Charlie Munger - co-founder of Berkshire Hathaway's success

Charlie Munger is one of the best investors in the world. He is not such an iconic figure as Warren Buffett, but she is one of the few influencers in Omaha Oracle's investment decision-making. Charlie Munger has been faithful to his investment strategy for many years. Thanks to its application, he became a billionaire and co-creator of Berkshire Hathaway's success. In today's article, we will present the history of this outstanding investor.

Childhood, education

Like Buffett, Charlie Munger was born in Omaha, Nebraska. At the time of writing the article Charlie is almost a hundred years old (was born in 1924). He came from a wealthy legal family. Munger's father was a lawyer, while Charlie's grandfather, Thomas Charles Munger, was a judge and representative of the State. As a teenager worked at Buffett & Son. It was a store that belonged to Warren Buffett's grandfather. However, he had to wait many more years for his acquaintance with Warren Buffett.

Charlie Munger did not follow in his father's footsteps at first. He enrolled at the University of Michigan, where he studied mathematics. Interestingly, Charlie Munger, while studying at the University of Michigan, joined one of the oldest associations operating in the United States - the Sigma Phi Society. In 1943, he volunteered for the US Army Air Corps. After receiving high scores at AGCT (Army General Classification Test), he was sent to study meteorology at Caltech in Padadena, California. 

After the war, Charlie Munger decided to start his father's alma mater studies - Harvard Law School. Initially, the dean refused Munger the opportunity to study because he did not complete his bachelor's degree (his studies were interrupted by the war). The case was settled by former Harvard Law dean Roscoe Pound who convinced the college administration to allow Charlie's education. The fact that the former dean was a friend of the Munger family adds some flavor to the case. Charlie Munger took his chance. He graduated from school in 1948 with honors (magna cum laude).

During studies and while in the army, young Munger learned a very useful skill - playing cards. Thanks to her, he learned to be reasonable when it comes to risk. During the game, he would often fold when the probability of winning was low, but he would increase the stakes sharply when he had a significant probability advantage over his opponents. 

Career

Munger began his career at the law firm Wright & Garett. In 1962, together with six partners, he founded the company Munger, Tolles & Olson LLP. The company is one of the most famous law firms in the United States. One of the hallmarks of this company is egalitarianism. Both the ground floor and the ordinary lawyer have an equal number of votes when hiring new employees. The company has participated in many significant transactions, including:

• Warren Buffett's donation of $ 31 billion to the Bill and Melinda Gates Foundation,
• Berkshire Hathaway General Reinsurance purchased for $ 22 billion,
• Berkshire Hathaway's acquisition of a $ 5 billion stake in Goldman Sachs.

Additionally, Charlie Munger was a partner at Wheeler, Munger and Co, which was an investment firm operating on the Pacific Coast Stock Exchange. The project was terminated in 1976 after a series of poor investment performance. 

Munger was also president of Westco Financial Corporation, now a subsidiary of Berkshire Hathaway. The company started as a loan and credit association, which over time became the owner of various companies (including CORT Furniture Leasing). Wesco had a concentrated portfolio of shares (including Coca-Cola, P&G, Kraft Food's, Goldman Sachs).

Munger has become popular in the investment world due to its excellent performance in an investment partnership. A nose to business caused it in the years 1962 - 1975, the average annual rate of return in the investment partnership was up to 19,8%. At the same time Dow index achieved an average annual rate of return of 5%. His investment strategy differed from that of the "early Buffett" i Benjamin Graham. Instead of buying companies that were valued well below intrinsic value, he believed that quality was paid for. Therefore he preferred to buy a fantastic company at an average price than an average company at a fantastic price.

CHECK: How to Invest in Berkshire Hathaway Stocks? [Guide]

Collaboration with Warren Buffett

Berkshire Hathaway Headquarters Source: Wikipedia.org

Although Charlie Munger and Warren Buffett worked in the same store in their youth, they only met as adults. They first met when Charlie Munger was 35 and Warren Buffett was 28 at the time. They met at dinner and liked each other right away. Charlie and Warren had a similar sense of humor without a doubt. It was at the urging of Warren Buffett that Charlie abandoned his legal career in favor of an investment. Their friendship eventually led to the decision to start a business relationship. In 1978, they began a mutual partnership to develop the Berkshire Hathaway investment vehicle. As part of the partnership, Munger received shares in Buffett's investment vehicle. Charlie became the second person in the company after Warren. 

After lengthy debates, Munger convinced Buffett that it is not worth investing only in discounted, average companies, but choosing companies of very good quality. One of the first joint investments of Munger and Buffett was a confectionery factory See's Candies. The company was purchased for $ 25 million, which was against Buffett's rules. This was due to the fact that the amount of $ 25 million exceeded the company's net worth many times over. In 1972 alone, See's generated $ 4 million in profit before tax.

Since its purchase, See's has generated over $ 2 billion in profit with minimal investment. It was a turning point in the history of the fund. From now on, companies with strong foundations, a significant investment moat and the ability to generate large free cash flow (FCF) in the long term were selected. It was thanks to the intelligence and persistence of Charlie Munger that Buffett abandoned Benjamin Graham's orthodox teachings. Buffett himself once mentioned:

“It took a tremendous amount of strength to convince me to deviate from Graham's limited views. This force was found to be the mental strength of Charlie Munger. It was he who broadened my horizons. "

Another piece of advice from Munger Buffett was to invest more in the insurance business. This was to allow the creation of a "float" deposit in the form of insurance premiums. These premiums were to be a cheap source of financing for portfolio investments Berkshire Hathaway. Since Munger's "tenure" in Berkshire, the "float" collected from insurers has increased from $ 19 million to nearly $ 150 billion. As a result, Warren Buffet and Charlie Munger had long-term capital to spread the company's sails. 

Charlie Munger: Investment Philosophy

Charlie Munger is typical "Value investors". It does not focus on predicting when a recession will occur, what will be inflation in 5 years or the policy of the central bank. Instead of this tries to find businesses that have a unique position on the market and a very good managementwho can take advantage of the competitive advantages of their enterprise. Munger might have characterized his investment philosophy as buying a $ 1 business for $ 1,25 that aims to be worth $ 15 in 10 years. 

Like Buffett, Munger is not very fond of "idle assets." For this reason does not invest in precious metals, raw materials or cryptocurrencies. About the last asset class, Charlie is very skeptical. In an interview on April 30, 2022, he named cryptocurrencies "Something unworthy of contempt" and "[Cryptocurrencies] is like a venereal disease". He maintained his skepticism about cryptocurrencies even despite the fact that Berkshire Hathaway itself invested in a company operating on the cryptocurrency market (Nubank).

Munger is also not in favor of too much diversification. This is because it is a straightforward way to "dilute the profit." Charlie Munger is of the opinion that instead of having a portfolio of 50 average companies, it is much better to concentrate the portfolio on a few or a dozen investments that are of very high quality. Carefully selected companies can provide an above-average rate of return.

A friend of Buffett also believes that market fluctuations should not be worried about if they do not result from a change in the long-term fundamentals of the company. The fact that this well-known investor is able to admit a mistake is evidenced by the investment in a Chinese giant - Alibaba. Munger invested in a technology company through the Daily Journal Corp. Charlie was a huge fan of Chinese companies, believing they could provide an investor with an above-average rate of return. At the end of 2021, Munger purchased over 136 ADRs for Alibaba, as a result DJC owned 000. ADRs. At the end of the year, the number of ADRs rose to over 302. However, with the escalating tensions between the United States and China and the growing regulatory pressure in the Middle Kingdom, Alibaba no longer looked like a good investment. As a result, DJC reported that in Q600 000 it reduced its exposure to Alibaba's shares by half. For now, the sale of the shares has generated a tax loss.

Lollapalooza effect

Charlie Munger at one of the lectures at Harvard University in 1995 (course title: The Psychology of Human Misjudgment) talked about Lollapalooza effect. In simple terms, it is the action of many factors at the same time and in the same direction. In special situations, it may lead to a non-linear effect. The Lollapaloosis effect can have negative effects and lead to irrational behavior as well as to create positive effects (e.g. AA associations can help some to recover from addiction).

The Lollapalooza effect is visible, inter alia, in at open auctions, where people fall into the trap of "bidding wars". In such a situation, bidders may be willing to purchase the item by paying for it well above its true value. 

Philanthropy

Like many multi-millionaires and billionaires, Charlie donated a portion of his fortune to charity. In 1997, Munger and Nancy B. Munger donated $ 1,8 million to the former Nancy - Marlborough School in Los Angeles. In 2004, Charlie donated 500 Berkshire Hathaway (Class A) shares worth $ 43,5 million to build a Stanford dormitory. In 2007, a friend of Buffett donated $ 3 million to the University of Michigan Law School. Four years later, Munger donated $ 4 million to a project to renovate the Lawyers Club residential complex at the University of Michigan. Following this grant, the complex was renamed Charles T. Munger Residences in the Lawyers Club.

It is worth mentioning, however, that unlike Warren Buffett and Bill Gates, Charlie Munger does not participate in the project "The Giving Pledge". He explained that he had donated most of his property to charity and to financially support his children.