Charlie Munger’s biography: What is his investment style?
“The difference between a good business and a bad one is that the good one usually has to face easy decisions and the bad one usually has to face painful decisions.”
Who is Charlie Munger?
Although a bit behind the scenes, Charlie Munger is not exactly an unknown, in fact, it is thanks to his advice and vision on “value investing”, that Warren Buffett changed his methodology for selecting stocks, a method without which Berkshire Hathaway would hardly be what it is today.
Munger was born on January 1, 1924, curiously enough, in Omaha, Nebraska. Years later, he was accepted to the University of Michigan to study mathematics, a career he abandoned to join the U.S. Air Force. He would later enter Harvard Law School, graduating in 1948.
Foray and rise in business
After graduating, Munger moved with his family to Pasadena, California, where he began working at a real estate firm, eventually founding his own firm in 1962.
Munger did not start out successfully in the business world; on the contrary, his first business was a company dedicated to the manufacture of transformers together with his partner, Ed Hoskins, in which he almost lost everything. However, thanks to Munger’s discipline and knowledge, as he himself says, they managed to obtain a respectable return on the capital invested.
In 1961, an old acquaintance of Munger’s, Otis Booth, invited him to partner with him in a real estate development deal, which was completed in 1967 and Munger made a 400% profit on the sale of the development. Munger stayed in the business for a few more years until he made his first million dollars.
He then founded his own investment company, which he operated from 1962 to 1975, where he demonstrated his keen investment sense, generating average annual returns of 19%, while the Dow Jones, over the same period, averaged a return of just under 5%.
Munger also chaired Wesco Financial Corporation, an investment firm that would eventually absorb Berkshire Hathaway, whose business also includes equity investments, and which has managed strong portfolios, mainly of companies with high long-term value.
What is his investment style?
Charlie Munger, like so many others, is a “value investor”, and defends the idea that anyone who applies this style is a “smart investor”. However, Munger’s interpretation of value investing differed substantially from Buffett’s interpretation.
It was thanks to Munger’s influence that his friend and business partner, Warren Buffett, changed his investment methodology, as it was his wife who convinced him to “look for great companies at a fair price”.
This refers to looking for companies with high value, and with the potential to maintain and increase that value over the long term that are also in some temporary trouble that has caused their share price to fall.
The above applies as Berkshire Hathaway’s investment philosophy, however, as an additional strategy, Munger has defined himself as an enemy of excessive diversification. He demonstrates this with the concentrated portfolio of just four stocks he manages at Wesco.
Munger defends his strategy by saying that, if you know the business, and therefore the risks and potential, over the long term, a concentrated portfolio will yield better returns than a highly diversified portfolio.
Charlie Munger today
Munger says that if there is one skill he learned, it was playing cards, because that’s where you learn to fold in time if the odds are against you and to take advantage of opportunities when they present themselves.
If anyone has been able to lead by example, it is him, because thanks to that skill he is today one of the richest men in the world. A lover of architecture and study, today he lives an active and quiet life.
He is still on the board of Berkshire Hathaway and, like so many other millionaires, he devotes time and resources to philanthropy. He donated more than $110 million to his alma mater from 2011 to 2013. He has also donated money to other universities in the U.S.
Charlie Munger is an example to follow, and with a story from which we can all learn important lessons such as resilience and how to apply logic in our decisions.
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