Munger's passing and the era of value investing "superstars"

A giant investor has passed away!

Berkshire Hathaway officially announced that Charlie Munger peacefully passed away in a hospital in California on the morning of November 28th, local time.

Munger, known as Warren Buffett's "closest partner," was praised by Buffett in a statement, saying, "Without Charlie's inspiration, wisdom, and involvement, Berkshire Hathaway would not have achieved its current status."

Munger's Rise

Charlie Munger was born in 1924 in a small town in Omaha, Nebraska, USA.

At that time, Omaha was a microcosm of the "melting pot" of the United States, with immigrants from all over the world: Italians, Greeks, African Americans, Irish, French, Czechs, Russians. Many immigrants worked for the Union Pacific Railroad Company and local meat processing plants.

Six years later, Buffett was also born here, just a few blocks away from the Munger family.

Omaha has become the "Mecca" for global investors, hosting the annual Berkshire Hathaway shareholders meeting.

It is said that when Munger was six years old, the global Great Depression plunged his family into a financial crisis. Munger, at the age of six, worked at Buffett's grandfather's grocery store.

However, there are different versions of the story. Munger had a happy childhood, and his father's decent income as a lawyer provided him with a good education.

At the age of 17, Munger entered the University of Mississippi to study mathematics.

World War II became a major turning point for Munger.

In 1942, the Pearl Harbor incident broke out, and Munger dropped out of school to join the military.

During his military career, Munger played cards with his comrades, and some even say he became obsessed with playing cards. During this time, he triggered some deep thinking: we must learn to surrender early in unfavorable situations, but if we have a good hand, we must bet heavily because good hands do not come often, so once an opportunity arises, we must seize it tightly.

After the end of World War II, Munger embarked on a career as a lawyer and started a law firm with several friends. Later, Munger established a small construction company specializing in bungalow construction projects and made his first million dollars - $1.4 million.

With a million dollars in savings, Munger embarked on an investment career, and he and many others boarded the "macro train" of the "era of peace."

Munger's first venture in the securities investment field was to build a securities company.

In 1962, Munger partnered with a poker buddy to establish a brokerage firm called "Wheeler, Munger & Co.," and Munger even insisted on working in a utility room. From the establishment of the company to 1972, the average annual return rate reached 28.3%.

In the 1960s, Munger also participated in land development.

When he started his law firm, a client had a piece of land at the California Institute of Technology, so they developed a community project together. The return on this investment was quite high. With an initial investment of $100,000, they eventually received $500,000.

Meeting Buffett

There are many stories about the fate of Buffett and Munger.

In 1959, Munger rushed back to his hometown of Omaha from Los Angeles for his father's funeral. At that time, Buffett had heard of Munger and invited him to dinner.

At that time, Buffett was running a private investment company, and the two hit it off.

During the dinner, Buffett reportedly criticized investment genius Benjamin Graham. Munger also knew about Graham's theories, so the two immediately began discussing businesses and stocks.

This passionate conversation laid the foundation for their "perfect match" partnership.

For a long time after that, Buffett and Munger were in different locations, but they liked to have long phone conversations every day.

One day, Munger's distance from Buffett got closer and closer. He asked for Buffett's opinion on whether he should establish an investment partnership in California. Buffett said he had no reason to say no.

In the end, their investment companies merged to form Berkshire Hathaway.

They played out the story of Boya and Ziqi in the investment circle.

When it comes to major decisions at Berkshire Hathaway, the two old men play very different roles, complementing each other to some extent.

Some analysts say that Buffett is an optimist who focuses more on the company's growth prospects, while Munger usually plays the role of the "black-faced" Du, always pointing out potential investment risks.

Buffett often teases Munger, calling him "No Man" because he always says "NO!".

In the end, under the combination of "Buffett + Munger", Berkshire Hathaway transformed from a marginal textile manufacturer to a comprehensive giant involved in insurance, railways, manufacturing, and consumer goods. Since 1965, the average annual stock price increase of this listed company has reached 20%, which is twice that of the S&P 500 index.

"Upgrading" Investment Philosophy with Peanut Brittle

It is worth mentioning that the two old men love to eat peanut brittle. During the five to six-hour annual shareholders' meeting, they would chew on it at the podium to replenish their energy.

This peanut brittle is a product of See's Candies, a consumer goods company that sells chocolates and candies. This crucial investment played a vital historical role in the "upgrade" of Berkshire Hathaway's investment philosophy.

In other words, the tremendous success of Berkshire Hathaway's investment in Coca-Cola is subtly related to peanut brittle.

Some analysts say that before acquiring See's Candies, Buffett and Munger were still bargain hunters, commonly known as "cigar butt investing," and their investment philosophy in specialized fields had not been fully established.Moreover, Buffett was initially hesitant about acquiring See's Candies.

At the time, after reviewing See's Candies' financial data, Buffett found that the company's book value was only a mere $8 million, but it was being sold for $30 million.

Buffett believed that the boxed chocolate business did not have much appeal.

Munger's optimistic view successfully changed Buffett's "pessimism".

Munger realized that See's Candies had a high brand value. If a competitor wanted to compete with the See's Candies brand, they would have to pay a huge amount of money. Therefore, the premium above the book value seemed reasonable.

Munger also realized that acquiring a high-quality business and allowing it to continue operating would be easier and more enjoyable than buying a struggling company at a low price and then spending time and effort to save it.

In early 1972, Buffett used his controlled blue-chip stamp company to purchase See's Candies for $25 million.

Looking back now, this transaction is a typical example of value investing.

At the time, See's Candies had tangible assets of about $8 million. In addition to seasonal short-term loans, the company's after-tax profit was about $2 million, which means that See's Candies was acquired at a price-to-earnings ratio of 12.5.

Years later, Buffett admitted that if they hadn't bought See's Candies, they probably wouldn't have bought Coca-Cola later on.

Munger reflected on this and said, "I learned a lot from See's Candies: thinking and acting must stand the test of time. Such experiences have made our acquisitions elsewhere wiser and better decisions."

See's Candies also brought Berkshire Hathaway more than $2 billion in investment returns.

Through this investment, the Buffett-Munger combination truly embarked on a journey of investing in higher-quality companies at lower prices.

Selected Quotes from Munger

Munger is a philosopher in the investment circle, and many of his views shine with the wisdom of a philosopher. We have selected some of them and organized them as follows.

1. Don't wrestle with a pig, because you will get dirty all over while the pig enjoys it.

2. Smart people bet big when the world offers them the opportunity. When the probability of success is high, they bet big, and the rest of the time they stay put. It's that simple.

3. I don't consider myself a model of a good education. I learned to get the information I wanted through reading. I have often done so throughout my life.

4. Many people with high IQs are terrible investors because of their character flaws. I believe that excellent character is more important than the brain. You must strictly control those irrational emotions.

5. When faced with a tragedy that is hard to accept, you should never let it turn into two or three tragedies because you can't get rid of its troubles and experience repeated failures in life.

6. Life is a series of "opportunity costs." You should marry the best person you can easily find, and investing is similar to that.

7. I like the independence of capitalists. I have always had a gambling tendency. I like to come up with plans and then place bets, so no matter what happens, I can handle it calmly.

8. If your thinking relies entirely on others and you seek expert advice as soon as you step out of your field, you will suffer many disasters.

9. I never pay for the intrinsic value of stocks unless they are managed by people like Warren Buffett. Only a few people are worth investing in for long-term benefits. The investment game always involves considering quality and price. The trick is to get better quality from the price you pay, it's that simple.

10. Diversifying investments will only distract you. It's better to focus on a few high-quality companies and concentrate your firepower. This way, you can reap great rewards on the path to wealth creation.

11. Remember that brokers who are eager to persuade you to do something are paid commissions and fees by others. It's better for novice investors who don't know much about this field to start with index funds because they are managed by public institutions and have fewer personal factors.

12. The so-called investment game is about making better predictions about the future than others. How can you make better predictions than others? One way is to limit your attempts to the areas where you have the ability. If you try to predict everything in the future, you are trying to do too much. You will fail because of the lack of limitations.

13. We won't just throw $45 billion around, but you must be able to identify the crazy moment when a high-tech stock soars and control yourself to stay away from it. You won't make any money, but you may avoid a disaster.

14. Different cultures in different countries have different affinities for passive investors. Some are trustworthy, such as the US market, while others are full of uncertain risks. It's difficult to quantify these affinities and the reasons for trust, so many people deceive themselves. This is dangerous and the most important research topic for emerging markets.

15. I just want to know where I will die, and then I will never go there.

Munger's Final "Monologue"

In October 2023, this investment giant handed in his final list of US stock holdings.

Munger's portfolio is "simple and clear," without the common "top ten holdings." In the latest disclosed document, the "old man" only holds four stocks, and his investment essence is hidden among them.

Since 1977, Munger has served as the chairman of a daily publication's board of directors. After stepping down in March 2022, he continued to serve as a director and focused on the company's investment affairs.

As of the end of September 2023, the market value of the company's US stock holdings was $158 million, equivalent to RMB 1.153 billion, with only four stocks "holding the fort."

Specifically, they include Alibaba, Bank of America, Citigroup, and Wells Fargo.

Although this scale is far from the trillion-dollar level of Berkshire Hathaway, it reflects Munger's "voice."

Munger once revealed at a shareholder meeting that his investment style was deeply influenced by Fisher, an American economist from the early 20th century. He holds a small number of stocks and thoroughly researches the companies he invests in.From this final "monologue," it can be seen that Munger is most fond of investing in "the financial heart" of bank stocks.