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How Charlie Munger Made His First Million

Munger's earlier years

June 08, 2017 | About:

We have probably all heard the saying, “The first million is the hardest.” I have always been curious how the most successful businesspeople and investors made their first round of wealth. A few years back, Geoff Gannon wrote a very popular article titled “How Warren Buffett Made His First $100,000.” Lately, I have been reading the biography of Charlie Munger (Trades, Portfolio) by Janet Lowe, “Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger.” The book dedicated one full chapter to how Charlie Munger (Trades, Portfolio) made his first million.

Charlie Munger (Trades, Portfolio) was always interested in money. “Like Warren, I had a considerable passion to get rich,” he once said, “not because I wanted Ferraris – I wanted the independence. I desperately wanted it.”

Mr. Munger was born on Jan. 1, 1924. From 1941-1942 he attended University of Michigan. After a year, he joined the U.S. Army and served as a meteorological officer in the Air Force. While serving in the Army, he attended Caltech in Pasadena, California. That was when he fell in love with California. In 1948, he graduated from Harvard Law School and moved to California to practice law.

At the age of about 30, Munger lost almost everything when he and his first wife divorced. He remarried at 32 and had eight children from the two marriages.

Munger worked hard practicing law. He gradually accumulated money from his legal practice and began investing in securies and joining friends and clients in business endeavors. His first major business endeavor was with Ed Hoskins in a company called Transformer Engineers, which made transformers. The business lost steam after the Korean War ended. He later said: “That was a bad business when the war was over… It was a lot of struggle, a lot of nerve pain. We damn near lost everything. We finally made it work out, but not fabulously. But we got a very respectable return on investment eventually.”

The transformer business taught him some good lessons and shaped his investing philosophy, with which he later influenced Warren Buffett (Trades, Portfolio). He said, “It is not much fun to buy a company that you hope liquidates at a profit just before it is destined to go broke.” He also learned how to define a good business: “The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.”

In the late 1950s, through his law practice, Munger got to know a gentleman named Otis Booth and they became good friends. In 1961, Booth came to Munger to handle a probate settlement. Munger advised Booth to keep the property and develop it. Booth asked Munger to join him and do it together. He did. They went together to own 50% each and developed apartments adjacent to Caltech. The project was completed in 1967. They sold it at a 400% profit. They each put in $100,000, and got back $500,000.

From this project they learned that the ground-floor apartments sold out quickly; they decided the make the next project one story, with a higher price for each unit. Even with a higher price tag, the single-level condos sold quickly. They stuck with the single-level floor plan on the a third, fourth and fifth projects. These units were profitable despite the ups and downs of the real estate market.

“Lush landscaping,” declared Charlie. “That is what sells. You spend money on trees, and you get back triple.”

“When it was over, I had $1.4 million as the result of my real estate involvement,” said Munger. “That was a lot of money at that time... I did a total of five projects, then stopped.”

By then, it was the middle of 1960s. Munger has past the age of 40, and had met Warren Buffett (Trades, Portfolio) some five years before.

About the author:

GuruFocus
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 5.0/5 (12 votes)

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Comments

RuleyRebel
RuleyRebel premium member - 1 month ago

A move from 100 to 500 is a 225% profit, not a 400% profit.

gurufocus
Gurufocus - 1 month ago    Report SPAM

@RuleyRebel, are you sure?

RuleyRebel
RuleyRebel premium member - 1 month ago

Absolutely! You start out with 100 and a 100% profit from there is 200, then another 100% increase from the 200 is 400. 25% from there gets you to 500. Thus, it's a 225% increase.

It's a mistake I see often made on business/investing sites. E.g., I often see the claim that a move from 15 to 20 is 5%, when it is actually 25%.

The best, Ruley

gurufocus
Gurufocus premium member - 1 month ago

The compound growth rate is related to the number of periods that you calculate. If the growth from $100 to $500 is within 1 period, the growth rate is 400%. But if it is within two periods, the growth rate is 123.61%.

But when you talk about the growth from $100 to $500, then the profit is 400%.

A move from 15 to 20 is actually a growth of 33.33%.

This calculator may help: http://www.csgnetwork.com/businesspercentincreasedecrease.html

RuleyRebel
RuleyRebel premium member - 1 month ago

Here you are correct: "A move from 15 to 20 is actually a growth of 33.33%."

Sorry, was thinking of something else. With the other increase of 100 to 500 I disagree with your figure of 400%.

batbeer2
Batbeer2 premium member - 1 month ago

>> A move from 100 to 500 is a 225% profit, not a 400% profit.

I like your thinking.

Say a stock you own drops from $100 to $25.

First it was cut in half (50%) and then it was cut in half again (50%). You can now tell the IRS you lost 100% of your original investment.

fung9815
Fung9815 - 1 month ago    Report SPAM

@RuleyRebel, mind to explain why do you reset your base in your calculation of returns every time you hit 100%? Is it because you have the tendency of complicating things for the sake of it?

ashbunn
Ashbunn - 1 month ago    Report SPAM

@Batbeer2 haha

@RuleyRebel Divide the profit by the original amount

i.e 400/100=4 or 400%

5/15=0.33 or 33%

Holly LaFon
Holly LaFon premium member - 1 month ago

percent increase = (new - original)/original. i.e., 400%. thanks, GRE :)

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