Our former Prime Minister, Malcolm Fraser, was famous for once telling Australians that "life wasn't meant to be easy". According to Charlie Munger, neither is building wealth.
Charlie Munger is best known for his partnership with the legendary investor Warren Buffett. Upon his untimely passing in 2023 at the ripe old age of 99, Buffett said of Munger that without him, there'd be no Berkshire Hathaway.
Munger was, in many ways, an opposing figure to Buffett. While the latter was at home in front of a crowd, freely dispensing folksy, sage-like wisdom, Munger would usually stay silent, only offering commentary when asked if he had anything to add.
When he did, it was always short, sharp, and brutally honest. But no less valuable.
In a recent article in the Australian Financial Review, Munger's comments at a 1998 Berkshire Hathaway shareholder meeting were discussed. It makes for some great viewing.
In this meeting, Munger told attendees that it would be hard to become wealthy if one were starting with nothing. However, he still gave his best advice about how to get there. Here's the quote:
If you have a standing start at zero, getting together $100,000 is a long struggle for most people… people who get there relatively quickly are helped if they're passionate about being rational, very eager and opportunistic, and steadily underspend their income grossly. I think those three factors are very helpful.
In summary, step one is to be "passionate about being rational".
Step two: Be eager and opportunistic.
And step three: Steadily underspend your gross income.
Charlie Munger's secrets to building wealth.
There's nothing fancy about this advice. And certainly no recommendations to bet big on horses or cryptocurrency.
Munger's three steps to build wealth
Charlie Munger long expressed an admiration for the power of compound interest. That's where I think his first step directs us. If we think hyper-rationally about money, properly invested, it has far more value in the future than today. If we can get a meaningful rate of return, $1 in 2025 could be worth $10 by 2040, and perhaps $100 by 2060.
Constantly keeping this in mind will likely make us far more judicious with what we choose to spend our money on today.
When it comes to step two, I think Munger is telling us to be hungry for success, because it won't just drop in our laps. If there's an opportunity that comes across our desks, and we either recognise it as a lucrative financial investment, or else a chance to build a happier life for ourselves, he is, in my view at least, telling us to seize it with both hands.
The third step is perhaps the simplest, but also the most difficult to adhere to over long periods of time.
He's telling us to make a habit of saving, to not spend every dollar that comes into our bank accounts, and to keep doing it.
It ties in nicely with the first step. Every dollar we can save today has the potential to be worth $10 and then $100 down the road. So if we amass as many dollars as we can today and make sure they are prudently invested in assets that generate income, we can get to the proverbial promised land.
Foolish Takeaway
Of course, it took many decades for Munger to become fabulously wealthy (it helps when you live to 99, too).
But he would no doubt tell us that he achieved it by mapping out the road to get there, and sticking to it religiously.
Although Munger is now, very sadly, no longer with us, his priceless advice thankfully is. The more we employ it in our own lives, the better off we'll all be.
