Chapter 2 Munger and Town’s lessons2

2.1 Charlie Munger’s four principles of investing

  1. It must be a business within your circle of competence.
  2. The business should have intrinsic characteristics that give it a durable competitive advantage.
  3. The business should have management with integrity and talent.
  4. The business should be available for a fair price that gives a “margin of safety.”

2.2 Five and a half moats

Table 2.1: Five and a half moats that determine the durable competitive advantage of a business with nice examples
Moat Example
Strong brand
Painful switching
(Network effect)
Toll bridge

2.3 Big four numbers

  1. Sales (a.k.a. revenue, top line)
  2. Net income (a.k.a. net profit, bottom line)
  3. Operating cash flow
  4. Book value (a.k.a. equity) + dividends (if any)

2.4 Management numbers

  1. Return on equity
  2. Return on invested capital (equity + debt)
  3. Debt

2.5 Pricing methods

  1. Ten cap (10-year owner earnings)
  2. Payback time (8-year payback)
  3. Margin of safety (10-year discounted cash flow)


Town, D., & Town, P. (2018). Invested: How warren buffett and charlie munger taught me to master my mind, my emotions, and my money (with a little help from my dad). William Morrow, an imprint of HarperCollinsPublishers.

  1. Contents of this chapter are mostly adapted from Town & Town (2018).↩︎