The ten wisdoms of stock market legend Charlie Munger

With the death of Charlie Munger, Warren Buffett loses his inseparable right hand. Munger cherished his image as the gruff sidekick to the world's biggest investor, but that didn't stop him from spreading witty stock market wisdom and life lessons. A selection from the repertoire of an investor icon.

A few weeks before he would turn 100, blew Charlie Munger took his last breath this week. His name is forever linked to Warren Buffett's. For decades, the duo set the lines at Berkshire Hathaway, Buffett's stock exchange vehicle where Munger became vice chairman in 1978. He liked to shine the spotlight on his good friend Buffett, but behind the scenes, Munger was influential as a sounding board and inspiration for Berkshire's investment approach.

When he spoke - like at the Berkshire Hathaway Annual General Meeting, on a stage next to Buffett in front of tens of thousands of shareholders present - it was typically in snappy one-liners. From time to time, he would pop out his classic “I have nothing to add” when Buffett had answered another question from a shareholder for minutes. The audience loved it.

But Munger did have something to add. He was a deep and complex thinker, a well-read man, who hated entrenched thinking patterns. At the same time, he valued old-fashioned decency, honesty and prudence. Although he was a billionaire, he still lived in the house he designed himself in the 1950s.

And he could talk for hours, at least when Buffett wasn't by his side. Like at the general meetings of the financial conglomerate Wesco, which he chaired until it was completely absorbed by Berkshire in 2011. For investors, and for all those hoping to make life a success, Munger had words of wisdom. An anthology.

'Any form of smart investing is value investing: getting more than you pay'

Buffett and Munger rose to fame as the ultimate value investors. In addition, an investor looks for stocks that seem cheap against their long-term fundamental value. Value stocks typically correspond to companies that generate robust cash flows and dividends, are well managed and preferably have a “moat” that gives them a strong competitive position. A strong brand like Coca-Cola is one of them.

Munger, not Buffett, provided the impetus for Berkshire Hathaway's highly lucrative investment philosophy. Initially, Buffett bought muddling companies at substantial discounts. He once compared them to “cigarette butts” that give you a last bite.

Munger recommended expanding the horizon. He convinced Buffett to focus on strong brands with loyal customers: they offer the prospect of years of cash flows, even if you pay a little more for it as an investor. Or as Buffett once said, “The blueprint he gave me was simple: forget what you know about buying fair companies at great prices, buy great companies at fair prices.”

An early example of that approach was Berkshire's acquisition of See's Candy Shops in 1971. At Munger's suggestion, Buffett paid a higher price than he was used to, in this case $25 million for a candy company with an annual profit of a modest 4 million dollars. Buffett wouldn't regret it. Over the next few decades, See's Candy Shops would generate around $2 billion for Berkshire.

By the way, Berkshire Hathaway itself was a cigarette butt when Buffett took control of the struggling textile company in 1965. Munger helped turn it into an impressive conglomerate that is worth more than 780 billion dollars on the stock market today.

'A lot of diversification is insane'

“One of the most foolish things they teach you about investing at university is that you have to diversify enormously. That's crazy. It is not easy to find a plethora of good opportunities. If you find three in a year, that's a lot. If you have a brilliant idea, go all out for it. Bet a lot. '

Munger and Buffett did this with American Express, among others. In 1995, they invested 1.3 billion dollars in the credit card issuer. That stake is now worth 25 billion. Dividends grew from 41 to 303 million dollars.
Munger thinks it's logical that a small number of supercompanies are responsible for most of Wall Street's climb. “We've learned that around twelve companies are doing much better than all the rest. You should have at least two or three of them,” he said earlier this year. With Apple as the largest stake, Berkshire is in the right place.

Munger saw Costco as such a mega grower. Since 2010, the price of the American department store chain has increased twelffold. He was personally one of the largest shareholders. “I wanted America to work as well as Costco. What a blessing that would be for us all. I'm a Costco addict. I will never sell a share of it.

'The big money is not in buying and selling, but in waiting. '

Many investors are hyperactive. They are guided by a slightly better or worse figure to push the buy or sell button. Or they let their fear or greed get the better of them, preventing them from making rational decisions. Many therefore buy when stocks are expensive, when optimism prevails. And they sell at low prices when the market is depressed. When they should do just the opposite.

“The world is still not over,” Munger said several times at the Berkshire General Assembly. There's always sunshine after the rain. According to Munger, the masterminds in investing take their time, stay calm and are always very cautious. They let time do its work. “As an investor, it's amazingly intelligent to just sit in a chair.” Great companies do get over dips, and growth over growth ultimately provides phenomenal returns. The occasional stock market crash - a dive of 50 percent every few decades - should make an investor look “as equanimous”, says Munger.

Busy trading also directly nibbles at your investment return. “Doing a lot of transactions leads to unnecessary transaction costs,” says Patrick Millecam, a fund manager at Value Square, which embraces Berkshire's philosophy of value investing.

“And it also distracts the manager from the long-term horizon. You have to be patient and be able to wait until you're right,” underlines Millecam Munger's mantra. “The stock market can spew out irrational prices for a long time, but sooner or later, economic reality forces investors to return to rationality. We see that again: rising interest rates have put an end to the venture capital bubble. And there are already far fewer meme stocks than a few years ago. '

The longest-lasting stock in Berkshire's portfolio is Coca-Cola. Buffett and Munger joined the soft drink maker 35 years ago. The stake grew from 1.3 billion to 25 billion dollars, and paid 704 million dollars in dividends last year. More than enough for Buffett's daily can of Coca-Cola.

“Go to bed a little wiser every day than you woke up”

Constant learning and making use of your experiences not only makes you a better investor, but also a better person, Munger emphasizes. 'I constantly see people moving forward in life who are not the smartest, often not even the most diligent, but they are learning machines. Especially if you still have a long life ahead of you, that is a huge help. Without a learning method, you're a one-footed person in a world that steps on your ass. '

Setbacks also help you become smarter and wiser. “Every now and then, you get hit in life. Huge blows. Unfair blows (Munger lost his nine-year-old son to leukemia, ed.). Some get over them, others don't. Take Epictetus' attitude (a Greek philosopher, ed.) to: every setback in life is an opportunity. Don't let yourself be immersed in self-pity, but use that sacrifice in a constructive way. '

Knowledge also helps you to realize your shortcomings. If you make an investor mistake, write it down. So you never make them again. Investing in an overpriced or shaky company, with poor management or a poor balance sheet: anyone can make mistakes, but a donkey won't bump into the same stone twice. 'I always rub my nose deep into my mistakes, 'says Munger.

Self-knowledge also means knowing what you don't know. “We're not that smart, but we know more or less how far our smarts go. That's a very important part of practical intelligence,” Munger said. He and Buffett translated that by putting investment ideas in three stacks: “yes”, “no” and “too difficult”. If they didn't understand, they left it behind.

Millecam cherishes that approach. “At Value Square, we have clearly defined what we do and what we don't do. We only invest in companies that we understand. For example, we don't invest in biotechnology companies because that's outside our area of competence. '

“If people weren't wrong so often, we wouldn't be so rich”

Apparently, many investors fail to take the previous wisdom to heart. “If you stay rational yourself, the world's stupidity will help you,” Munger oracled. “Our experience shows that being well prepared to act quickly and ambitiously at a few moments in a lifetime, doing the simple and logical, will often dramatically improve your investment results,” he said.

Berkshire has repeatedly proved that it dares to go big when panic and exaggerated pessimism prevailed on the stock market. “Be anxious when others are greedy, be greedy when others are anxious,” says Buffett's well-known investment wisdom. For Millecam, this is why it is important as an investor to “do your homework and dig deep enough” into your analysis. “Because the market is really not as efficient and omniscient as it is sometimes said. Otherwise, Berkshire couldn't exist.”

That does not mean that investing is easy. On the contrary, Buffett and Munger have regularly made it clear that even the most professional investors don't make much of it, even though they charge their customers. There is therefore nothing wrong with investing in a cheap index fund that simply follows a stock index such as the US S&P500.

“Most people should probably only have index funds,” Munger said. “That's perfectly rational for someone who doesn't want to think too much about the stock market and has no reason to believe they're a good stock picker. Why should he also choose stocks? Surely he doesn't design his own electric motor and mixer? '

“When the world changes, you have to change too”

A good investor is like a chameleon adapting to changes in society. “If you don't see the world as it is, it's like judging through a distorted lens,” Munger emphasizes. “Sometimes you have to change your point of view.”

One example is Berkshire's investment in the Burlington Northern Santa Fe railway company. “Warren and I have hated railway companies for decades. But the world changed. In the end, four major railway companies in the US were left that are vital to the economy. We were slow to see that change. But better late than never. It has brought us billions. '

Berkshire is also involved in greening. Berkshire Energy is the largest private investor in renewable energy in the U.S. Although Munger and Buffett emphasized that fossil fuels are also needed. The oil giants Chevron and Occidental Petroleum are Berkshire's major positions. On the other hand, under the impetus of Munger, who was fascinated by technology, Berkshire bet heavily on Chinese e-car manufacturer BYD. Not without first convincing the notoriously technophobic Buffett.

“Real estate? The buildings don't usually fall over, but the owners do.”

Although Munger made his first million with apartments, he and Buffett are not real estate enthusiasts. Berkshire Hathaway said goodbye to its sole property landlord, Store Capital, last year. The holding company is in brokerage through Berkshire Home.

Munger and Buffett quickly realized that the interest rate climb that began 1.5 years ago could be detrimental to debt-laden real estate players. “The US economy is getting over the interest rate storm. The buildings will not fall down either. But the owners do,” Munger said. “Commercial real estate, in particular, is in a toxic cocktail. Shopping centers, offices: a lot of real estate is in trouble. The defaults will also hurt the banks. We have no special competence in real estate. That's why we spend almost no time thinking about it. '

Munger kept his real estate modest. He lived in the house that he designed himself for 60 years. “I deliberately didn't want to live a life like the Duke of Westchester or anything,” he told CNBC in his latest interview. 'I didn't want my children to grow up in extreme opulence, but to teach them the values of modesty and diligence. '

Buffett also still has his modest home in Omaha from 1958, although he usually lives in his mansion on a 6-square-kilometer site that he bought in Illinois.

“Crypto is like trading in turds”

Munger never minced words, and the world of cryptocurrencies must have known that. He once compared bitcoin to “rat poison” and “worthless artificial gold.” He took offense at the usefulness of cryptocurrencies for “kidnappers and extortionists”.

At the Berkshire General Assembly last year, he opened fire again. “In my life, I try to avoid things that are stupid and evil and that make me look bad. Bitcoin does all three things.” In an opinion piece earlier this year, he asked the US government to ban cryptocurrencies because they are nothing more than a gambling tool.

“Munger's strong criticism of cryptocurrencies can also be seen more broadly: shoemaker, stick to your reading,” says Millecam. “We've been sticking to the principles of value investing for over 15 years. Even though they faced headwinds for a long time due to falling interest rates and exuberant prices for big tech and other growth stocks, private equity and recently private debt. Don't jump on hypes. Stick to principles and valuation criteria. No matter how tempting the uptake effect of a hype may be. '

“They got the boy from Omaha, but Omaha didn't get out of the boy”

Like Buffett, Munger grew up in Omaha, an unswinging city in rural Nebraska. Munger never denied his ancestry, although he had moved to California fairly quickly. “All those old-fashioned values - family first, making sure you're in a position to help others, prudence, a moral obligation to be reasonable - are more important than being rich or important,” said Munger, who donated hundreds of millions to educational institutions.

When it came to investing, the honesty of business leaders came first for him. Munger hated juggling with accounting profit definitions - should you replace “ebitda” (gross operating profit) with “bullshit” for him.

“Stay happy despite setbacks”

When Munger was asked about his secret to a long and happy life on the CNBC business channel in 2019, the answer was “easy because that simple.” “Don't be too envious or resentful. Live within your financial means. Stay happy in the face of setbacks. Hang out with trustworthy people and do what you're supposed to do. All those simple rules work great to improve your life. '

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Source

The Time: The ten wisdoms of stock market legend Charlie Munger

Authors: Kris Van Hamme, Serge Mampaey

Date: 01/12/2023

Image

Description: Charlie Munger in 2010

Date: 5/5/2010

Source: https://www.flickr.com/photos/nickwebb/4588663010/

Author: Nick Webb