2023-12-03 09:10:49
Warren Buffett’s right-hand man cherished his image as a somewhat gruff acolyte of the world’s greatest investor. But that didn’t stop him from sharing his advice with those who would listen. Anthology of the repertoire of this investment icon.
He was soon going to celebrate his 100th birthday but a few days ago, he breathed his last. His name has always been linked to that of Warren Buffett. For decades, the duo presided over the destiny of Berkshire HathawayBuffett’s investment vehicle, of which he became vice-president in 1978. He happily left the spotlight to his friend Buffett but, behind the scenes, Munger was influentialboth as a sounding board and source of inspiration for Buffett’s investment strategy.
When he spoke – for example on the podium, alongside Buffett, in front of several tens of thousands of shareholders gathered for the group’s general meetings – it was generally in the form of sentences as short as they are sharp. From time to time, he released his traditional “I have nothing to add” following Buffett had spent long minutes answering a shareholder’s question. The public loved it.
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Munger, however, had things to say. It was a very cultured man who hated fixed thought patterns. At the same time, he was attached to old values somewhat outdated like honesty and prudence. Even though he had become a billionaire, he still lived in the house he had built himself in the 1950s.
For investors – and those who hoped to succeed in life – Munger had wisdom to spare. Anthology.
1. “Every intelligent investment is a value investment, where you get more than you pay for.”
Buffett and Munger became famous as investors in value stocks. This approach consists of buy stocks that look cheap relative to their long-term fundamental value. They generally correspond to companies generating strong cash flow and generous dividends, which are well managed and preferably have a “moat” which gives them a significant competitive advantage. A brand like Coca-Cola is an example.
“The plan he gave me was simple: forget what you know regarding buying honest companies at extraordinary prices and buy extraordinary companies at honest prices.”
It is Munger – not Buffett – who is behind Berkshire Hathaway’s highly lucrative investment philosophy. Initially, Buffett bought distressed companies at fire-sale prices. He once compared his strategy to “cigarette butts” from which you take a final drag. Munger advised broadening this horizon and convinced Buffett to set his sights on strong brands with loyal customers: you have to pay a little more for their shares but they have the potential to generate cash flow, year following year. Or, as Buffett once said: “The plan he gave me was simple: forget what you know regarding buying honest companies at extraordinary prices and buy extraordinary companies at honest prices. “
Berkshire Hathaway itself was a cigarette butt in 1965 when Buffett took control of the struggling textile company. Munger helped build it into an impressive conglomerate whose market value today amounts to more than 780 billion dollars.
2. “It’s crazy to diversify too much”
“One of the stupidest things we teach at university regarding investments is that you have to diversify as much as possible. It’s crazy. It’s not not easy to find a host of good opportunities. With any luck, you’ll find three per year. If you have a brilliant idea, go all in and bet big on it.”
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Munger found it logical that a small number of supercompanies accounted for most of Wall Street’s rise. “We found that a dozen companies were doing much better than the others. You absolutely have to have two or three in your portfolio,” he said earlier this year. With Applethe main holding of the holding company, Berkshire hit the nail on the head.
3. “You don’t win the jackpot by buying and selling, but by waiting.”
According to Munger, good investors do not rush to buy or sell. They take their time, stay calm and are always very careful. They let time do its work. “It may come as a surprise, but an intelligent investor just sits there and does nothing.” During stock market crashes, “investors must remain calm,” he added.
25
billions of dollars
Acquired 35 years ago for $1.3 billion, Berkshire Hathaway’s stake in Coca-Cola is now worth $25 billion.
The longest-lived stock in Berkshire’s portfolio is Coca-Cola, of which Buffett and Munger became shareholders 35 years ago. The value of the stake increased from 1.3 to 25 billion dollars and last year distributed 704 million dollars to the famous holding company. That’s more than enough to finance the can of Coca-Cola that Buffett treats himself to every day.
4. “Be a little smarter every evening than in the morning”
To become a better investor, but also a better person, you must continuously learn and use your experience, Munger liked to say. “I see people every day moving forward in life who are not the smartest, or even the most diligent, but are always learning new things. That’s important, especially when you have life ahead of you. If you don’t have a learning method, you find yourself in the situation of a one-legged person in a world that kicks your ass.”
THE Hard hits also help you become smarter and wiser. “From time to time, life gives you blows. Violent blows. Unfair blows. Some manage to overcome them. Others do not. Take the attitude of Epictetus (a Greek philosopher, editor’s note): for him, every setback was an opportunity. Don’t let self-pity dominate you, but use these setbacks in a constructive way.”
Furthermore, if you know yourself well, you know what you don’t know. “We are not as intelligent as we think, but we more or less know our limits. That’s a very important part of common sense,” Munger said. The two partners translated this principle by classifying investment ideas into three categories: “yes”, “no” and “too difficult”. If they didn’t understand a business, they ignored it.
“We’re not as smart as we think we are, but we more or less know our limits. That’s a very important part of common sense.”
5. “If people made fewer mistakes, we wouldn’t be so rich.”
“If you remain rational, the stupidity of the world will help you,” Munger once said. “Our experience has taught us that good preparation followed by rapid and ambitious actions, with a good dose of simplicity and logicmade it possible to significantly improve the return on an investment,” he added.
Berkshire has repeatedly shown boldness at a time when panic and exaggerated pessimism were sweeping the stock markets. “Be cautious when others are greedy, be greedy when others are worried,” is a famous Buffett mantra.
But that doesn’t mean it’s easy to invest successfully. On the contrary. Buffett and Munger regularly made it clear that even the most professional investors do not always succeed but still charged fees to their customers. There’s nothing wrong with investing in a cheap ETF or index fund that blindly tracks a stock index like the US S&P500.
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“The Most people might get by with just one index fund“, said Munger. “It’s 100% rational for someone who doesn’t want to think too much and has no reason to believe that he knows anything regarding the stock market. Besides, why should he select actions when he does not design his own electric motor or his mixer?
6. “If the world changes, you must change too”
A good investor is like a chameleon who adapts to changes in society. “If you don’t see the world as it is, it’s like you’re judging through a distorted lens,” he liked to say. “Sometimes you have to change your perspective.”
“Most people might get away with just one index fund. It’s 100% rational for someone who doesn’t want to think too much and has no reason to believe they know anything regarding stock market matters.”
An example of this principle is theBerkshire investment in Burlington Northern Santa Fe rail company. “For years, Warren and I hated the railroads. But the world changed. Eventually, there were only four major railroads left in the United States, and they are vital to the economy. It took us a while to realize this change. But it’s better late than never. It’s brought us billions.”
Berkshire is not left out with the “greening” of the economy. Berkshire Energy is the largest private investor in renewable energy in the United States. Even though Munger and Buffett emphasized that fossil fuels remained necessary. The oil giants Chevron and Occidental Petroleum are also important Berkshire holdings. On the other hand, Berkshire – under the leadership of Munger, a technology enthusiast – has bet massively on Chinese electric car manufacturer BYD. After having had to convince Buffett, a notorious technophobe.
7. “Real estate? It’s rare for buildings to collapse, unlike their owners”
Even though Munger made his first millions from apartments, He and Buffett were not fans of real estate. Last year, Berkshire Hathaway sold its only real estate lessor, Store Capital. Via Berkshire Home, the holding company is however active in brokerage.
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Munger and Buffett quickly understood that Rising rates that began 18 months ago might have a negative impact on indebted real estate players. “The American economy will weather the rate storm and buildings will not collapse, unlike homeowners,” Munger said.
“In my life, I try to avoid things that are stupid and harmful and that harm my image. Bitcoin brings together all these characteristics.”
“L’commercial real estate in particular faces a dangerous cocktail. Shopping centers and office buildings: many real estate players are in difficulty. Payment defaults will also affect banks. We do not have any particular skills in real estate. That’s why we don’t spend a lot of time thinking regarding it.”
8. “Cryptocurrencies are like trading turds”
Munger never minced his words and the cryptocurrency world learned that the hard way. He once compared bitcoins to “rat poison” and called them “artificial gold, worthless.” He took offense at the usefulness of cryptocurrencies for “kidnappers and scammers.”
Last year, he opened fire during Berkshire’s shareholders’ meeting. “In my life, I try to avoid stupid and harmful things and which harm my image. THE bitcoin brings together all these characteristics.” In an op-ed published earlier this year, he called on US authorities to ban cryptocurrencies “because they are nothing more than gambling.”
9. “They took the boy out of Omaha, but not Omaha out of the boy.”
Like Buffett, Munger grew up in Omaha, a not-so-hip town in rural Nebraska. Munger never denied his origins, although he soon moved to California. “All these old values – family first, using one’s position to help others, prudence, the moral obligation to be reasonable – are more important than wealth or social rank,” said Munger, who has paid hundreds of million dollars to educational institutions.
“Don’t be envious or resentful. Live within your means. Keep your spirits up, even in tough times. Surround yourself with reliable people and do what you’re supposed to do.”
For him, When it came to investing, the honesty of business owners trumped everything else. Munger hated having to juggle different accounting definitions of profit – for him, Ebitda (gross operating profit) might just as easily be replaced by “bullshit”.
10. “Keep your good mood, even in the face of setbacks”
In 2019, when Munger was a Alex Reed on business news channel CNBC and asked for the secret of its longevityhe replied: “easy because so simple”.
“Don’t be envious or resentful. Live within your means. Keep your spirits up, even in tough times. Surround yourself with reliable people and do what you’re supposed to do. These simple rules are a effective way to improve your life.”
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