Charlie Munger and the Art of Saying No

Perhaps we all need to become an "Abominable no-man"

Hi! It’s George from Investorama. It’s been a while, I’ve been busy revamping my Course on Alts - more on that soon.

I don’t know enough about Charlie Munger to call this a tribute, but I admired his sharp wits, investment acumen and philosophy of life. I’ve often looked up what would Charlie Munger say about XYZ. I quoted him about incentives in my latest video on Masterworks (finalized before his death but published just after).

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The recent passing of the legendary investor, Charlie Munger, has brought to light the crucial role he played as Warren Buffett's "Abominable no-man." This endearing nickname stemmed from Munger's ability to swiftly identify potential pitfalls in investment opportunities. While Munger and Buffett, the dynamic duo behind Berkshire Hathaway, were well-versed in sifting through pitches, everyday investors are increasingly bombarded with a plethora of options in the ever-expanding landscape of alternative assets.

But “normal” investors also get pitched constantly, in fact, the number of pitches has exploded this decade. It used to be plain Stocks and Bonds funds. Then strategies that could be multi-asset. Today if you express an interest in Alternative Assets, you can add everything from Private Equity to Art and Wine - and strategies on top of that. Like this one, received today:

This increased freedom of choice, while empowering, also raises the stakes for investors. It increases the possibility of big mistakes particularly those managing their portfolios independently with limited resources.

The first step in avoiding being taken for a ride is to recognize that you are a mark for people trying to make money off your money. This is still valid for the investment world despite layers upon layers of regulation, but it has become acute in the alternative space.

The risk of fraud, marketed loudly exists (remember the FTX stadium?), the greater concern lies in the sophisticated marketing of legitimate products from reputable institutions. With the former, you should worry about the returns of your money. The latter is about the returns on your money. But the skill required is similar, and it’s well summarized in what Cristophe Shelling calls: “Retail Alts 2.0” (emphasis mine):

“owning the management of the portfolio, ensuring outcomes meet expectations, and getting paid on that basis. Sourcing, diligencing, selecting (or perhaps more accurately, declining over and over and over until finally finding something worthwhile), structuring, and monitoring will matter more than mere access.”

Alternative investment pitches often share common characteristics:

• Great performance (low volatility; superior returns)

• Diversification benefits (low correlation)

• Underpinned by a reputable institution or at least some reassuring facts

• Backed by research, or a smart rationale

The seemingly foolproof nature of these offerings demands a discerning eye. I’ve covered the first two previously:

Why Are All Illiquid Alts Outperforming? Masterworks & friends

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In business literature, the Abominable No-men is the person who automatically says no to every new thing because it is the easiest thing to do. It is as scary to an organizations as the Yeti is to explorers, but when it comes to investing, its skills should be in demand. The much-loved Charlie Munger may have made the character more acceptable.

I wish I could deliver some principles and lessons with the wit of Munger when he took center stage along Buffett. I’m not even going to try. So here’s a plain delivery of basic principles that help keep me grounded in the exploration of alternative assets, (some are borrowed and adapted from Benn Eiffert).

• Low knowledge is riskier than No knowlege: If you don’t know the rules of poker, you’re less likely to seat at the table. Investment fraud victims demonstrate a better understanding of financial literacy than non-victims¹.

• Markets are in constant flux. By the time an investment opportunity reaches individual investors, professionals have already exploited it.

• High returns with low risk explained away by complex strategies deserve great scrutiny.

• Be skeptical; do not assume that just because brand-name firms or your favourite influencers are involved that all is well.

Channel the spirit of the Abominable No-Man.

1. https://www.sec.gov/news/press/extra/seniors/nasdfraudstudy051206.pdf