Sunday, June 1, 2014

How to choose best investment?


Some lesson from Charlie Munger

In the investment world, if you want to learn fundamental of investment you cannot ignore Warren Buffett and Charlie Munger. Almost all fund manager and banker across the globe learn the investment principal from both investment icons. Buffett admits in his one letter that before 50 year, Charlie had given him one advice that it is far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.

Munger has given a lot of stress on the multiple mental models. In this model there are need to understand the various dynamics surrounding an investments both in its internal and external environment. One doesn't need to be an academic to tap these different models, including the modern Darwinian synthesis model from biology or cognitive misjudgment models from psychology. Indeed, Munger himself acknowledges that his understanding of these models is entirely self-taught.

According to Munger that any ordinary investor should follow preparation, patience, discipline, and objectivity. When practiced correctly, these attributes should result in buying great businesses at good prices and keeping one's portfolio turnover low. Munger considers every aspect of a business when considering a candidate for investment, evaluating management's character and capital allocation decision-making. He also analyzes a business' competitive advantages, mindful that few businesses endure for multiple generations. Thus, understanding a business' sustainable competitive advantages is critical. Munger pays close attention to the company's operating and regulatory environment, the impact on it from changes in technology, hidden exposures, and the current and future impacts of stock options, pension plans, and retiree medical benefits.

Munger holds the view that he should stick to his knitting when evaluating investment candidates. "Yes" candidates are easy-to-understand businesses with distinct and sustainable competitive advantages with a dominant franchise. He immediately dismisses other possibilities, especially in health care and technology, into what he calls the "too tough to understand" pile. Some of the core investment principles that Munger has espoused can be found in the excellent 2005 book Poor Charlie's Almanack, a collection of Munger's best talks, quotations, and thoughts.

If you want more information regarding investment or you have any other query about investment feel free to ask us.
Warm regards,

Arvind Trivedi
Certified Financial Planner

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