An Important Lesson From Ben Graham by Charlie Munger (GuruFocus)
This month’s article (link) features a short excerpt from an old Outstanding Investor Digest issue, in which Charlie Munger himself recalls an encounter he had with his investment mentor, Ben Graham, that taught him a valuable lesson about corporate management. The takeaway is simple; there are incredibly intelligent people working for the companies you invest in, and given the wrong incentives, they may very well seek to mislead you. Munger’s solution? Stick to your “circle of competency,” where you have an adequate understanding of the businesses you own. This seemingly obvious lesson is often lost on investors; while I doubt that the average person would be willing to buy a business they do not fundamentally understand simply because management say it is a good idea, many are quick to invest under similar circumstances. In sticking to our circle of competency, we not only stand a better chance against the trickery of higher-ups, but we better align our investment philosophy with that of a business owner, a valuable tactic for enduring the ups and downs of the market.
In the attention to details series, we lift the lid on what WDS does behind the scenes to invest well by sharing what we are reading. These are pieces that often articulate different aspects of our philosophy and ultimately our process. Check back regularly for a new article that is worth the read.