Charlie Munger, a great investor worth remembering

Table of Contents

Introduction

A famous investing guru

Charlie Munger is one of my most admired investing guru and thinkers. He passed away on November 28, 2023, only 33 days away from his 100th birthday.

Net worth and personal investments

Munger’s own statements say that the majority of his wealth comes from four investments: Berkshire Hathaway (tickers: BRK.A and BRK.B), retailer Costco (ticker: COST), Himalaya Capital Management, and investments in Afton Properties, a real estate company that owns apartment buildings in California and New Jersey.

At the time of his death, Munger’s net worth was estimated at $2.4 billion, according to Forbes.

Transforming Buffett

Buffett praised Munger for broadening his investment strategy from a preference for buying distressed companies at low prices in the hope of profiting from them to focusing on higher-quality, undervalued companies. He said Munger has always emphasized: “Let’s buy really good companies.”

An early example of this transformation was when Munger persuaded Buffett to agree to Berkshire Hathaway’s acquisition of See’s Candies for US$2,500 in 1972. Although See’s Candies’ annual pre-tax profit that year was only about US$4 million, since then, It generated more than $2 billion in sales for Berkshire Hathaway. “He actually hit me over the head with a two by four from the idea of buying very so-so companies at very cheap prices, knowing that that was some small profit and looking for really wonderful businesses that we could buy at fair prices,” Buffett said in an interview.

Buffett later quickly discovered the problem with the cigar butt investment method (please see my previous post “Problems with Cigar Butt Investment“). If he had not made adjustments early, we probably would not know about this in the investment world today. Because he will not become so successful and great───This is what makes Buffett so great. You can refer to my other article “Why Buffett deserves further study?“.

Buffett’s core investment skills are typical value investments that follow the example of value investment master Graham (please refer to my previous post “The past and present of value investing“), that is, looking for undervalued companies from the stock market. Too worried about whether those companies are great growth engines. Munger urged Buffett to expand the application of Graham’s investment philosophy and expand the investment network from “cheap” stocks to “fairly priced” high-quality stocks, that is, to include well-managed and widely recognized companies in the investment portfolio.

“Charlie shoved me in the direction of not just buying bargains, as Ben Graham had taught me,” Buffett told Forbes in 1996. “It took a powerful force to move me on from Graham’s limiting views. It was the power of Charlie’s mind.”

Buffett himself once said that it was Charlie Munger who made him evolve from an orangutan to a human being, otherwise he would be much poorer.

See’s Candies

The person most profoundly influenced by Munger’s investment philosophy is none other than Buffett.

The most critical one was the merger and acquisition of See’s Candy. Buffett later accepted Munger’s advice to buy See’s Candy. The biggest change was that Buffett no longer insisted on using his teacher Graham’s “cigarette butt investment” method. Way:

Instead of simply using working capital, discounted cash flow (DCF) and private market valuations are used as a margin of safety when investing.
Under the great influence of Munger, through the actual verification of the See’s Candy acquisition────adding non-quantified, corporate future growth rate, corporate long-term outlook, market share, management team capabilities, moats and other invisible values, as an important consideration when investing.

Distinctive personality

Outspoken

However, Munger’s straightforward investment style, his belief in operating a company with integrity, and his straightforwardness have won him the trust and respect of ordinary American investors.

Disdain for Wall Street

Munger and Buffett have always believed that so-called financial advisors, hedge fund managers and other investment managers are not worth the fees they charge, and call them “financial assistants”.

In May 2023, Investment managers are nothing more than “fortune tellers or astrologers who are dragging money out of their clients’ accounts,” he told the Financial Times in a wide-ranging interview published Sunday, arguing there’s currently a “glut of investment managers that’s bad for the country.”

Against cryptocurrencies

He also used strong terms like “dementia” to describe the growing enthusiasm for cryptocurrencies.

“I think the people who are professional traders that go into trading cryptocurrencies, it’s just disgusting,” he said. “It’s like somebody else is trading turds and you decide, ‘I can’t be left out.’” He has also criticized cryptocurrencies many times, calling “bitcoin is noxious poison”.

“This is a very, very bad thing. The country did not need a currency that was good for kidnappers,” Munger said. “There are people who think they’ve got to be on every deal that’s hot. I think that’s totally crazy. They don’t care whether it’s child prostitution or bitcoin.”

Munger said that combination of fraud and delusion was to blame.

“In my life, I try to avoid things that are stupid and evil and make me look bad…and bitcoin does all three,” he said. “In the first place, it’s stupid because it’s still likely to go to zero. It’s evil because it undermines the Federal Reserve System…and third, it makes us look foolish compared to the Communist leader in China. He was smart enough to ban bitcoin in China.”

“sometimes I call it crypto crappo and sometimes I call it crypto shit.” Munger said at the Daily Journal’s 2023 virtual annual shareholder meeting. It’s very dangerous and the governments were totally wrong to permit it. I’m not proud of my country for allowing this crap — what I call the crypto shit. It’s worthless, it’s no good, it’s crazy, it will do nothing but harm, and it’s anti-social to allow it.

Popular in China

Munger is very popular in China, which personally is not surprising to me. Because Menger’s thoughts, philosophy of life, theories, and recommended actions are actually very close to Chinese Confucianism. Munger himself was surprised that the book he wrote was very popular in China, but not so well sold in the United States.

It is also worth mentioning that for a long time, Munger has had a special love for China. He not only praised the Chinese people on various occasions for their intelligence, diligence, and ability to endure hardships; he also spared no effort to praise China for its achievements in more than 10 countries over the past thirty years. He is full of praise for the achievement of lifting 100 million people out of poverty, and agrees that China’s future development is still unlimited.

At the Berkshire Hathaway Shareholders Meeting in 2021, when talking about the Chinese economy, Munger said “I think that the Chinese government will allow businesses to flourish. It was one of the most remarkable things that ever happened in the history of the world when a bunch of committed Communists just looked at the prosperity of places like Singapore and said, “The hell with this. We’re not going to stay here in poverty.

We’re going to copy what works.” They changed communism. They just accepted Adam Smith and added it to their Communism. Now we have Communism with Chinese characteristics, which is China with a free market with a bunch of millionaires and so forth. They made that shift. They deserve a lot of credit. Warren and I are not quite as good at that, at changing our minds, in many cases.”

In 2023, in an interview with the Acquired podcast released, Munger mentioned his high expectations for the Chinese economy. He said that the Chinese economy has better prospects over the next 20 years than almost any other big economy, and that the leading companies of China are stronger and better than practically any other leading companies anywhere – and they’re much cheaper. Therefore, he said he was “willing to have some China risk in the Munger portfolio.”

Companies highly connected to Munger

Berkshire Hathaway

Munger is Berkshire Hathaway’s sole vice chairman. Berkshire Hathaway is also one of the four major sources of his personal wealth.

Daily Journal

Daily Journal (ticker: DJCO) is a listed company founded by Munger. For his recent speech, please see my previous post: “Charlie Munger speaks at 2023 Daily Journal Shareholders Meeting“.

According to the U.S. Securities and Exchange Commission (SEC) website: As of the end of September 2023, Alibaba (ticker: BABA), Bank of America (ticker: BAC), U.S. Bank (ticker: USB), Wells Fargo (ticker: WFC) is one of the top four holdings in the Daily Journal’s rankings.

Costco

In my previous post, “Costco moats, and the Differences from Other Competitors“, I detailed: He has been a member of the board of directors since 1997. There are only three stocks in his personal portfolio, and Costco is one of them. The financial media really went to investigate whether this old man was consistent with his words and deeds from time to time, and found that he would continue to buy small amounts and increase his bets on Costco stocks. As of the end of 2020, he personally owned 186,000 shares of Costco stock.

Himalaya Capital

Himalaya Capital Management was founded by Li Lu, a Chinese-American investor and hedge fund manager. Li Lu mainly adopts the value investment method advocated by Buffett and Munger. Li Lu himself has a lot of Munger’s true inheritance, and Munger also trusted him quite a lot and handed over part of his private property to Li Lu for management.

BYD

In 2003, Meng met Li Lu. Five years later, in 2008, Li Lu recommended BYD to Munger. According to industry legend, Munger and Buffett have been working together for more than 50 years and made a total of three recommendation calls to Buffett, the third of which was to invest in BYD.

Investment style

Stay rational

Munger noticed patterns of irrational behavior that led to repeated mistakes, so he set out to finds ways to understand psychology in order to avoid the mistakes himself:

I was greatly helped in my quest by two turns of mind. First, I had long looked for insight by inversion in the intense manner counseled by the great algebraist, Jacobi: “Invert, always invert.” I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes.

Second, I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories. After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to-find stupidity was just over the fence in the other fellow’s professional territory? Besides, I could already see that real-world problems didn’t neatly lie within territorial boundaries. They jumped right across.

That’s how Berkshire has been largely successful for many years. Please see my previous post for this part: “Thinking cannot be outsourced“.

Expand your knowledge

For this part, please see my previous post: “Investment knowledge required is breadth, not depth as most people think” In particular, Munger repeatedly emphasized “The Irreplaceability and Necessity of Reading for Investors“.

Trait is more important than IQ

For this part, please see my previous post: “Too high IQ is not useful in investment, but will hinder“.

Concentrate investment

Most of his personal wealth comes from four investments: Berkshire Hathaway, Costco, a fund managed by Himalaya Capital Management, and an investment in Afton Properties; he only has three in his personal portfolio stock.

The Daily Journal of Listed Companies, where he serves as chairman, has only four main stocks in its investment portfolio: Alibaba, Bank of America, U.S. Bank, and Wells Fargo.

These two examples prove that he is consistent in his advocacy of concentrated investment and has consistently done so himself.

Circle of competence and strengths

“Playing poker in the army and as a young lawyer honed my business skills,” Munger said. “What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often.“

For this part, please see my previous post: “The importance of circle of competence“.

Invest in outstanding companies at reasonable prices

The most typical example is See’s Candies mentioned earlier in this post.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he said. “Charlie understood this early: I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.”

Change In other words, if it were not for being inspired by Munger, Buffett might still not change his “picking up cigarette butts” investment style, hoping to pick up low-priced stocks to “suck the last puff.”

Against EBITDA

Companies that use earnings before interest, taxes, depreciation and amortization (EBITDA) to improve their accounts─Munger believes that using EBITDA to measure profits is simply “nonsense.” Charlie Munger asked investors to be careful of “nonsense jargon” in the investment world.

In the financial world, be careful of “nonsense.” He once joked, “Whenever you see adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) , you can replace this word with “profit from bullshit”. In other words, as an investor, you should pay attention to the management of the company and beware of their nonsense to deceive investors.

For this part, please see my previous post: “Why would Buffett oppose to EBITDA and financial forecasts?“.

Buffett and Munger

Official response from Berkshire Hathaway

Berkshire announced that Munger passed away peacefully in a California hospital on the morning of November 28, local time. Berkshire CEO Buffett said in a statement announcing Munger’s passing: “Without Charlie’s inspiration, wisdom and involvement, Berkshire would not be where it is today.”

Buffett pays tribute to Munger

At the beginning of Berkshire Hathaway’s 2024 shareholder letter, Buffett deliberately wrote a page of text at the beginning titled: “Charlie Munger – The Architect of Berkshire Hathaway“. The complete original text is as follows:

Key contribution to Berkshire Hathaway

Buffett credits Munger with teaching him Berkshire’s key investment philosophy, “investing in good companies at reasonable prices.”

The Wall Street Journal reported on November 28, 2023, that Buffett stated in his annual letter to investors in 2000 that Munger was more thoughtful about business economics and investment matters than anyone he knew. I have been traveling with him for decades and have benefited a lot from listening to him.

Buffett’s thoughts on Munger

The Wall Street Journal compiled Buffett’s thoughts on Munger as follows:

Berkshire Hathaway’s annual shareholder letter in 1982: “Charlie Munger, my partner in management, will continue to operate from Los Angeles whether or not the Blue Chip merger occurs. Charlie and I are interchangeable in business decisions. Distance impedes us not at all: we’ve always found a telephone call to be more productive than a half-day committee meeting.”

1985 Berkshire Hathaway Annual Shareholder Letter: “Charlie Munger, has always emphasized the study of mistakes rather than successes, both in business and other aspects of life. He does so in the spirit of the man who said: “All I want to know is where I’m going to die so I’ll never go there.” You’ll immediately see why we make a good team: Charlie likes to study errors and I have generated ample material for him, particularly in our textile and insurance businesses.”

1989 Berkshire Hathaway Annual Letter to Shareholders: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner.”

1995 Berkshire Annual Shareholder Letter: “At Berkshire, we believe in Charlie’s dictum – “Just tell me the bad news; the good news will take care of itself” – and that is the behavior we expect of our managers when they are reporting to us.”

2011 Berkshire Hathaway Annual Shareholder Letter: “I try to look out ten or twenty years when making an acquisition, but sometimes my eyesight has been poor. Charlie’s has been better; he voted no more than “present” on several of my errant purchases.”

2014 Berkshire Hathaway Annual Shareholder Letter: “Charlie has a wide-ranging brilliance, a prodigious memory, and some firm opinions. I’m not exactly wishy-washy myself, and we sometimes don’t agree. In 56 years, however, we’ve never had an argument. When we differ, Charlie usually ends the conversation by saying: “Warren, think it over and you’ll agree with me because you’re smart and I’m right.”

2022 Berkshire Hathaway Annual Shareholder Letter: “Charlie and I think pretty much alike. But what it takes me a page to explain, he sums up in a sentence. His version, moreover, is always more clearly reasoned and also more artfully – some might add bluntly – stated.”

Books recommended by Munger

Poor Charlie’s Almanac

“Poor Charlie’s Almanack” is a must-read book if you want to understand Menger’s life “thoughts”. The focus is not on investment, but on Menger’s philosophy of life. The content is very rich. I would like to remind everyone that this book is actually very difficult to read and is not suitable for everyone to read. However, if you are willing, you can still understand the contents of the book after reading it several times.

I also wrote a detailed introduction to this book: “Munger’s most important work “Poor Charlie’s Almanack”“.

Damn Right

“Damn Right” was written before 2000 by the famous American financial author Janet Lowe. Although this book has been published for many years, it is a biography of Munger written by Janet Lowe. It is plain in content and provides a wonderful description of Munger’s life, thoughts, behaviors, conduct, investments, and life. It is worth the time of readers who want to understand Munger.

The book records Munger saying: “Like Warren, I had a considerable passion to get rich, not because I wanted Ferrari’s – I wanted the independence. I desperately wanted it.”

Charlie Munger: The Complete Investor

“Charlie Munger: The Complete Investor” is a book written by Tren Griffin. It mainly describes how Monger applied his investment philosophy to stock market investment.

The content is compiled from his interviews, speeches, writings and letters to shareholders, plus comments from money managers, other value investors and business case researchers.

The Warren Buffett Portfolio

“The Warren Buffett Portfolio” is a book recommended by Munger. There is a Chinese translation in Taiwan, but it is not a very mainstream and famous book. I personally have read it many times. The text is very simple, the book is very thin, and the content is loud and clear. It is an excellent introductory book for those who want to understand the investment principles of Buffett and Menger and how they construct long-term investment portfolios.

The TAO of Charlie Munger

“The TAO of Charlie Munger” is an edited volume that specifically collects Munger’s famous speeches, wise sayings, aphorisms, and important opinions. The author spent a lot of time collecting, excerpting, and organizing them. This is a concise book of Munger’s thoughts suitable for readers and investors who want to understand Munger’s speeches and wise sayings.

Poor Richard’s Almanack

Franklin published his own almanac under the name Poor Richard, Poor Richar’s Almanack in 1733, and printed humorous, inspiring and inspiring wisdom on the blank pages, hoping that the public would learn from it. Cultivate various virtues in a relaxed way and create wealth through diligence and thrift.

Franklin is a figure that Munger admires very much. He himself also mentioned that the title of his book Poor Charlie’s Almanac was inspired by Franklin.

Munger recommends more famous and classic books

“Outsiders, one of the greatest investment books for managment team“
“The Intelligent Investor”, author: Benjamin Graham
“Security Analysis”, author: Benjamin. Graham
“Common Stocks and Uncommon Profits and Other Writings”, author: Philip Fisher
“Barbarians at the Gate”, author: Brian Berry
“Den of Thieves”, author: James. B. Stewart
“Influence, New and Expanded”, author: Robert Sirdini
“Only the Paranoid Survive”, author: Andy Grove

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