The ten wisdoms of stock market legend Charlie Munger

With the passing of Charlie Munger, Warren Buffett loses his inseparable right-hand man. Munger cherished his image as a gruff sidekick to the world's greatest investor, but that did not prevent him from sprinkling around witty stock market wisdom and life lessons. A sampling of an investor icon's repertoire.

A few weeks before he would turn 100, Charlie Munger breathed his last this week. His name is forever linked to Warren Buffett's. For decades, the pair set the lines at Berkshire Hathaway, Buffett's stock market vehicle of which Munger became vice chairman in 1978. He gladly left the spotlight to his good friend Buffett, but behind the scenes Munger was influential as a sounding board and inspirer of Berkshires investment approach.

When he spoke - as at Berkshire Hathaway's annual general meeting, on a stage next to Buffett in front of tens of thousands of shareholders in attendance - it was typically in cutting one-liners. Occasionally he would then bring out his classic "I have nothing to add" when Buffett had once again spent minutes answering a shareholder's question. The audience savored it.

But Munger did have something to add. He was a deep and complex thinker, a well-read man too, with an aversion to fixed patterns of thought. At the same time, he valued old-fashioned decency, honesty and prudence. Although he was a billionaire, he still lived in the house he had 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 financial conglomerate Wesco, of which he was chairman until it was swallowed whole by Berkshire in 2011. For investors, and for all those hoping to make a success of life, Munger had words of wisdom to spare. An anthology.

'Any kind of smart investing is value investing: acquiring more than you pay for'

Buffett and Munger earned fame as the ultimate value investors. In this process, an investor looks for stocks that appear cheap versus their longer-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 edge. A rock-solid brand like Coca-Cola is one such.

Munger, not Buffett, provided the impetus for Berkshire Hathaway's highly lucrative investment philosophy. Initially, Buffett bought muddling companies at steep discounts. He once compared them to "cigarette butts" from which you puff a last puff.

Munger recommended broadening the horizon. He convinced Buffett to set his sights on strong brands with loyal customers: those offer the prospect of years of cash flows, even if, as an investor, you pay a little more for them. Or as Buffett once put it, "The blueprint he gave me was simple: forget what you know about buying fair companies at wonderful prices, buy wonderful companies at fair prices.

An early example of that approach was Berkshires acquisition of See's Candy Shops in 1971. On Munger's advice, 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. Buffett would not regret it. See's Candy Shops would generate some $2 billion for Berkshire over the following decades.

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

'Much diversification is insane'

'One of the most foolish things they teach you in college about investing is that you have to diversify tremendously. That's insane. It's not easy to find an abundance of good opportunities. If you find three in a year, that's a lot. If you have a brilliant idea, go all in. Put a lot into it.'

Munger and Buffett did that with American Express, among others. In 1995, they invested $1.3 billion in the credit card issuer. That stake is now worth $25 billion. Dividends grew from $41 million to $303 million.
Munger thinks it makes sense that a small number of super companies provide the bulk of Wall Street's climb. 'We've learned that about a dozen companies are doing much better than everything else. You have to have at least two or three of them," he said earlier this year. With Apple as its largest holding, Berkshire is sitting pretty.

Munger saw Costco as one such mega-growth company. Since 2010, the U.S. department store chain's share price vertwaalfvoud. He was personally one of the largest shareholders. "I wish America worked as well as Costco did. What a blessing that would be for all of us. I am 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 let a slightly better or worse number lead them to push the buy or sell button. Or they let their fear or greed take over, preventing them from making rational decisions. Many therefore buy when stocks are expensive, when optimism prevails. And they sell when prices are low, when the market is depressed. Whereas they should do just the opposite.

'The world has still not ended,' Munger said several times at Berkshire's general meeting. After rain always comes sunshine. The masterminds in investing, according to Munger, take their time, stay calm and are always very cautious. They let time do its work. 'It's amazingly intelligent as an investor to just stay in a chair.' Great companies do overcome dips, and growth upon growth eventually produces phenomenal returns. The occasional stock market crash - a 50 percent plunge every few decades - is something an investor should take "equanimously," Munger said.

Busy trading also nibbles directly at your investment returns. 'Doing a lot of trades leads to unnecessary transaction costs,' says Patrick Millecam, 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 are right,' Millecam underscores Munger's mantra. 'The stock market can spit out irrational prices for a long time, but sooner or later economic reality forces investors to return to rationality. We are seeing this again: rising interest rates have put an end to the venture capital bubble. And there are already a lot fewer meme stocks than there were a few years ago.'

The stock that has been in Berkshires portfolio the longest is Coca-Cola. Buffett and Munger got into the soft drink maker 35 years ago. The stake grew from $1.3 billion to $25 billion, yielding $704 million in dividends last year. More than enough for Buffett's daily can of Coca-Cola.

'Go to bed a little wiser each day than you got up'

Constantly learning and leveraging 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 have a long life ahead of you, that's a huge help. Without a learning machine, you're a person with one leg in a world that kicks your butt.'

Setbacks also help you become smarter and wiser. 'Occasionally in life you get hit. Huge blows. Unfair blows (Munger lost his nine-year-old son to leukemia, ed.). Some overcome them, others don't. Adopt the attitude of Epictetus (a Greek philosopher, ed.): every setback in life is an opportunity. Don't be immersed in self-pity, but use that blowup in a constructive way.'

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

Self-knowledge, in addition, involves knowing what you don't know. 'We're not that smart, but we know more or less how far our smartness extends. That's a very important part of practical intelligence," Munger said. He and Buffett translated that by putting investment ideas on three piles: "yes," "no" and "too hard. If they didn't understand it, they abandoned it.

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

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

Apparently, many investors fail to take the foregoing wisdom to heart. 'If you remain rational yourself, the silliness of the world will help you,' Munger orated. 'Our experience shows that being well prepared, and then acting quickly and ambitiously at a few moments in a life while doing the simple and logical thing, will often dramatically improve your investment results,' he said.

Berkshire has proven on several occasions to be bold when panic and excessive pessimism reigned in the stock market. 'Be fearful when others are greedy, be greedy when others are fearful,' reads a well-known Buffett investment wisdom. For Millecam, this means it is important as an investor to 'do your homework and dig deep enough' in your analysis. Because the market is really not as efficient and omniscient as is sometimes postulated. Otherwise Berkshire could not exist.'

This is not to say that investing is easy. On the contrary, Buffett and Munger have regularly made it clear that even most professional investors do very little while charging their clients fees. Therefore, there is nothing wrong with investing in a low-cost index fund that foolishly tracks a stock index such as the U.S. S&P500.

'Most people should probably just 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 he's a good stock picker. Also, why would he pick stocks? He doesn't design his own electric motor and his blender, does he?'

'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 having to make a judgment through a distorted lens,' Munger emphasizes. 'Sometimes you have to change your view.'

One example is Berkshire's investment in the Burlington Northern Santa Fe railroad company. 'Warren and I hated railroad companies for decades. But the world changed. Finally, four major railroad companies remained in the U.S. that are vital to the economy. We were slow to see that change. But better late than never. It made us billions.'

Berkshire is also on board with greening. Berkshire Energy is the largest private investor in renewable energy in the US. Although Munger and Buffett stressed that fossil fuels are also needed. Oil giants Chevron and Occidental Petroleum are big positions held by Berkshire. On the other hand, Berkshire, spurred by Munger, who was fascinated by technology, bet firmly on Chinese e-car maker BYD. Not without first convincing the notoriously technophobic Buffett.

'Real estate? The buildings don't usually topple, the owners do'

Although Munger made his first million with apartments, he and Buffett are not lovers of real estate. Berkshire Hathaway parted ways with its sole real estate landlord, Store Capital, last year. The holding company is in the brokerage business through Berkshire Home, though.

Munger and Buffett quickly recognized that the interest rate climb that began 1.5 years ago could be pernicious for debt-laden real estate players. 'The U.S. economy will weather the interest rate storm. Buildings won't fall over either. But the owners will,' 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 for 60 years in the house he designed himself. 'I deliberately didn't want to live a life like the Duke of Westchester or anything like that,' he told CNBC in his latest interview. 'I didn't want my children to grow up in extreme opulence, but to instill in them the values of modesty and diligence.'

Buffett also still has his modest 1958 home in Omaha. Though he usually resides in his mansion on a 6-square-mile site he bought in Illinois.

'Crypto is like trading turds'

Munger never minced words, and the crypto-currency world will have known that. He once compared bitcoin to "rat poison" and "worthless, artificial gold. He took offense at the usefulness of crypto currencies to "kidnappers and extortionists.

At Berkshire's general meeting last year, he opened fire again. 'In my life, I try to avoid things that are stupid and evil and make me look bad. Bitcoin does all three of those things.' In an opinion piece earlier this year, he asked the U.S. government to ban crypto currencies, saying they are nothing more than a gambling tool.

'Munger's strong criticism of crypto currencies can also be viewed more broadly: cobbler, stick to your last,' says Millecam. 'We have stuck 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 the exuberant prices for big tech and other growth stocks, private equity and recently also private debt. Don't jump on hypes. Stick to principles and valuation criteria. No matter how enticing the sucking effect of hype may be.'

'They got the boy out of Omaha, but not Omaha out of the boy'

Like Buffett, Munger grew up in Omaha, a not very swinging town in rural Nebraska. Munger never denied his roots, 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," mused Munger, who donated hundreds of millions away to educational institutions.

In investing, the honesty of corporate executives took precedence for him. Munger abhorred juggling accounting profit definitions - "ebitda" (gross operating profit), for him, could be substituted for "bullshit.

'Stay cheerful despite setbacks'

When Munger was asked on the business channel CNBC in 2019 about his secret to a long and happy life, the answer was "easy, because so simple. 'Don't be too envious or resentful. Live within your financial means. Stay cheerful despite setbacks. Deal with trustworthy people and do what you are supposed to do. All these simple rules work fine 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