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Notes From Charlie Munger's Partnership

Before he built a reputation as Warren Buffett right-hand man at Berkshire Hathaway, Munger made a name for himself managing money for investors at his own partnership

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Apr 09, 2018
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Before he built a reputation as

Warren Buffett (Trades, Portfolio)'s right-hand man at Berkshire Hathaway, Charlie Munger (Trades, Portfolio) made a name for himself managing money for investors at his own partnership -- similar to the way Warren Buffett (Trades, Portfolio) originally built his following.

Munger ran his partnership in the same way he has continued to invest ever since, in a few select opportunities, which says a lot about his intellect. Most investors gain experience throughout their career, but it seems Munger was born with all the knowledge needed to be a successful investor.

Munger managed his partnership from 1962 to 1975 and over this period achieved a return for investors of 24.3% per annum, compared to a gain of 6.4% per annum for the Dow Jones Industrial Average over the same period.

Munger wanted to find great businesses and invest in them with as much money as possible to maximize his potential returns, as Alice Schroeder described in her book on Buffett's life and career:

“Munger bought cigar butts, did arbitrage, even acquired small businesses … he said to Ed Anderson, 'I just like the great businesses.' He told Anderson to write up companies like Allergan, the contact-lens-solution maker. Anderson misunderstood and wrote a Grahamian report emphasizing the company’s balance sheet. Munger dressed him down for it; he wanted to hear about the intangible qualities of Allergan: the strength of its management, the durability of its brand, what it would take for someone else to compete with it.” — "The Snowball:

Warren Buffett (Trades, Portfolio) and the Business of Life."

Munger was also not afraid to use leverage to gear up his performance when the risk-reward ratio was skewed significantly in his favor, something even Buffett has gone to extreme lengths to avoid doing:

“He wanted to get really rich, really fast. He and Roy Tolles made bets on whose portfolio would be up more than one hundred percent in a year. And he was willing to borrow money to make money, whereas Buffett had never borrowed a significant sum in his life …

Munger did enormous trades [with borrowed money] like British Columbia Power, which was selling at around $19 and being taken over by the Canadian government at a little more than $22. Munger put not just his whole partnership, but all the money he had, and all that he could borrow into an arbitrage on this single stock—but only because there was almost no chance that this deal would fall apart.” — "The Snowball:

Warren Buffett (Trades, Portfolio) and the Business of Life."

While this approach did achieve fantastic returns for Munger and his partners, it also came with a lot of volatility.

In the mid-1970s, according to Jane Lowe’s book, "Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire

Charlie Munger (Trades, Portfolio)," Munger lost around 50% of his partners' money as the market declined. Two holdings accounted for just 84% of his portfolio at this time, Blue Chip Stamps and the New America Fund.

Blue Chip had been purchased at an average price of $7.50 but had fallen in value to just $5.25 by the end of 1974. Meanwhile, the New America holding had dropped in value from a purchase price of $9.22 to $3.75.

Munger's long-term outlook helped him through this period, and the same can be said for most of his partners who helped him ride out this turbulent time. However, it was so stressful that when the value of the portfolio had fully recovered, Munger decided that it was time to liquidate his partnerships and return the cash to investors. He could stomach managing his own money through market cycles, but it was more challenging to manage the funds of outside investors.

As Lowe's book described:

"When dealing only with his own money, investment losses never bothered Munger much. To him it was like a losing night in a regular poker game where you knew you were one of the best players - you’d make up the difference later. But he now found that reported, temporary quotational losses in the Wheeler, Munger limited partnership accounts gave him tremendous pain. And so, by the end of 1974, he had resolved, like Buffett, to stop managing money for others in a limited partnership format. "

Disclosure: The author owns no stock mentioned.

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