Charlie Munger's 2nd Quarter Portfolio

Sage continues to allow time to reward him for 4 highly profitable investments

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Jul 13, 2018
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Many people don’t know that Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) vice chairman Charlie Munger (Trades, Portfolio) manages his own portfolio, possibly because he hasn’t changed it since 2014. Indeed, in the second quarter, Warren Buffett (Trades, Portfolio)’s sage business partner didn’t touch a share, opting to hang on to his favorites and allow time to reward him. Each is down slightly year to date, but that puts hardly a dent in his long-term gains.

Munger’s $161 million portfolio that he manages for publisher Daily Journal (DJCO, Financial), like Berkshire Hathaway’s, leans heavily toward financials. His allocation to the sector stems from his dedication to the idea that an investor should stay within their circle of competence. His inactivity and concentration are also important components of his philosophy. In a 2005 interview with Kiplinger’s, Munger said:

“The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?”

Munger purchased most of the positions in the portfolio during the financial crisis. The lion’s share, at 54.9%, goes to Wells Fargo & Co. (WFC, Financial). With the position, Munger’s proclivity for remaining patient and swinging only at the most unambiguous of pitches paid of handsomely. He bought 1.6 million shares of Wells Fargo in the first quarter of 2009 as the U.S. financial sector collapsed. Munger paid $8 per share, he said at a 2015 Daily Journal meeting, which was around the lowest the stock traded during the crisis.

Munger explained what he saw in the bank at the time of his purchase at a Daily Journal meeting in 2016:

“When Berkshire bought into Wells Fargo, the world was coming unglued in a banking panic. Real estate lending had been the source of it. Wells Fargo had been huge in real estate lending. This is back when Berkshire bought its first Wells Fargo.

The answer was we knew that the lending officers at Wells Fargo were not normal bank lending officers. They had grown up, a lot of them, in the garment district. They had a cynical view of human life. They were appropriately careful. When they needed to intervene strongly, they did so, because they learned that was the right way to run a garment lending business.

They were just better. We knew they weren’t going to lose as much money as everybody thought they were, with their big real estate portfolio. They’d chosen it better, and they managed it better, etc. We had an information advantage, just based on general thinking. That gave us a big advantage, so we bought heavily.”

In the past decade, Wells Fargo has gained 160% to close at $56.03 Thursday. It is down 9% year to date.

Though the company is fighting a cascade of scandals that has led to price volatility, his outlook suggests he is unlikely to sell.

“I think the reality is that if you hold a stock for a long, long term even though it’s screamingly successful as an investment, you will have huge declines in the value of that stock two or three times in half a century,” he said at Berkshire Hathaway’s 2009 shareholder meeting. “And I don’t think that should bother long term holders all that much.”

Each of Munger’s financial stocks has also rewarded him in the form of dividends. Munger collected 39 cents per share from Wells Fargo in June. In 2009, the bank had cut back to a 5-cent payout.

Munger’s 2.3 million Bank of America shares, also purchased in 2009, are worth 40.3% of his portfolio as of second quarter-end.

Munger explained why he bought the bank at his Daily Journal annual meeting in 2016. “Bank of America was bought through the way that we used to buy securities. It just got pounded so hard that it was selling for less than it was worth. Way less. And there’s a lot in the Bank of America which is sound.”

Though he has not given a dollar amount for the shares he purchased, Bank of America (BAC, Financial) traded as low as around $3 in early 2009 and closed at $56.40 Thursday, with a 4% decline year to date. At its lowest point, its price-book ratio was 0.12 – the smallest on record since 1992. It has since risen back up to 1.22.

The bank has also revived its dividend in 2014 after slashing it to 1 cent during the financial crisis. Bank of America’s payout stood at 12 cents per share since the third quarter of 2017.

Last of the financials in Munger’s portfolio is U.S. Bancorp, of which he owns 140,000 shares, representing 4.35% of his portfolio. Another of his acquisitions from 2009, the bank plunged to its lowest price in more than a decade in the first quarter that year. It was also the most expensive, with a book value as low as around 1.28 at the time.

U.S. Bancorp (USB, Financial) traded as low as $13 in March 2009 and sold for around $51 on Friday, giving Munger another spectacular return. It has slid 6% year to date.

After slashing its dividend to 5 cents in 2009, U.S. Bancorp will pay Munger 30 cents per share in July.

South Korean steel company POSCO (PKX, Financial) represents 0.45% of Munger’s portfolio as his smallest position. In May 2008, Munger said South Korea “represents sound value.”

"I'd take the Korean stock market so much faster than the American banks that it'd make your head spin,” he said at a 2008 Berkshire Hathaway shareholder meeting.

It was also his most recent trade. He reduced the holding by 84.9% to 9,745 shares in the fourth quarter of 2014 for around $69 per share, shortly after he revealed the position in the Daily Journal’s first SEC disclosure that year.

The sale proved to be a prudent decision in the short run. POSCO declined by about half in 2015. After rallying since 2016 and a 15% year-to-date decline, it traded Friday near his sale price at $70 per share.

See Charlie Munger (Trades, Portfolio)’s portfolio here.