Charlie Munger: An Investor's Guiding Light

The investing world has lost one of its brightest stars.

Charlie Munger, Vice Chairman of Berkshire Hathaway, and the man who guided Warren Buffett, has passed away at 99.

Buffett himself called Munger his right-hand man. It's safe to say that Berkshire Hathaway wouldn't be what it is today without his contribution.

We at Equitymaster are well aware of Munger's work and wisdom. His biggest contribution to the world of investing was probably convincing Buffett to change his investing style.

Buffett trained under Benjamin Graham, the father of value investing, in a hard-nosed, conservative style of fundamental analysis. Buffett would base his buy/sell decisions on a company's current fundamentals. He wouldn't give much importance to its future prospects.

It was Munger who made him change his approach. Buffett eventually shifted his focus to high quality companies with a 'moat', i.e., a long-term durable competitive advantage. These companies can sustain high levels of profitability and cash flows in the face of rising competition.

The stocks of such companies rarely trade cheap. Buffett, well aware of this, would avoid them before he changed his style. Now his portfolio is largely made up of stocks of such high-quality companies with strong moats. It's the reason why Apple is his biggest equity investment.

Munger's Legacy

Many of Buffett's legendary investments came after he partnered with Munger, who called them 'wonderful businesses.'

The best example of this was Buffett's purchase of See's Candies in 1972. Munger convinced Buffett of the reason why the company was a 'dream business.'

You see, in many ways this was a defining moment in Warren Buffett's investing career. It was the first time he bought a company that was not available cheap. So why did he buy it?

It's because Munger had convinced him of the following...

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

That brings us to what Munger means by the term "wonderful company". Wonderful companies exhibit the following characteristics:

• A strong reputation in the market.
• A focus on core strengths.
• A sustainable business model that needs very little capital for growth.
• Run by ethical and competent managements who are focused on the company’s moat.
• And are extremely profitable.

We at Equitymaster are grateful for the lessons that Buffett learned from Munger. It has helped shape our thinking in priceless ways.

A wonderful business will steadily compound investor wealth over the long term. Even if you don't purchase such a stock at a dirt-cheap price, you can still expect an above average return on your investment.

Munger's Views

Munger's two strongest views were about fraud, corporate salaries at senior levels, and cryptocurrencies.

Munger was of the view that executive compensation had become extravagant. Compensation packages given to some senior executives were so high, that as per Munger, it was 'immoral'.

He believed that greed at the senior levels of large corporations had reached such a scale that fraud had become commonplace.

We completely agree with Munger on this.

He was also a fierce critic of cryptocurrencies. Munger believed they had no value and that governments should ban them.

We wrote about this here - Why Value Investors Hate Bitcoin.

Just like Buffett, Munger has been quite generous in sharing his wisdom about investing and life. We wrote a piece on this too - 5 Buffett and Munger Quotes that Will Change Your Thinking.

A China Bull

Munger is a noted bull on China.

He has openly praised the Chinese government and economy many times. He supported the Chinese government's decision to ban bitcoin and said the US government should do the same.

He convinced Buffett to buy the stock of Chinese EV maker BVD, although Buffett has been reducing his stake in the firm.

Conclusion

Munger has been a major voice in the investing world when it comes to investing safely and intelligently.

If there is one thing you can learn from Munger, it would be this - do your research, buy when others are fearful, buy stocks you understand, and most importantly invest, don't trade.

Advocating thinking like a business owner, he always looked for companies with an economic moat.

Munger also strongly believed that no matter how good a business or its prospects, it boils down to the person running the show and how much you're willing to pay for it.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...