2 Lessons I Learn From Warren Buffett Most Trustable Partner

29 nov 2023

If you are investor, there is high chance you are familiar with the name Charlie Munger. He is the legendary investor, the right hand of Warren Buffett Berkshire Hathway with a net worth estimated at $2.6 billion dollar.

Just how much is $2.6 billion?

Well consider this car. A Lamborghini Aventador which cost around $789,809 to $825,914.

With $2.6 billion, you could buy around 3,250 Lamborghini Aventadors.

But we are not talking about his wealth. What I want to say is what learned from Charlie Munger as a stock investor.

There are many lessons of course but I will only showcase two lessons that I consider important.

First. Charlie Munger introduced me to a fascinating concept: the lollapalooza effect. It refers to situation where multiple biases, tendencies or mental models act together to produce a particularly strong effect or outcome.

This effect can be observed in the following situation:
1. Positive News: The company releases an announcement of a major, successful breakthrough in their product or service.
2. Social Media Hype: Influential figures or platforms create a buzz around the stock, encouraging more people to buy it.
3. Fear of Missing Out (FOMO): Seeing the stock rise rapidly, more investors jump in, not wanting to miss the opportunity.
4. Momentum Investing: Traders looking to capitalize on the trend add to the buying frenzy.

Here, Munger's lollapalooza effect is seen as multiple factors resulting in a sharp increase of price. All these scenarios show how different element can align to create a significant impact on a stock's performance.

The practical lesson from Lollapalooza effect
Knowing this effect is not only about knowing about how different multiple elements can create an impact. But it can help us to exercise caution and conduct through research.

Here is what I mean. Let's say a stock rises sharply. This is the first element. But you shouldn't buy just because it rises sharply. You should also critically consider another factor. Like whether the stock's hype is supported by strong fundamentals or determining the trend behind the stock price.

By doing this, you are trying to avoid getting swept up in market excitement and make decision based on the company actual value and the trend not only the price spike.

The next lesson is "Invert, always invert".
This is a guiding principle that emphasizes the importance of looking at problem from the opposite perspective.

Simply put, it means to think about what you want to avoid instead of only thinking about what you want to achieve.

For example, if you want to be rich, instead of only thinking how to be rich, you also need to think of how not to be poor.

In investing, this can mean to focus on why a stock could decrease in value or what risk are involved rather than just its potential upside for profit.

This mindset helps investor identify potential problems early on and make more balance, risk aware decisions.

Charlie Munger, the billionaire investor and Warren Buffett's right hand at Berkshire Hathaway, offers us two invaluable lessons: The Lollapalooza effect and the concept of inversion.

The Lollapalooza effect teaches us to be cautious, urging a thorough analysis of a stock's fundamentals instead of getting swept up in market hype.

Meanwhile, the principle of inversion reminds us to consider potential downsides and risks, not just the positives.

Together, these lessons from Munger encourage a balanced, well-researched approach to investing, focusing on both opportunities and potential pitfalls.

Thank you Charlie Munger. Rest in peace