Wit and wisdom from Warren Buffett’s right-hand man

Two years ago this week, the world lost investing legend Charlie Munger. Best known as Warren Buffett’s right-hand man, Munger served as vice chairman of Berkshire Hathaway from 1978 until his death in November 2023. His tenure helped transform the company from a fledgling textiles business into one of the world’s most well-known investment conglomerates.

Their 60-year partnership was also the stuff of legend. At the time of his death, Buffett wrote “Berkshire Hathaway could not have been built to its present status without Charlie’s inspiration, wisdom and participation.”

Munger’s legacy lives on through the principles he shared that apply to any investor, whatever your choice of investment vehicle.

“The first rule of compounding: Never interrupt it unnecessarily”

As any Buffett/Munger disciple could tell you, compounding is the gift that keeps on giving – as long as you don’t interrupt it. Throughout his career, Munger advised those building wealth against selling their best-performing positions too early, as doing so would reduce the principal amount and the potential for future growth.

Not everyone invests the same way or starts at the same time – and that is reasonable. Let’s look at a hypothetical example involving two investors who each invest their money into a traditional 70/30 portfolio (that is, 70% shares and 30% bonds). It is assumed the annual return is 7.5% p.a. (before fees and taxes).

The numbers below show what could happen if they start investing today and let compounding do its work. Each deposit is added to the investment and then grows at the same rate, meaning the figures reflect how regular contributions build over time. Finally, we’ve set up each example so that both investors stop at age 55, illustrating the effect of long-term investing up to a typical pre-retirement age. This illustrates how regular contributions, reinvesting investment distributions and capital gains, and taking advantage of compounding returns, can grow wealth before retirement.

Kerry starts at 25, investing $100/fortnight ($2,600/year) over a 30-year period

Oliver starts at 40, investing $200/month ($2,400/year) over a 15-year period

Source: Betashares. This hypothetical example is provided for illustrative purposes only, it is not a recommendation to make any investment decision or adopt any investment strategy. Does not account for taxes and any other fees and costs associated with buying and holding investments. Projected investment balances do not take into account the effect of inflation. Actual outcomes may differ materially.

Even though Oliver invested for only half as long and contributed less overall, compounding still grows his money substantially. Kerry, by staying invested for the full 30 years, ends up with a larger portfolio, which shows both the power of starting early and letting your money work for you.

The other lesson here is, in both cases, most of this growth arrives later in the journey. Notice how the growth accelerates dramatically in the final decade. Between the last and second-last periods in each table, the investment returns increase sharply, even though both investors are adding the same modest amounts each period.

“A great business at a fair price is superior to a fair business at a great price.”

Early in his career, Buffett was heavily influenced by Benjamin Graham’s “cigar butt” investing approach, buying mediocre companies at deep discounts. Munger convinced him to focus instead on businesses with strong fundamentals, even if they commanded higher prices. The logic was that great companies compound wealth over time, while weak ones rarely recover regardless of how cheap they look.

This approach still works today. Quality-focused strategies, be it through individual stocks, managed funds or ETFs like QLTY Global Quality Leaders ETF , still resonate with investors.

The principle Munger championed remains relevant: businesses with durable competitive advantages justify premium valuations through superior long-term performance expectations.

“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.”

Buffett’s right-hand man understood that successful investing is as much about intelligent choice of assets as it is about emotional discipline.

Even the smartest people can make for ordinary investors because they panic during downturns, chase trends or tell themselves they can time the market. If you need any proof of that, see the time Isaac Newton invested at the top of the South Sea bubble.

Dollar cost averaging can offer a structural solution to this. By automating investments into one or more ETFs, investors build in disciplined behaviour. There’s no temptation to panic-sell when individual stocks drop, no opportunity to chase the latest tip and no endless second-guessing.

Whether markets rise or fall, you’re buying at predetermined intervals and removing emotion. For most people, this systematic approach beats trying to outsmart the market every time.

“If you’re not a little confused by what’s going on, you don’t understand it.”

If you’ve ever felt overwhelmed by markets, Munger would likely congratulate you for paying attention.

With tens of thousands of potential investment ideas, countless variables and millions of investors all acting on different information, investing can be a confusing experience.

But this is where diversified investing proves its value. A single fund can give you exposure to hundreds or thousands of companies, meaning an investor is not betting on their ability to decode every earnings report or predict which sector will outperform.

Munger’s lasting legacy

Two years after his passing, Munger’s wisdom endures: acknowledge what you don’t know, stay disciplined, let quality compound and resist the urge to outsmart the market. Sometimes the wisest investment decision is admitting you don’t need all the answers – just a plan and the patience to stick with it.