Did Charlie Munger ever invest in industries outside his circle of competence, and what were the results?

Did Charlie Munger Ever Invest in Industries He Didn't Understand? What Were the Results?

Hey there! I'm a huge fan of Munger and have studied his investment philosophy for years, especially his concept of the "circle of competence." Simply put, Munger always emphasized investing only in areas he understood and avoiding reckless risks. But nobody's perfect – he stepped on some landmines when he was younger. Let me break it down for you in plain language.

First, Munger's Investment Principles

Munger (Warren Buffett's legendary partner) often said investing is like baseball: you wait for the right pitch and only swing within your "circle of competence." What's that? It's the industries you truly understand. Munger himself mastered areas like consumer goods, insurance, and media. Over decades of partnership with Buffett, they largely avoided high-tech because they found it too complex – if you don't understand it, don't touch it. The result? This principle helped them dodge major pitfalls, like the 2000 dot-com bubble.

Did He Ever Break His Rule?

Yes! Munger wasn't infallible. Early on, he experimented with unfamiliar sectors. A classic example: In the 1960s, Munger invested in a tech company called Electronics Capital Corporation. Tech stocks were hot then, and Munger thought his smarts could figure it out. But he knew nothing about electronics – it was like an average person buying stocks based on rumors. Result? The company struggled, and Munger lost a significant amount. This taught him a hard lesson, and he later repeatedly stressed: "If you don't understand it, don't invest!"

Another example, though not solely Munger's: Berkshire Hathaway (where Munger is Vice Chairman) invested in Salomon Brothers, an investment bank in the financial services sector, during the 1990s. Neither he nor Buffett fully grasped Wall Street's complex trading practices. The firm got embroiled in scandal, nearly collapsed, and they had to scramble to stabilize it before selling at minimal profit. This also served as a lesson on the risks of stepping outside one's circle.

What Were the Outcomes?

• Bad Outcomes: Those unfamiliar investments mostly ended in failure. Munger himself admitted these mistakes taught him that a smart person's biggest error is thinking they know everything. After losing money, he became even more disciplined about staying within his circle.
• The Silver Lining: These failures became valuable lessons. Munger later focused intensely on areas he knew, like buying Coca-Cola and See's Candies, which were immensely profitable. Even later, when he and Buffett invested in Apple (a tech stock), it was because they viewed Apple more as a consumer brand they could understand – and that bet paid off big time!

In short, Munger's experience teaches us: Don't force investments. If you don't understand it, leave it alone. For us regular folks, don't just follow the hype – ask yourself if you really get it first. If you want to learn from Munger, I recommend his book Poor Charlie's Almanack; it's full of these stories. Feel free to ask if you have more questions!