This article was written by Balaji Kasal pursuing an Executive Certificate Course in Corporate Governance for Directors and edited by Koushik Chittella.
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
Charlie Munger is an investor and thinker from the USA. He was the Vice Chairman of the multinational conglomerate Berkshire Hathaway, which has $780 billion in market capitalization. Berkshire holds equity shares in top-tier companies like Apple, Bank of America, Coca-Cola, Chevron Corporation, Kraft-Heinz, Moody’s Corporation, and many more across the globe.
Mr. Charlie Munger was considered the right hand of the legendary investor Warren Buffett and was influenced by his investment approach. Hence, he was vital in shaping the success of Berkshire Hathaway. He was vocal about the world order and so-called ‘innovative’ financial instruments. He was a philanthropist and an architect in his own way. He is known for his mental models, which he used during decision-making. He passed away on November 28, 2023, at the age of 99 years.
Major contributions of Charlie Munger
Charlie Munger was well known for his wit. He evolved from his childhood and kept learning lifelong. These combinations made him unique and critical in various subjects.
The following are his major contributions:
- Changed Warren Buffet’s mindset from cigar-butt to value investing. Warren Buffett himself was trained under Benjamin Graham, who was considered in many ways the father of value investing. However, Warren was struggling with scaling and long-term investment philosophy, which was evident through the purchase of Berkshire Hathaway, a textile mill company.
Charlie Munger embedded him with a long-term value investment idea and later joined the board to build Berkshire Hathaway in today’s state. Hence, he was instrumental in creating wealth for millions of investors across the globe.
- Charlie Munger served as Chairman and CEO of Wesco Financial Corporation, which was a holding company and later became a subsidiary of Berkshire.
- Charlie Munger was Chairman of Daily Journey Corporation, a newspaper, law firm, and legal technology company.
- He helped in the design of multiple architectural buildings, like dormitories at Stanford University and the University of Michigan. He passionately designed his final home, too.
- He was a philanthropist. Donated millions to the University of California, University of Michigan, and the hospital.
Personal life of Charlie Munger
Charlie Munger’s childhood was shaped by modesty. His father was a lawyer, and his grandfather was a US district court judge. Since childhood, he has recognised the role of luck in life, and he gives credit to his successful investment journey. He was educated at California Tech and Harvard Law School. After his divorce from his first wife, he remarried Nancy Barry, and they had a total of seven children.
Early career of Charlie Munger
Charlie Munger started his career in California at the Wright & Garrett law firm. Later, he started practicing as a real estate attorney in California. He started managing investments and became a real estate developer. He started running his own investment firm between 1962 and 1975. Munger was the chairman of Wesco Financial Corporation, which later became a subsidiary of Berkshire. Wesco held concentrated holdings, including Coca-Cola, Wells Fargo, Procter & Gamble, US Bancorp, and Goldman Sachs, worth $1.5 billion.
Munger was also the chairman of the Daily Journal Corporation, which is a publishing and technology company. The company was founded way back in 1886. Apart from carrying commercial advertising, it even developed software for trial and appellate courts. Munger, being a keen learner and observant, was an architect, though he had no formal education in it. He contributed multiple building designs, including dormitories, for Stanford University and the University of Michigan. He loved to design and architect his own houses.
Turning point in Charlie Munger’s life
In 1959, at an Omaha club party, Charlie Munger and Warren Buffett met for the first time. For hours, they discussed topics related to investment and life. They naturally got attracted to each other. Since then, they have been in touch through hours of telephonic conversations. Meanwhile, Munger independently managed an investment counselling firm from 1962 to 1975 with a 19.8% compounded return.
Finally, Buffett convinced Munger to join Berkshire Hathaway in 1978. He argued that people of a similar calibre should be doing more valuable work, like investments. And joked that law may be good as a hobby. This is a critical juncture for Munger, Buffett, and Berkshire.
Charlie Munger with a 30-second mind
In life, a person would get an edge over people around them if he or she was able to make decisions faster and better in probabilistic scenarios. Munger trained his mind to do exactly the same. He developed various models and filters in his mind. For instance, he quickly ran through them to decide the prospectus of it. Munger could take any complex problem and dissect it in such a way to solve it effectively. It is a multi-fold phenomenon:
- He could stick to the principles and make sure ongoing events meet his criteria for the journey.
- It avoids mistakes and helps keep actions in perspective.
- As prepared, it gave him the opportunity to bet big to take advantage of it fully. He needed only a few decisions in life to magnify his finances and life events.
Munger vividly explained in his speech at Harvard Law School as ‘The Psychology of Human Misjudgement’ where he listed 24 standard causes named as tendencies. It clearly elaborated on how he dealt with life and learned over the period. The following are a few biases:
- Reinforcement bias: The person starts to look for documents, media, and people who are all discussing positively about that company or theme. Humans love mingling with it for a long time and not only get biased but also hooked on it. We spend a lot of time and energy doing activities and get carried away easily.
Question for you: How often do you do it? What are you doing to recognise this bias?
- Incentives caused bias: This is so powerful that you observe in your daily life from a child to a top-position person. Incentives are becoming so prominent in society that you could observe a person’s behaviour and derive what vested interest he or she has. Many people get trapped in fancy financial products sold by ‘agents’ without questioning what they are interested in selling.
- Psychological denial: Few people are slow learners or never accept the facts. They love to stay in a state and deny new information to change opinions or actions. It demands rationality and factuality in life.
- Bias from envy or jealousy: This bias is seen all around us. The same bias leverages many companies by hiring celebrities to market products and services. Envy takes away people from Self & Peace and gets into a whirlpool of endless cribbing. We need to be watchful of our thoughts and actions and not carry away envy.
- Bias from misgambling compulsion: People pick the lottery and think they have committed to it. We know Yudhishtir’s gamble in the Mahabharata, and he lost everything, from his spouse to his kingdom.
Learnings and quotes
The best and quickest way to learn from Munger is through his interviews, Q&A sessions at Berkshire, the Daily Journal, and speeches. He spoke on multiple subjects, from human evolution to politics to investments. There are multiple books available on him. Also, many websites collected his teachings on multiple platforms. He himself was devoted to it as a lifelong learner. His children described him as a book with hands and legs. Let’s dissect a few of his quotes to understand them better.
- “Need to be a lifelong learner and advocate as a moral duty” – Humans have a unique gift to think and learn each day, apart from other animals.
- “You have to keep learning if you want to become a great investor. When the world changes, you must change.” – Now it became more apparent to learn not only to grow but to survive with changing technology. Hence, you could see companies remodelling their business plans to adapt to artificial intelligence and machine learning to productize and deliver services to remain relevant.
- “The best thing a human being can do is help another human being know more” – It is the ultimate way of giving back. It is said, ‘Do not give a fish to a hungry man, but teach how to fish.’
- “Invert, always invert” – It is an everyday tool to get insight into what if I am on the other side of a deal and why ‘Agents’ are keen to sell products. The tool helps us question our bias and think rationally.
- “Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.” – We see around us what happens to people who lose these assets. It takes ages to earn, and a single event or behaviour could ruin it.
- “To the man with a hammer, every problem tends to look pretty much like a nail.” – This quote from Munger is profound. It demands that we have a set of tools to solve problems in life. And not to stick to single problem-solving approach. It would take back to us to keep learning and always be ready with multiple ways to solve a problem, or each problem has a different solution, and we need to apply them accordingly.
- “Like Warren, I had a considerable passion to get rich,” said Charlie, who early on earned his living as a lawyer. “Not because I wanted Ferraris—I wanted the Independence.” – This secret is known to only a few percent of people in the world and embarrasses independence. It allows a person to identify their own passion and realise their true potential.
Food for thought: Which lifestyle would you be following if money were not the factor? What makes you want to get up in the morning and cheer?
- “If you took our top fifteen decisions out (at Berkshire), we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.” – In investment, one needs to design and build their own principles and framework. Opportunities do not come often, and when they do, you need to seize them big time. It needs tonnes of patience, clarity of thought, courage, and many more aspects.
- “A great business at a fair price is superior to a fair business at a great price.” – Investors need to hunt for great businesses that are sustainable and run by able and honest people.
- “The big money is not in the buying or the selling, but in the waiting.” – Patience, as a virtue that he followed and made big bucks.
- “The idea of excessive diversification is madness.” – We see people use diversification mindlessly without understanding what it is. Diversification could be a tool to manage risk. The risk may come from business failure, promoter misbehaviour, industry challenges, government policies, and many other factors.
- “I think that every time you see the word EBITDA, you should substitute the words “bullsh*t earnings.” – Many businesses report EBITDA growth. Anyone who could understand financial statements and notes to them could make out that EBITDA reporting is not the real story of business growth. The problem with EBITDA is that it gives many opportunities to hide information and report it.
Conclusion
Charlie Munger is a one-of-a-kind legend who not only kept learning his entire life but also applied it. He was introverted and had many different personalities than Warren Buffett, though both remained partners, holding Berkshire board. This partnership is worth studying and learning more about, as they have different personalities in many ways, both respect each other, and have never had arguments.
The passing away of Munger created a void in Warren’s life and sure in the core investment decision-making theme of Berkshire: Invert-always-invert. Finally, we should be learning not only investment lessons from Munger but also how to live life and build harmonious surroundings for a more progressive society. This would be the real tribute to the legend.
References
- Charles T. Munger (Author), Peter D. Kaufman (Editor) (2005). Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger Walsworth Publishing Company. ISBN-13 978-1578645015.
- Berkshire Hathaway AGM meeting recordings
- “Charlie Munger on the Psychology of Human Misjudgment” (PDF). RBCPA. June 1995. Archived from the original (PDF) on December 10, 2016.
- https://en.wikipedia.org/wiki/Charlie_Munger
- https://fs.blog/great-talks/psychology-human-misjudgment/
- https://fs.blog/intellectual-giants/charlie-munger/
- https://finance.yahoo.com/news/memorable-quotes-from-berkshire-hathaways-charlie-munger-225308303.html
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