A Box Of Chocolate Becomes $800 Billion
One month shy of 100, Charlie Munger passed away. The man, often described as Warren Buffett’s sidekick, was much more than a “sidekick.” The modern-day iteration of Berkshire Hathaway is much stronger and better, because of the lesser-known Munger.
By the 1960’s, both Buffett and Munger were financially secure from their respective investment skills. Munger, made his first chunk of money as an attorney and real estate developer. He also ran an investment partnership.
At the time, Buffett was looking for cigar butts, investments with a few puffs of value available for a bargain. This meant buying quite mediocre businesses. Although successful at the time, it was Munger who helped Buffett see significant limitations in this strategy.
Munger recognized this strategy was not scalable. Furthermore, you were constantly looking for deal after deal. After each deal paid out, you started over at zero. It did not build anything that consistently grew.
Instead, Berkshire’s Vice Chairman educated Buffett that it was better to buy a wonderful business at a fair price, not a fair business at a wonderful price. This led to Buffett and Munger buying See’s Candies in 1972 for $25 million. Since then, Berkshire Hathaway has received an 8,000% return on investment, with cumulative pretax earnings of more than $2 billion.
There are many lessons to learn from Munger’s wisdom.
These wonderful businesses have a “protective moat” surrounding the castle. This moat holds competitors at arms-length and maintains profitability for extremely long time frames. A great business earns more and more money virtually every year which enhances cumulative wealth over decades.
If you hold wonderful businesses, you trade less. If you don’t trade, you don’t pay commissions or incur realized capital gains. This lowers taxes and improves returns. If you simply hold wonderful businesses, you don’t have to replace them from a pool of lesser opportunities. The more you trade the harder it is to produce geometrically compounded returns.
When buying high quality businesses, your timing can be wrong on when you buy, or you can pay too much. However, if patient, they typically still produce good investment results. As such, Munger understood this strategy offered more upside potential and less downside hardship.
Understand opportunity cost and recognize there are not many great businesses. Find great ones and concentrate your holdings. Concentration allows development of understanding in your assets . Plus, why would you own your 100th best investment when you can own ten or twenty truly great ones?
It was this seminal moment when Munger helped Buffett acquire See’s Candies that spawned the nearly $800 billion value of Berkshire today. Along the way, Berkshire reinvested profits and acquired Dairy Queen, GEICO, the Burlington Northern Railroad, Duracell and Fruit Of The Loom. In total, Berkshire owns 65 distinct businesses and 260 subsidiaries making it one of the greatest testaments to compounded returns and capitalism, all from a chocolate maker.
Munger was often blunt and direct. Buffett said that what took him a page to summarize, Munger did the same in one sentence, and with better clarity.
Despite being a multi-billionaire, Munger lived in the same home for seventy years. Although he always wanted to be wealthy, it was not to possess material things, but rather to provide his family with independence.
Munger was a significant supporter of education, donating hundreds of millions throughout the years. Given this, it is no surprise he was a lifelong reader and learner. Munger stated, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time–none, zero.” His kids joked he was a book with legs.
On getting ahead, Munger said, “I constantly see people rise in life who aren’t the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than when they got up and boy does that help, particularly when you have a long run ahead of you.”
Finally, on success, Charlie Munger said, “It’s so simple. Spend less than you earn. Invest shrewdly, avoid toxic people and toxic activities, and keep learning all your life. Do a lot of deferred gratification because you prefer life that way. If you do those things, you are almost certain to succeed.”
Thank you for the education, Mr. Munger.
Dave Sather is a Certified Financial Planner and the CEO of the Sather Financial Group, a fee-only strategic planning and investment management firm.