Charlie Munger is the Chairman of Wesco Financial. He is also the Vice Chairman of Berkshire Hathaway, where his long term partner Warren Buffett serves as Chairman. Like Buffett, Munger is a native of Omaha, Nebraska. After studies in mathematics at the University of Michigan, and service in the U.S. Army Air Corps as a meteorologist, trained at Caltech, he entered Harvard Law School without an undergraduate degree. Graduating in 1948 with a Juris Doctor magna cum laude, he founded and worked as a real estate attorney at Munger, Tolles & Olson LLP until 1965. He then gave up the practice of law to concentrate on managing investments. In his book Poor Charlie's Almanack, Munger has introduced the concept of "Elementary, Worldly Wisdom" as it relates to business and finance. Munger's worldly wisdom consists of a set of mental models framed as a latticework to help solve critical business problems.
Buffett followers believe that Charlie Munger had significant influence on Warren Buffett’s investment philosophy. Before partnering with Munger, Buffett was a Ben Graham type of cigar butt bargain investor. Charlie Munger inspired Warren Buffett to invest in high quality business for long term. The latest investment Charlie Munger convinced Warren Buffett was the investment in Chinese electric car maker BYD.
Charlie Munger is an American business magnate and investor. He is Vice-Chairman of Berkshire Hathaway Corporation, led by Warren Buffett. Buffett has often publicly stated that he regards Munger as his partner. Although Munger is the Vice-Chairman, he is not involved in the day-to-day operations at Berkshire and much more private than Buffett. Munger and Buffett did not meet until 1959, although they grew up a half a block from where they lived. Munger has been the chairman of Wesco Financial Corporation since 1984, now owned by Berkshire Hathaway. He is also the chairman of the Daily Journal Corporation and a director of Costco Wholesale Corporation. Munger ran his own investments from 1962 to 1975 without Buffett, and according to Buffett's essay, "The Superinvestors of Graham-and-Doddsville,” Munger earned compound annual returns of 19.8% during the 1962 to 1975 compared to only 5.0% of the Dow. When Munger managed of the portfolio of The Daily Journal in the 10 years up to 2012, he took the company’s portfolio value from $4.3 million to $76.7 million. Munger make decision on what Benjamin Franklin would do given the situation. Like Warren Buffett, Munger believes in holding substantial amount of stocks that he knows extremely well and wait for long term returns. Munger has been described as an independent thinker who is very talented in making connections from a vast amount of knowledge.
Charlie Munger is native to Omaha, Nebraska. He studies mathematics at the University of Michigan and serviced in the U.S. Army Air Corps as a meteorologist. Then Munger attended Caltech and transferred into Harvard Law School. There he was a member of the Harvard Legal Aid Bureau, without an undergraduate degree, and graduated in 1948 with a Juris Doctor magna cum laude. Munger founded and worked as a real estate attorney at Munger, Tolles & Olson LLP until 1965 when he gave up the practicing law to concentrate on managing investments. He first partnered up with Otis Booth in real estate development then partnered with Jack Wheeler to form Wheeler, Munger, and Company an investment firm on the Pacific Coast Stock Exchange. He wound up Wheeler, Munger in 1976 after losses of 31% in 1973 and 1974.
Wesco Financial Corporation
Munger was the chairman of Wesco Financial Corporation since 1984 before joining Berkshire Hathaway in 2011. Wesco Financial is based in Pasadena, California where the company's annual shareholders' meeting was typically held after the Berkshire Hathaway annual meetings. Wesco Financial originated as a savings and loan association that grew to control Kansas Bankers Surety Company, Precision Steel Corp., CORT Furniture Leasing, and other ventures. It had held an equity portfolio of over $1.5 billion dollars including companies such as Goldman Sachs, Wells Fargo, Procter & Gamble, Kraft Foods, US Bancorp, and Coca-Cola.
In 2007, Munger made a $3 million donation to the University of Michigan Law School for lighting improvements in Hutchins Hall and the William W. Cook Legal Research Building. Then again in 2011, Munger contributed another $20 million out of the $39 million in costs for renovations to the Lawyers Club housing complex. Therefore, the new section in the Lawyers Club will be renamed the Charles T. Munger Residences in his honor. Once more on December 28, 2011, Munger donated 10 shares of Berkshire Hathaway Class A stock, which is worth about $1.2 million in total, to the University of Michigan.
With Munger’s wife and daughter being alumnus of Stanford University and his daughter currently a member of the board, Munger donated 500 shares of Berkshire Hathaway Class A stock, valued at $43.5 million at the time, to Stanford in 2004 for a graduate student housing complex that can house 600 students.
In 1997, Munger and his wife, who was an alumna, donated $1.8 million to the Marlborough School in Los Angeles. They also donated to the Polytechnic School in Pasadena and the Los Angeles YMCA.
Munger has been a trustee as well as the chair of the board of trustees at the Harvard-Westlake School in Los Angeles for more than 40 years. His five sons and stepsons and so far one grandson graduated from the prep school, and naturally, over the years Munger had contributed generously to the school. The Mungers had first contributed $13 million to the Munger Science Center at the high school campus opened in 1995. In 2006, Munger donated 100 shares of Berkshire Hathaway Class A stock, valued at $9.2 million, to the school toward buildings at Harvard-Westlake's middle school campus. Then again in 2009, Munger donated eight shares of Berkshire Hathaway Class A stock, valued at $800,000.
Similar to Buffett, Munger has a Benjamin Graham-style approach, and he is focused on investing in undervalued businesses with economic moats.
Munger believes that incentives explain why people behave the way they do. He believes in the value of highly ethical business standards and said, "Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail," in the 2009 Wesco Financial Corporation annual meeting. Munger considers reputation and integrity are the most valuable assets and can be lost in a heartbeat.
It is better to tightly grip the obvious than some esoteric matter though do not overlook the obvious and drown out the details. Allocate the relative attention according to the situation, and do not avoid your fears or troubles that may come back and hurt you. The obvious usually consists of the future, so consider totality of risk and effect including potential second order and higher levels of impact.
When analyzing value and price, it is important to determine value apart from price because they are not the same. This idea of separating even the slightest of concepts is common for Munger. He also suggests separating progress from activity and wealth from size. In the end, to Munger it is about being a business analyst not a market, macroeconomic, or security analyst.
Proper allocation of capital is an investor’s primary objective. The best use of capital is always measured by the nest best use or essentially the opportunity cost. Great ideas are rare so learn to recognize those opportunities and act accordingly. When a proper circumstance presents itself, act decisively with conviction but be aware of others. Munger has suggested the mentality of being fearful when others are greedy and be greedy when others are fearful, essentially, the mind must be always be prepared for any opportunity. But always remember to never love an investment irrationally, you still must be situation-dependent and opportunity-driven. It is about resisting to natural human bias. To Munger, making correct decisions of allocating any capital at any given time is how to become a better investor. Along the way of investing, patience is a virtue in enjoying the process as well as the proceeds, so avoid unnecessary transactional taxes and frictional costs. Nevertheless, adapt to the true nature of the world since it will not adapt to you. Make decisions after recognizing and accepting unmemorable complexities of the world, especially the aspects you do not like.
When judging the natural occupational hazard of risk, Munger has a few guide lines that he follows and advises. Obviously, among the first are to leave an appropriate margin of safety, ensure proper compensation for the risk, and beware of inflation and interest rate exposures. Munger also advises to avoid people of questionable character. More importantly, risks should avoid the big mistake of permanent capital losses.
Munger’s reason and inspiration in quitting being a lawyer as well as his personality has been a pursuit of independence. He believes objectivity and rationality is required for independent thought and therefore the best decisions. Whether people agree or disagree with you is irrelevant, what matters is the correlation and justification of the decision led from an accurate analysis. Naturally, mimicking the herd merely leads so average performance which is not what Munger does or independent.
Munger highly values preparation. He believes in the will to prepare more than just the will to work and succeed. One aspect of becoming successful is to develop fluency mentally by devoting to be a lifelong self-learner through vigorous reading and curiosity in attempt to be wiser every day. Education in various disciplines is a notable quality that makes Munger a wise thinker. Preparing also requires asking the right questions and that always includes numerous whys. Also Munger always desires to invert by reevaluating reasons to like and dislike a stock before buying.
True wisdom is also defining the limits of competence. It is always important to identify and reconcile false evidence. Having humility in intelligence is the way to resist the craving for false perception and certainties. Just imagine that you are already gullible so never try to fool yourself farther. Always challenge yourself and continually improve your best ideas.
Munger "think gold is a great thing to sew into your garments if you're a Jewish family in Vienna in 1939, but I think civilized people don't buy gold. They invest in productive businesses," just like Buffett.
Munger admires China’s policies and policy makers that transformed it from a “Communist bureaucracy” nation to the prosperity of today without major wars. With only population control and some intelligent policy making promoting free market, China’s ability to raise its massive population from the brink of starvation to the welfare of the people today is admirable, and he compares this to the transformation of Singapore.
Hypothetically Munger has said he would like to stop short term trading in the stock market because it leads to too much problems and it is essentially gambling. Because there are too much liquidity in the stock market including derivatives, Munger would if he could tax short term trades to reduce what is basically gambling and hedge funds reporting their pay as long term capital gains.
Munger convinced Buffett to invest in Chinese electric car maker BYD. Munger justified it as the exception to the rule that Berkshire avoids technology companies because the CEO is so talented and has right character worth investing in.
Buffett and Munger believe in the efficient market theory, that the market is mostly efficient most of the time.
Munger uses the term Lollapalooza effect that describes what happens when more than one biases or incentives act at the same time causing major misjudgment.
Munger uses the term "Elementary, Worldly Wisdom" describing that you cannot really know anything with just isolated facts. If the facts do not connect together on a latticework of theory, they are not usable.
There is more sin today in business conduct and the political system today than before.
Munger does not think the presidential election and either presidential candidate will effect much change to the financial market.
Buffett and Munger share many similar principles and work well together with few difference, among one is Buffett is a Democrat while Munger is a Republican.
Munger does not think it is necessary for most people to be terribly facile in statistics.
Munger want to be remembered as a great teacher.
Charlie Munger’s Investing Principles Checklist:
from Poor Charlie’s Almanack
Risk – All investment evaluations should begin by measuring risk, especially reputational
* Incorporate an appropriate margin of safety
* Avoid dealing with people of questionable character
* Insist upon proper compensation for risk assumed
* Always beware of inflation and interest rate exposures
* Avoid big mistakes; shun permanent capital loss
Independence – “Only in fairy tales are emperors told they are naked”
* Objectivity and rationality require independence of thought
* Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
* Mimicking the herd invites regression to the mean (merely average performance)
Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights”
* Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
* More important than the will to win is the will to prepare
* Develop fluency in mental models from the major academic disciplines
* If you want to get smart, the question you have to keep asking is “why, why, why?”
Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom
* Stay within a well-defined circle of competence
* Identify and reconcile disconfirming evidence
* Resist the craving for false precision, false certainties, etc.
* Above all, never fool yourself, and remember that you are the easiest person to fool
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”
Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions
* Determine value apart from price; progress apart from activity; wealth apart from size
* It is better to remember the obvious than to grasp the esoteric
* Be a business analyst, not a market, macroeconomic, or security analyst
* Consider totality of risk and effect; look always at potential second order and higher level impacts
* Think forwards and backwards – Invert, always invert
Allocation – Proper allocation of capital is an investor’s number one job
* Remember that highest and best use is always measured by the next best use (opportunity cost)
* Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
* Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven
Patience – Resist the natural human bias to act
* “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
* Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
* Be alert for the arrival of luck
* Enjoy the process along with the proceeds, because the process is where you live
Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction
* Be fearful when others are greedy, and greedy when others are fearful
* Opportunity doesn’t come often, so seize it when it comes
* Opportunity meeting the prepared mind; that’s the game
Change – Live with change and accept unremovable complexity
* Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
* Continually challenge and willingly amend your “best-loved ideas”
* Recognize reality even when you don’t like it – especially when you don’t like it
Focus – Keep things simple and remember what you set out to do
* Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat
* Guard against the effects of hubris (arrogance) and boredom
* Don’t overlook the obvious by drowning in minutiae (the small details)
* Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
* Face your big troubles; don’t sweep them under the rug
In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness.
“All intelligent investing is value investing - acquiring more than you are paying for. You must value the business in order to value the stock.”
“Spend each day trying to be a little wiser than you were when you woke up.”
“In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time - none, zero.”
“Mimicking the herd invites regression to the mean.”
"We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves."
"Warren is one of the best learning machines on this earth. The turtles who outrun the hares are learning machines. If you stop learning in this world, the world rushes right by you."
"There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested - there's never any cash. It reminds me of the guy who looks at all of his equipment and says, 'There's all of my profit.' We hate that kind of business."
"You need a different checklist and different mental models for different companies. I can never make it easy by saying, 'Here are three things.' You have to derive it yourself to ingrain it in your head for the rest of your life."
"What matters most: passion or competence that was born in? Berkshire is full of people who have a peculiar passion for their own business. I would argue passion is more important than brain power."
“Most ambitious young men will be more aggressive than they should. That's what happened with investment banking. I mean, look at Lehman Brothers. Everyone did what they damn well wanted until the whole place was pathological about its extremeness.” “The smart way to regulate is to act like a referee. You have to curtail the activities that are permitted. There should be less trying to fix things and more trying to prevent bad outcomes.”
“The world would be better off if JPMorgan didn't run a gambling casino alongside a legitimate business.”
“We have a tendency in America to think everyone should do it just like us. I don't think that's necessarily true. What has worked for us socially might not work for China. Actually, it almost certainly won't.”
“Choose clients as you would friends. ”
“The best armour of 0ld age is a well-spent life preceding it. ”
When you borrow a man’s car, always return it with a tank of gas. ”
“If only I had the influence with my wife and children that I have in some other quarters! ”
“Take a simple idea and take it seriously. ”
“In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables — like the discount warehouses of Costco. ”
“Don’t do cocaine. Don’t race trains. And avoid AIDS situations. ”
“We look for a horse with one chance in two of winning and which pays you three to one. ”
“You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing. ”
“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities. ”
“A great business at a fair price is superior to a fair business at a great price. ”
“All intelligent investing is value investing — acquiring more than you are paying for. ”
You must value the business in order to value you the stock. ”
No wise pilot, no matter how great his talent and experience, fails to use his checklist. ”
There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash — and I don’t want to go back. ”
…it never ceases to amaze me to see how much territory can be grasped if one merely masters and consistently uses all the obvious and easily learned principles. ”
Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying eighteen percent. ”
If you always tell people why, they’ll understand it better, they’ll consider it more important, and they’ll be more likely to comply. ”
Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer. ”
You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time. ”
Three rules for a career: 1) Don’t sell anything you wouldn’t buy yourself; 2) Don’t work for anyone you don’t respect and admire; and 3) Work only with people you enjoy. ”
I won’t bet $100 against house odds between now and the grave. ”
I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge. ”
…being an effective teacher is a high calling. ”
I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart…”
Without numerical fluency, in the part of life most of us inhibit, you are like a one-legged man in an ass-kicking contest. ”
“In my life there are not that many questions I can’t properly deal with using my $40 adding machine and dog-eared compound interest table.”
Charlie Munger’s Performance of his limited partnership:
|Mass. Inv. Trust (%)||Investors Stock (%)||Lehman (%)||Tri-Cont. (%)||Dow (%)||Overall Partnership (%)||Limited Partners (%)|
|Average Annual Compounded Rate||3.8||2.8||5.5||4.6||5||19.8||13.7|
Charlie Munger: Art of Stock Picking: BRK.A, BRK.B
Charlie Munger: Art of Stock Picking (Part II)
Notes from a Morning with Charlie Munger; Comments on Greece, Berkshire Hathaway, Costco, USB, WFC