  • Index Funds vs. Active Management: Index investing can often outperform active investment management by professionals due to lower operational costs and the difficulty for managers to consistently beat market averages. This suggests index funds might be a more efficient investment strategy for most investors.


Successful investing often lies not in the complexity of our strategies but in their simplicity. Rather than amassing extensive knowledge on every conceivable topic, it is more beneficial to focus our efforts on a few selected areas and master them thoroughly. It’s crucial to resist the allure of plausible but potentially flawed ideas and instead engage in critical thinking and questioning. Like Warren Buffett, the power of selectivity and having limited, focused ambitions can yield significant rewards. Hence, it’s not about who knows the most but who exercises patience, critical thinking, and focused expertise.