Warren Buffett (Trades, Portfolio) is often considered the greatest investor of all time. However, he has attributed a great deal of his success to his partner and vice chairman of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), Charlie Munger (Trades, Portfolio).
Munger's early career
Before he joined forces with Buffett at Berkshire, Munger was an accomplished investor himself. When they first met, Buffett convinced the young lawyer to go into the investment management profession, which he did with great success.
According to Buffett's essay, "The Super Investors of Graham-and-Doddsville," Munger compounded his investors' capital at an annual rate of 19.8% between 1962 and 1975. His long-term returns might have been better if it were not for the mid-70s market crash.
Munger decided to close down his partnership in 1975 because he could not stand having to report losses to his investors. Munger used to run relatively concentrated positions, which came with the risk of significant drawdowns. In 1973 and 1974, for example, the value of the fund declined by around 32% each year.
These losses reportedly caused the value investor "great pain," and he decided to shut down his investment partnership as a result.
According to Jane Lowe's book, "Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger (Trades, Portfolio):"
"When dealing only with his own money, investment losses never bothered Munger much. To him it was like a losing night in a regular poker game where you knew you were one of the best players - you'd make up the difference later. But he now found that reported, temporary quotational losses in the Wheeler, Munger limited partnership accounts gave him tremendous pain. And so, by the end of 1974, he had resolved, like Buffett, to stop managing money for others in a limited partnership format."
Since closing his investment partnership, Munger's investment activities have been relatively limited. He only owns a handful of stocks in his personal investment portfolio, as well as an investment in Li Lu's hedge fund, Himalaya Capital.
Munger's other primary investment vehicles are Berkshire and the Daily Journal (DJCO, Financial). The Daily Journal only owns four public stocks.
Learning from Munger's approach
The billionaire investor's entire investment process is based on the principle of sticking to what you know and only acting when the time is right.
Munger's current investment portfolios show us how disciplined he is when it comes to picking investments, and that he is prepared to wait decades for the right opportunity to come around. He will invest only with managers he likes and trusts and in companies he understands.
What is quite interesting is the difference between Buffett's investment strategy and that of Munger. Over the past few decades, Buffett has directed tens of billions of dollars of Berkshire's money into public securities and private businesses.
During this time, Berkshire has owned thousands of different public stocks. One has to wonder what the conglomerate would look like if Munger, and not Buffett, had taken over the business in the mid-60s. It would have a much more concentrated portfolio, that's for sure.
Still, we can learn a lot from Munger's approach to business and investing. With this being the case, I have gathered some of his most informative insights below, which sum up his investment process in just a few bullet points:
- "Knowing what you don't know is more useful than being brilliant."
- "One of the greatest ways to avoid trouble is to keep it simple."
- "A great business at a fair price is superior to a fair business at a great price."
- "Success means being very patient but aggressive when it's time."
- "The big money is not in the buying and the selling, but in the waiting."
This information won't tell you how to invest, but the above bullet points could be a great starting point to improve your investment process and invest more like Munger.
Disclosure: The author owns shares in Berkshire Hathaway
Read more here:
- Lessons From 'The Super Investors of Graham-and-Doddsville'
- Why Warren Buffett Decided to Launch Berkshire's B Shares
- Warren Buffett: Diversification Is 'Protection Against Ignorance'
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