Investments Lessons from Charlie Munger

Charlie Munger, vice-chairman of Berkshire Hathaway, wasn't just Warren Buffett's right-hand man, he was a brilliant investor in his own right. His wisdom is beyond the stock market, offering valuable insights applicable to all aspects of life. Here are some of the investing lessons from Charlie Munger:

Power of Brands and Quality

Charlie Munger advocated for investments in companies possessing a sustainable competitive advantage, often referred to as a "moat." This advantage could be attributed to factors such as strong brand recognition, intellectual property, or efficient cost structures. Berkshire Hathaway's long-term holdings, like Coca-Cola and See's Candies, exemplify this strategy, as their established brands and loyal customer base contribute to wide moats.

Munger's insights proved correct, evident in the success of See's Candies, acquired for $25 million but yielding over $2 billion in pre-tax earnings. This investment not only delivered substantial returns but also imparted valuable lessons to Warren Buffett on the significance of brand power and product quality. This wisdom influenced subsequent strategic moves, including Berkshire's substantial investments in Coca-Cola and Apple.

Focus on Value, Not Price

Munger and Buffet are always driven by value investing, it involves buying quality stocks that are traded below their intrinsic value. Munger's influence on Buffett drove him away from the cigar-butt value investing approach of Benjamin Graham and towards a willingness to pay a premium for companies of superior quality.

Always buy Wonderful Businesses at Fair Prices. "But why focus on 'wonderful companies'?," you might ask. Munger's philosophy was clear – it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. These wonderful companies, according to Munger, possess strong reputations, core strengths, sustainable business models, and ethical management.

Long-Term Investments

Munger follows a strategy of buying and holding investments. Once he identifies a good opportunity, he holds onto that stock, letting the power of compounding work over time. According to him, the real gains come not from frequent buying and selling but from patient waiting. Munger shares the belief with his partner Warren Buffett that the best time to sell a stock is essentially never. He derived $70,000 annually from a $1,000 investment made six decades ago, likely accumulating over $1 million from the profitable bet made in 1962 through investment in Oil.

Munger's unique approach involves thinking in reverse. Instead of aiming for extreme intelligence, he emphasizes the value of consistently avoiding foolish decisions. In his words, "It's remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."  This philosophy aligns with Berkshire Hathaway's strategy, where they hold onto investments for the long term, unaffected by short-term market fluctuations.

Conviction, Leverage, and Learning

Alibaba was the most distinct position Munger had by far, it was his high-conviction investment done with leverage. Leverage was something he rarely ever used to buy stocks, but this time it was different. He used leverage to buy Alibaba, which was against the conventional idea in the world of finance.

This was despite Munger’s saying, “The three things that ruin people are ladies, liquor, and leverage.” Munger did not escape the consequences of his own advice; during the first quarter, of 2022 he sold half of his Alibaba holdings at a loss. It emphasizes the importance of acknowledging errors and adapting one's strategy. Munger acknowledged regretting his Alibaba investment and ultimately sold half his position after realizing it was a competitive market.

Don’t Over-Diversification

Unlike the widely accepted belief in diversifying across numerous stocks, Munger was unconvinced that even holding 10 stocks could escape the risk of over-diversification. In his view, if truly valuable opportunities are scarce, diluting their impact with a plethora of mediocre investments makes little sense.

Munger maintained a dual perspective on investing broadly, combining an inclination towards widespread investments with a firm aversion to diversifying merely for the sake of diversification. He criticized the prevailing notion, often taught in modern university education, that diversification is an absolute necessity in stock investing. Munger dismissed this as an irrational idea, emphasizing the challenge of readily identifying numerous excellent opportunities.

Learning from Mistakes

In 1977, Charlie Munger acquired 300 shares of Belridge Oil, an energy company, but passed on an opportunity to buy an additional 1,500 shares shortly thereafter. Regrettably, he missed out on significant gains when oil giant Shell acquired Belridge Oil in 1979 at a price approximately 30 times higher than Munger's initial investment. Reflecting on the decision, Munger admitted, "It was one of the stupidest mistakes I ever made." Despite his overall success, he acknowledged that choosing differently with Belridge Oil could have doubled his wealth. Specifically, by forgoing the chance to buy more shares at $172,000, he missed out on additional returns of $5.5 million. Munger later redirected the funds, investing $1.1 million in Berkshire Hathaway.

In summarizing Munger's investment strategy, he emphasizes that valuable investment opportunities are scarce. Consequently, he focuses his portfolio only around a few good ideas, as long as he can acquire them at a reasonable price. Once purchased, Munger adopts a long-term holding approach for these investments.

Happy Investing!