Charlie Munger lived to 99, and he never got rich by chasing whatever was hot. He spent decades as Warren Buffett’s partner at Berkshire Hathaway, and his advice on money remained almost boringly simple throughout.
He wanted to own things that grew more valuable every year. Sometimes that meant shares of a great business, and sometimes it meant knowledge he could put to use for the rest of his life.
Pull together what he said at shareholder meetings and in his speeches, and a short shopping list appears. Here are five things people can buy to be wealthier, according to Charlie Munger.
1. High-Quality Books Across Many Disciplines
Munger read constantly. Psychology, history, economics, biology, and physics all went into the pile, and he pulled the big ideas out of each field so he could use them later.
He called the result a latticework of mental models. People who know only one discipline tend to force every problem into the topic they already understand, and Munger liked to point out that a man with a hammer sees nails everywhere.
He was open about how much reading shaped him. In one of his best-known lines, Charlie Munger said, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time, none, zero. You’d be amazed at how much Warren reads and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
Books are cheap compared to the gains they can lead to. Say a $15 book on reading financial statements teaches you to recognize a company that earns high returns on its capital without needing much new cash, and that lesson gives you the confidence to buy the stock and hold it while the stock keeps compounding growth for years.
2. Ownership Stakes in Wonderful Businesses
Before Munger came along, Buffett liked to buy cheap, beaten-down companies. He called them cigar butts, since they had one free puff left in them and not much else.
Munger talked him out of it. Buffett has said his partner convinced him to quit buying fair businesses at wonderful prices and go after wonderful businesses at fair prices instead.
A wonderful business has a moat that keeps competitors away. It earns high returns on its capital and can raise prices without watching customers walk out the door.
Buying one is the easy part. Sitting still afterward is where most people fail, and Charlie Munger summed it up this way: “The big money is not in the buying and selling, but in the waiting.” Selling a great company too early cuts off the compounding gains that made it worth owning in the first place. Buying the right stock and letting it run higher will make you wealthier.
3. Low-Cost Broad-Market Index Funds
Munger got rich picking a handful of great stocks, yet he didn’t think most people should try it. Few have the temperament for it, and fewer still have the time to study businesses closely. His answer for everyone else was a cheap index fund. An S&P 500 index fund hands you a piece of hundreds of large American companies for a small yearly fee.
He had harsh words for money managers who charge high fees yet still lag the index, going so far as to call the practice moral depravity. At a Daily Journal annual meeting, Charlie Munger put it plainly: “These index funds have come along, and they’ve basically beaten everybody.”
Retail investors can buy an index fund and go back to focusing on their careers. Your attention is better spent earning more income than trying to outguess millions of other investors if you don’t have a passion for investing. Index funds have made many people wealthier when held for 10 to 30 years.
4. Assets That Earn High Returns on Invested Capital
Munger sized up any purchase by what it earned on the money tied up in it. An asset that keeps demanding fresh cash to keep up with competitors rarely makes its owner rich.
The good ones spit out cash year after year with little reinvestment. Picture a private business with loyal customers or a brand people happily pay extra for.
He laid out the math in a 1994 talk at the USC Business School, and it’s worth reading slowly. Speaking to students that day, Charlie Munger said, “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for those 40 years, you’re not going to make much different than a 6% return, even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay a high-looking price, you’ll end up with one hell of a result.”
Look closely at what he says about price. Overpaying a bit for an 18% business can work out fine, while a bargain on a 6% business will mostly remain a 6% investment, no matter how clever the purchase felt. This applies not just to stocks but also to owning private businesses, as Berkshire Hathaway does, to capture the business’s cash flow.
5. Investments in Your Own Skills and Competence
Your own earning power is probably the biggest asset you’ll ever have. Munger thought spending money to grow it was one of the safest bets around.
He pushed people to stay within their circle of competence, meaning knowing exactly where their knowledge ends. Big decisions belong inside that circle, and outside it you’re mostly guessing.
A class or a good mentor can push that boundary out a little further each year. In his 2007 commencement speech at USC Law School, Charlie Munger described the people he watched get ahead: “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy does that help, particularly when you have a long run ahead of you.”
Nobody can repossess what you know. A stock can crash, and a building can burn down, yet a skill you’ve built stays with you for good. Paying to learn new skills can make you wealthier.
Conclusion
Munger’s shopping list was short. He bought books, great stocks, great companies, education, and assets with high returns, then he waited for decades while they compounded.
You don’t need much money to start. A used book costs a few dollars, and plenty of brokers will sell you a fraction of an index fund share. Start there, then keep buying assets rather than consumer stuff for the next decade.