Warren Buffett (Trades, Portfolio) has built a tremendous fortune by following the investment principles of the dean of value investing, Benjamin Graham. However, Buffett's long-term partner, Charlie Munger (Trades, Portfolio), does not have the same kind of affection toward Graham as Buffett.
Munger on Graham
In an interview with Jason Zweig of The Wall Street Journal back in 2014, A Fireside Chat With Charlie Munger, the great investor explained why he does not have the same kind of love for Graham as his business partner. "I don't love Ben Graham and his ideas the way Warren does," Munger said.
"You have to understand, to Warren -- who discovered him at such a young age and then went to work for him -- Ben Graham's insights changed his whole life, and he spent much of his early years worshipping the master at close range," he added.
Munger went on to say that he believes, "Graham had a lot to learn as an investor," because his investment principles were developed during the Great Depression, and he designed his investment strategy around making sure he never had to lose money again. "It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay," Munger said. "I think Ben Graham wasn't nearly as good an investor as Warren Buffett (Trades, Portfolio) is or even as good as I am," he adds.
Cigar butt style out of date
Munger's main issue with the way Graham invested was that he stuck to "cigar-butt" style investments, which was undoubtedly a great investment strategy at the time, but the world has changed significantly since then. For Berkshire, with hundreds of billions of dollars in assets under management, it would be impossible to make this strategy work today.
According to Munger, Graham's downfall was "trying to make a strategy that anyone could use." He explained this view in his now well-known speech, "A Lesson on Elementary, Worldly Wisdom as It Relates to Investment Management & Business," at the University of Southern California Business School in 1994:
"Graham didn't want to ever talk to management. And his reason was that, like the best sort of professor aiming his teaching at a mass audience, he was trying to invent a system that anybody could use. He also had a concept that management would often couch the information very shrewdly to mislead."
He went on to add that by combining both robust financial analysis and qualitative analysis of management, Buffett and Munger have been able to build a more profitable investment strategy:
"We realized that some company that was selling at two or three times book value could still be a hell of a bargain because of momentums implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other, or some system or other."
Munger went on to add:
"If a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you'll end up with one hell of a result."
Adapting with the times
I think this is interesting because it offers an insight into how Munger's (and Buffett's) investment strategy has developed over the years. It shows us how important it is not to take any investment strategy for granted.
Graham is considered to be one of the best investment teachers of all time, but if Buffett and Munger had continued to follow his advice blindly, it's possible that they wouldn't have got to where they are today. They realized the strategy was running out of puff, so they decided to tweak how they looked at the market. The rest, as they say, is history. It's a good lesson in never taking any investment strategy for granted and always adapting and planning according to your own experience and circle of competence.
Disclosure: The author owns shares in Berkshire Hathaway.
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