INTRO: Warren Buffett is generally regarded as the
best investor of all time which is not surprising given his insane track history.
He has managed to achieve an average annual return of 20.5% since 1965.
And while Buffett does deserve all of the praise he receives, someone that often doesn’t
get enough credit is Charlie Munger.
Charlie is the vice chairman of Berkshire Hathaway and has known Buffett since 1959.
Buffett says that he knew that he wasn’t going find another guy like Munger as soon
as he met him.
So, hiring Munger was a no brainer for Buffett.
Since then, Munger has Buffett’s closest ally and business partner, and together, they’ve
made Berkshire’s most iconic investments such as Coca Cola.
Today, Charlie is a multi billionaire himself thanks to the phenomenal performance of Berkshire
Hathaway.
Yet, Munger is still heavily underrated amongst the general public especially in comparison
to Buffett, so here’s how Munger become the back bone of Berkshire Hathaway.
EARLY LIFE: Taking a look back, Charles Thomas Munger
was born on January 1, 1924 in Omaha, Nebraska.
Munger had a pretty nice childhood as he came from a pretty well off family.
Munger’s grandfather himself was a district court judge and a state representative.
Meanwhile, Munger’s father was a lawyer.
Considering this background, I don’t think you’d be surprised to hear that Munger would
eventually end up pursuing a law degree.
Anyway, as a teenager, Munger would find a modest job a local grocery store named Buffett
& Son.
As you would guess, this store was owned by Buffett’s grandfather, and this was Munger’s
first introduction to the family.
Munger would go onto attend the University of Michigan where he majored in mathematics.
But, just as he enrolled, Pearl Harbor would be bombed resulting in Munger dropping out
of college and enlisting in the US Army Air Corps which would eventually become the Air
Force.
While this was quite a turn in events, it wasn’t all bad for Munger.
He would soon be stationed in Alaska where he met a woman named Nancy Huggins who would
soon become his wife.
Apart from this, however, Munger found little joy in the Air Force.
He was numbed by all the death and destruction that he saw on a daily basis.
One of the few things that kept him sane during this time period was playing cards with his
colleagues, and this is where he learned many of the principles that he would later apply
to investing.
Munger says that cards taught him to fold early when the odds are against him and double
down when he had the edge.
Playing cards also taught him that opportunity doesn’t come often which makes it especially
important to seize an opportunity when it does come.
Anyway, the war would finally come to an end in 1945, and Munger would leave the military
shortly after.
By this point, Munger didn’t want to go back and finish his bachelors, but he did
want to pursue a law degree.
Fortunately, the GI Bill would help Munger do exactly this.
He went ahead and took a bunch of advanced courses at Caltech, and he would leverage
this experience to sneak his way into Harvard Law school without a bachelors.
Despite this, law school was a breeze for Munger as he would end up graduating magna
cum laude in 1948, and with that, Munger was officially a lawyer.
EXTREME ADVERSITY: After graduation, Munger and his new family
would move to California where he found a job at a law firm called Wright & Garrett.
For most people, this would be the pinnacle of life as Munger had secured a solid job
and family, but it wouldn’t take long for everything to unravel.
After 8 years of marriage and 3 children, Munger and Nancy would decide to split ways
which was not only challenging emotionally but also financially.
Munger would end up losing most of his money and his house to the divoce.
And, Munger would end up spending the next few years simply working back to where he
was.
To make things worse, divorce was heavily stigmatized at the time which didn’t earn
Munger much respect from his peers.
And just when you think things couldn’t get worse, they got way worse.
Munger’s son, Teddy, would be diagnosed with leukemia.
Munger didn’t have health insurance, so he not only had to pay for all the treatment
out of pocket, but he had to slowly watch his son get weaker and weaker for 11 months
before passing away at age 9.
Around the same time, Munger’s father would pass away which forced Munger to return home
and support his family for some time.
The one good thing that came out of this visit is that he would end up meeting a man named
Warren Buffett.
The two would quickly become friends and exchange contact info, but both of them would return
to their own lives after this visit was over.
After returning to California, Munger would eventually develop cataracts which forced
him to get surgery in his left eye.
Unfortunately, this surgery would go wrong which left him blind in his left eye.
He held onto the blind eye for some time, but he eventually got it surgically removed
due to severe pain.
To make things worse, doctors told him that blood would eventualy fill up his right eye
as well which would make him completely blind.
So, Munger would actually begin learning braille, but thankfully, Munger would finally catch
a break and the condition would slowly recede.
Clearly, Munger had a quite a difficult life throughout his 30s and 40s, but here’s what
Munger has to say about it.
“You do not want to drift into self-pity…
Self-pity will not improve the situation.”
GIVING UP LAW: Before returning to Nebraska for his father’s
death, Munger would actually find a second wife.
Ironically, her name was also Nancy, but this marriage would end up working far better than
the first despite it being unorthodox for the time.
Both Munger and Nancy had two children each from their previous marriages, and together,
they would form a new family of 6.
These two would end up staying together up for the next 54 years until Nancy passed away
in 2010.
Anyway, after his father’s death, Munger decided start fresh by launching his own business
in 1962.
This new business was called Munger, Tolles & Olson and it provided real estate attorney
services.
While his day job was still being a lawyer, Munger spent most of his freetime meddling
with the stock market.
He had his ups and downs and the income wasn’t super consistent, but Munger saw opportunity
in the stock market and he didn’t waste much time seizing it.
Soon enough, he left law altogether and partnered with Jack Wheeler to launch an investment
firm called Wheeler, Munger, and Company.
At first, Munger saw a significant amount of success.
For years, he was averaging 20% annual returns which was 4 times higher than the market at
the time.
But, the 1970s would bring with it a lot of pain, not just for Munger, but all investors
in general.
In 1971, President Nixon would drop the gold standard which sent inflation to the moon
and stocks to rock bottom.
The S&P 500 would face multiple bear markets throughout this decade, and stocks would basically
make no progress.
Munger was by no means immune to this market downturn, and his investments would get crushed.
In 1973, Munger would lose 32% and in 1974, Munger would lose another 31%.
Fortunately, the stock market had a massive rebound in 1975 which allowed Munger to post
a 73.2% return.
Munger took this as a signal that he should leave while he still could and he would close
up Wheeler, Munger, and Company in 1976.
And that marks the end of Munger’s days of running his own business.
A few years later in 1978, Munger would join Buffett’s company as vice-chairman and the
rest is history.
BERKSHIRE HATHAWAY: While Munger technically always worked under
Buffett on paper, Buffett never treated him as an employee.
Rather, Buffett treated Munger as a business partner.
In 1984, Munger was made as the CEO and Chairman of Wesco Financial which was a company that
Berkshire Hathaway had a majority stake in.
And this is where Munger would spend most of his time at Berkshire.
Wesco Financial was primarily an insurance company, but Munger was allowed to operate
Wesco financial as a sort of mini Berkshire Hathaway.
Through Wesco, Munger had the opportunity to invest in companies like Coca-Cola, Kraft
Foods, Procter & Gamble, and Wells Fargo.
This was perfect for Munger because Wesco was headquartered in Pasadena, California
which had been Munger’s home for most of his adult life.
He served as the CEO and chairman of Wesco up until 2011 when Buffett would purchase
the remaining portion of Wesco and integrate it completely into Berkshire.
Aside from his role at Wesco, Munger was also the chairman of the Daily Journal which was
yet another Berkshire Hathaway business.
As the name suggests, the Daily Journal was a publishing company, but news publishing
was never Munger’s top priority.
Rather, Munger primarily focused on acquiring other publishing companies and investing the
company’s profits especially in China.
Munger is actually a massive fan of China and Alibaba was one of the Daily Journal’s
biggest investments.
As you would guess, Munger is not a big fan of the conflict between the US and China whatsoever.
He says that “They should like us and we should like them.”
Nonetheless, due to the strain between the US and China over the past few years, Munger
has reluctantly reduced his Alibaba position significantly.
This is one of the last things he did before stepping down from the Daily Journal a few
months ago.
Moving onto Munger’s final major responsibility, we have his role at Costco.
Munger become a director at Costco in 1997 around the time that Berkshire invested into
the company.
Berkshire exited their position in Costco in 2020, but Munger still personally owns
$81 million worth of Costco stock.
Munger is a massive fan of Costco’s business model and he thinks that the company has great
culture and ethics.
He doesn’t necessarily think that Costco is a value buy at today’s prices, but he
also doesn’t see a reason to sell out.
And that brings us to where we are today.
MUNGER’S LEGACY: Like Buffett, Munger has turned much of his
focus to philanthropic activities.
One of his biggest contributions has been to universities.
For example, he was a massive donor to the University of Michigan.
He has also donated hundreds of millions to UC Santa Barbara.
Something that we should note, however, is that Munger has not signed the Giving Pledge,
and he has actually been super transparent about this.
He says that he’s already given too much of his money to his children to take any credit
for joining the giving pledge.
This has sparked some criticism against Munger, but honestly, it’s his money, and he should
be able to do whatever he wants with it.
Something else that has sparked a lot controversy is Munger’s position on Bitcoin.
He has claimed that Bitcoin is “disgusting and contrary to the interests of civilization.”
He has also called Bitcoin “rat posion”.
His biggest critiques against the crypto are that it has no fundamental value and that
it produces no cash flow.
Munger and Buffett aren’t big fans of gold either, so it’s not surprising that they
don’t buy into Bitcoin.
Another sector in which Munger has missed out on is growth stocks and especially tech
stocks.
They never really invested into any of the FAANG companies except for Apple, and even
there, they were late to the party.
But, the cool thing is that Munger and Buffett have managed to still roughly match the S&P
500 despite missing out on tech companies.
It looks like they’ve chosen to stick with what they know, and this strategy has played
out extremely well for them.
Also, I’m not sure how much either of them even care about beating the market anymore
in the first place.
Buffett has already said that Berkshire is 100% prepared for his death, and I assume
that this applies to Munger as well given that he’s 98 years old.
Though both of them are nearing the end of their lives, there’s no doubt that they’ll
be remembered as a legendary investing duo for generations to come.
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