Friday, February 19, 2010

What Is Intrinsic Value? – Charlie Munger’s Checklist

Charlie Munger is Warren Buffet’s long time partner in running Berkshire-Hathaway. He is also a multibillionaire and a successful CEO in his own right. The Motley Fool ( discusses Charlie Munger’s “Investing Principles Checklist” in the February 8th, 2010 article, "Charlie Munger on How to Become Rich", by Morgan Housel.

The Investing Principles Checklist is a high level summary of recommended investor traits and behaviors. It’s not specifically about intrinsic value. However, four of Charlie Munger’s ten investing principles struck me as pertinent to my developing definition intrinsic value. First, the ten principles:

(1) Measure Risk
(2) Be Independent
(3) Prepare Ahead
(4) Have Intellectual Humility
(5) Analyze Rigorously
(6) Allocate Assets Wisely
(7) Have Patience
(8) Be Decisive
(9) Be ready for Change
(10) Stay Focused

Of the ten, these four struck a chord with me; (1) Measure Risk, (5) Analyze Rigorously, (6) Allocate Assets Wisely, and (7) Have Patience.

Under (1) Measure Risk, the objective is to assess how risky the proposed investment is. Does the business have a “moat” – an important competitive advantage? Is the investment overvalued?

For (5) Analyze Rigorously, the objective is to understand the potential investment – do your homework – and apply your research to whatever rules you’ve developed.

(6) Allocate Assets Wisely is about having and using an asset allocation plan. It also made me think that in order to take advantage of an opportunity you must have some cash available - or you’ll have to sell something. Having available cash – “keeping your powder dry” - seems like the better path. That means having a cash reserve for the purpose of taking advantage of investing opportunities.

(7) Have Patience means waiting for the right opportunity. It means waiting until others are fearful to become greedy; waiting until the price is right to provide the “margin of safety” that you want.

I’ve learned the following about intrinsic value from Charlie Munger’s “Investing Principles Checklist”:

(a) Intrinsic value includes the risk associated with the investment. I need to have a reasonable estimate of the reward and a reasonable estimate of the risk. And, knowing myself, I’ll need to analyze each separately.

(b) Intrinsic value may have nothing to do with maintaining a cash reserve for investment opportunities or with being patient until the price is right; but both behaviors enable an investment with the right intrinsic value - when I find it.

Link to Other Topics in the Special Report: What Is Intrinsic Value?

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