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Robert Stephens, CFA
Robert Stephens, CFA
Articles (358) 

4 Reasons Why Charlie Munger Outperforms the Stock Market

The Berkshire Hathaway vice-chairman has a simple but effective strategy

May 11, 2020 | About:

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) Vice-Chairman Charlie Munger (Trades, Portfolio) has a strong track record of outperforming the stock market.

For example, he ran an investment partnership from 1962 to 1975 that delivered an annualized return of around 20%. That was almost four times the annualized return of the Dow Jones Industrial Average over the same period.

He has also been an integral part of Berkshire Hathaway’s successful performance as Warren Buffett (Trades, Portfolio)’s right-hand man. The company’s compounded annual gains of 20% have been almost twice those of the S&P 500 between 1965 and 2019.

Knowledge limitations

One of the reasons why Munger has been able to outperform the stock market is his acceptance that his own knowledge is limited. No investor can know everything about a company, its competitors and the industry in which it operates. Further, they cannot accurately predict the future on a consistent basis.

Rather than try to know everything about a company and its future prospects, Munger has previously stated that “knowing what you don’t know is more useful than being brilliant.” In adopting this viewpoint, he likely aims to understand the key points about a stock and then seeks a margin of safety when buying a slice of it to accommodate unforeseen risks.

Continuous improvement

At 96 years old, Munger has had a long investment career. Although he has been successful for much of that time, some of his investments have been significant failures. For example, his bet on trading stamps company Blue Chip Stamps produced an almost total loss for his partnership in 1974.

That loss, as well as many others during his career, have not dissuaded Munger from continuing to buy and hold stocks. Over time, he has sought to continually improve his investing ability and use the experience gained from disappointments to make him a more successful investor. As he once said, “Those who keep learning, will keep rising in life.”

An honest appraisal

Munger’s investment career has contributed to him obtaining a net worth of around $1.6 billion. Despite this, he maintains an open stance when it comes to listening to opposing views from other investors. In Munger's own words: “You must force yourself to consider opposing arguments. Especially when they challenge your best-loved ideas.”

This approach enables him to make an honest appraisal of potential purchases, as well as the stocks he currently holds. His ability to consider risk as well as reward enables him to more accurately make an assessment of the future prospects for a stock.

Company fundamentals

Munger places a significant amount of importance on company management when explaining the success of Berkshire Hathaway’s holdings. This doesn’t mean that he assumes all of the conglomerate's subsidiaries will enjoy strong leadership from their management teams in perpetuity.

Instead, Munger consider the prospects for Berkshire Hathaway’s businesses should they end up having poor company management that make the wrong decisions. As he once noted: “Invest in a business any fool can run, because someday a fool will. If it won’t stand a little mismanagement, it’s not much of a business”.

In the long run, Munger knows he can replace failing management teams that have ineffective strategies to grow sales and profitability. By ensuring those businesses have strong fundamentals and dominant market positions that increase their ability to survive periods of poor leadership, he shifts the investment odds further in his favor and increases his chances of outperforming the stock market.

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