Charlie Munger (Trades, Portfolio) is considered to be one of the greatest investors and thinkers of the financial world. However, we don't have a particularly detailed picture of his investment style.
Unlike his business partner, Warren Buffett (Trades, Portfolio), who has been writing letters to his investors and shareholders since he started managing outside money in the 1950s, Munger has rarely published detailed correspondence on his portfolio activities.
That being said, we do have some insight into how Munger has been investing from other sources. For the most part, his investment career can be put into three buckets.
Unlike Buffett, who was investing from an early age, Munger concentrated on his legal career first and then moved on to investing.
"Charlie started out, you know, in real estate development because it took very, very little capital, and you could magnify brainpower and energy — or, I should say, brainpower and energy could magnify small amounts of capital in a huge way that was not true in securities."
By leveraging up his capital, Munger was able to turn a small investment into a big fortune relatively quickly. "I had five real estate projects. I did both side-by-side for a few years, and in a very few years, I had $3 million -- $4 million," Munger told Michigan Ross Dean Scott Derue in 2017.
After meeting Buffett, Munger went into the investment management business. At this stage, we get more of an idea of how Munger liked to invest.
According to various sources, Munger was happy to invest big chunks of his and his partners' money, borrowing money on occasion to turbocharge returns. According to Alice Schroeder's "The Snowball:"
"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."
This approach ultimately caused Munger to close his partnership in the mid-1970s because he couldn't take the pain the volatility was causing his investors. From Jane Lowe's book, "Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger:"
"Charlie realized that some partners would suffer hard-to-bear distress. After all, an investment of $1,000 on January 1, 1973, would have shrunk to $467 by January 1, 1975, if the partner had never taken any money out during the period. In contrast, a similar $1,000 investment that performed in line with the Dow Jones Industrial Average over the same period would have shrunk much less, leaving $688. Moreover, following precedents in the Graham and Buffett partnership, all Wheeler, Munger partners drew cash from their partnership accounts at one half a percent per month on start-of-the-year value. Therefore, after regular monthly distributions were deducted, limited partners' accounts in 1973 to 1974 went down in value even more than 53%."
The Daily Journal
The next major stage of Munger's investment career is his work at the Daily Journal (DJCO, Financial). While he did manage money and companies in between, his trading at the Daily Journal has been much more public, that's why I've highlighted it as the third major stage.
At the Daily Journal, Munger waited years for the right opportunity, putting all excess capital generated into treasury bonds. He then acted rapidly and with conviction. Munger deployed $15.5 million of the Daily Journal's money right at the peak of the financial crisis, buying stakes in Bank of America (BAC, Financial), Wells Fargo (WFC, Financial), U.S. Bancorp (USB, Financial) and Posco (PKX, Financial).
When he was asked at a later date why he decided to buy Wells Fargo in particular, he said: "We bought Wells Fargo & Co. stock when it was at $8, and I don't think we will have another opportunity like that."
So what can we take away from all of this? Well, it's clear from Munger's trading history that he's always been willing to make significant, highly leveraged bets. (Highly leveraged both in terms of borrowing and upside.)
It also seems as if Munger has never been diversified and never wants to be. He acts infrequently and with conviction when opportunities arise. That appears to be the secret to his success.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- How Buffett Analyzes Risk: We Don't Have a Formula
- Mohnish Pabrai: Why Investors Should Operate Alone
- Bank of America May Be Buffett's Favorite Stock in an Overvalued Market
Not a Premium Member of GuruFocus? Sign up for aÂ free 7-day trial here.