Charlie Munger: 3 investing classes from a mistake by Charlie Munger

It is good to be taught out of your errors. It is higher to be taught from different folks’s errors. ~ Warren Buffett

This quote has been embedded in my thoughts since I first learn it. So, I attempt to observe the world and preserve reflecting on the errors that I and that others round me make. There’s a lot to be taught. Right this moment, I’ll talk about one such mistake. And one made by, maybe, the particular person I love most – Charlie Munger. So, when our guru makes a mistake, it is best to sit up and take discover.

The Alibaba Saga

Here’s what occurred. Charlie Munger took a guess on the Chinese language large Alibaba. This was simply earlier than the Chinese language authorities determined that Jack Ma had grown too huge for his or her consolation and pared his wings. Munger purchased his preliminary stake at round $246 per share. To this point so good. Alibaba was an enormous in China. It was one of many largest B2B and C2C e-commerce websites on the planet. Alibaba was on its approach to launching the most important IPO on the Shanghai Alternate in October 2020. Simply earlier than this, Ma addressed an meeting of high-profile figures in China with a controversial speech that criticised the Chinese language monetary system. After which all of the sudden, he virtually went lacking for 3 months.

This roughly began the crash in Alibaba’s inventory. From above $300 it has now crashed to shut to $70, an general fall of near 75%.


Munger was in all probability satisfied this was a passing section and issues will get again to regular after Jack Ma is “taught” a lesson in adhering to the federal government line. He doubled down and stored including because the inventory stored falling. He added substantial portions within the July-September quarter round $182 and once more within the October-December quarter round $145. Every time he almost doubled his place from earlier than. He in all probability realised his mistake and offered half his place within the January-March quarter of 2022 at $115. Right this moment, the inventory value is round $70.


The Classes

After I sit and take into consideration this commerce, listed below are the teachings I draw from it.

  1. Macro issues – Nothing actually modified within the firm. The underlying macro components modified. The corporate stored doing the identical enterprise it was doing in 2019, but the inventory is down 75%. So, those that say that macro doesn’t matter are merely incorrect.
  2. Psychological Bias Impacts All – Even in case you have devoted your life to learning and understanding human biases, nobody is proof against them. The steadfast perception, a type of narrative fallacy bias, within the superior “Chinese language system” that Munger stored alluding to in a lot of his talks in all probability blindsided him. Any autocratic system offers nice outcomes however solely so long as the system works in your pursuits. If it really works within the reverse pursuits, then the draw back is also equally massive. Authority bias may have had a task to play. Li Lu really helpful Alibaba to Munger. Beforehand, Li Lu had really helpful BYD, a Chinese language EV large, and Munger had invested in it and made vital income. Li Lu is a Chinese language-born American investor and familiarity with Chinese language companies was a significant benefit for him. Li Lu can be the one person who Munger has given his personal cash to handle, so one can perceive the belief he has in his views. Thirdly, social proof additionally in all probability performed a task. Munger had taken a really massive and visual place. He had spoken concerning the nice Chinese language system. He had praised the Chinese language authorities for stepping in “preemptively to cease hypothesis”. The problem with psychological biases is when you might have quite a lot of them lined up collectively, they mix and create a lollapalooza impact which has the potential to fully blindside an individual.
  3. Lack of threat administration system – It doesn’t matter how nice an investor you’re, you’ll make errors on occasion. There must be a security guess that you simply create for your self while you make a mistake. The one which works effectively is to make use of a cease loss. The easy purpose is that it places a flooring to the utmost loss to your capital. It helps you to get out of your place after which assess extra objectively if there’s something incorrect along with your thesis. The worst that may occur is after reviewing your thesis you assume that the inventory remains to be price shopping for, you’ll be able to at all times purchase it again. In any other case, you’re paralysed by a inventory with falling costs and preserve hoping that one thing will occur to show it round. Hope is rarely a superb funding technique.


Errors will likely be made. It’s good to preserve your guard excessive on a regular basis. As Richard Feynman famously stated, “It’s essential to not idiot your self, and you’re the best particular person to idiot.” As buyers, more often than not we preserve fooling ourselves. One of the simplest ways is to have a concentrate on constructing processes that can firstly, stop you from making a mistake, and secondly, even if you happen to do, will defend you from making nice injury to your portfolio.

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