posted by admin on May 21
Charles T. Munger is Vice-Chairman of Berkshire Hathaway, the same company that Warren Buffett is Chairman of. Born in 1920, he is five years older than the more famous Chairman. Although he does not have an undergraduate degree, he does have a degree from Harvard Law School, and was a successful attorney for a number of years before joining up with Buffett many decades ago.
If you ask people that really know both of them, they would probably tell you and this will surprise you that Munger is the smarter of the two, while Buffett is the better investor. They would also tell you that Munger made Buffett into a better investor than what Buffett was, before meeting Charlie Munger.
When Charlie Munger is pressed on this issue, his response is that Warren Buffett would have come around to this way of investing anyway; it was just a matter of time. Charlie helped him get there sooner. What is this way of investing that Munger is famous for, after all, Munger is a billionaire from investments in his own right. It can be summed up in a few sentences.
“The number one idea is to view a stock as an ownership of the business, and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you’re paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds, and have the discipline to bet only when the odds are in your favor.”
Let’s rip this philosophy apart and see where it gets us. “View a stock as an ownership of the business.” Charlie Munger is saying that he doesn’t like trading stocks. He buys and he holds, but he wants to hold the right stock for the right reasons. I have seen people buy stocks in seconds that if they were buying a car, would take days of intense reasoning back and forth. Let’s say you go to buy a car, you wind up going to different dealers, you take test drives. You read about the car in consumers report, you look at the JD Powers surveys. You probably look at other car magazines. You might even go out, and test drive other cars in the same price range as the car you have in mind to do a value comparison. Meanwhile, you buy a stock, you know barely more than the symbol, and you’re right in there investing, and you want to know why some people lose money in the market. As far as these gentlemen are concerned trading stocks makes no sense
These people are taking out their gambling instincts on the market. Charlie Munger wouldn’t do that. Charlie talks about the “staying quality of the business in terms of its competitive advantage.” What is competitive advantage to him; it’s what we call that quality which keeps you constantly ahead of your competitors, so you can charge a premium price. It’s the franchise value. Is there anyone in the world that doesn’t know the name Pepsi-Cola, or Disney?
You put the name Coke on a bottle of soda, guess what, it sells. It has sold for the last fifty years, and it will sell for the next fifty years. This represents the competitive advantage of a business. It’s what Munger loves to see, and invest in. You want to nourish that competitive advantage, and do everything to enhance it. This is why ethics is so important to himr. Do nothing to risk the franchise.
“Look for more value in terms of discounted future cash flow than you’re paying for.” Buy the stock at the right price. You don’t have to buy cheap, cheap, cheap. This is something that Munger has hammered Buffett about. He believes that Buffett before he met him would only buy that which is truly cheap, what Buffett use to call cigarette butts. Charlie has taught Warrem that it’s all right to pay up for a stock, as long as you believe that over time, you have a money machine with a great franchise that has predictable staying power.
Wait, there’s more!!!!!
“Move only when you have an advantage. You have to understand the odds and have the discipline to bet only when the odds are in your favor.” This is brilliant, absolutely brilliant. There are great companies out there, sometimes they falter, but the basic business is intact. When they falter, and the institutions are bailing out because they don’t want to be associated with a headline story at the end of the quarter, you can sometimes buy a fabulous company at a BARGAIN PRICE. “Move only when you have the advantage.” Now you know what Munger is talking about.
“Bet only when the odds are in your favor”. You don’t become a billionaire starting with zero by buying a different stock every day, or even every month. It’s like a batter standing at the plate. Only in this case, you wait; you just keep waiting for the perfect pitch to come down the plate, and then boom, home run. Wait for the odds to be in your favor. Wait until you hear the next one, it’s fabulous!!!
Both Warren and Charlie have talked about an interesting concept. If you have ever traveled on a commuter railroad, most people buy what is called a commutation ticket. In other words, the commuter realizes that he’s going to be traveling to and from work all month, so he buys a monthly ticket, because it saves him money. There are 31 numbers on the ticket and the ticket changes every month.
When the commuter gets on the train, the conductor at some point punches the ticket indicating that the day in question has been used. Munger likes to say, and Buffett agrees with this, “Wouldn’t it be nice if when you’re born you were given a stock buying ticket that allowed you to purchase no more than let’s say 15 or 20 stocks in your entire lifetime.” Investors would be much more careful in their choices if they know they were limited to a certain number. It would end daily or even monthly trading. Your performance would most likely benefit wildly to the upside.
We love Charlie Munger, because so much of what he says is so appropriate for our own work at StocksAtBottom.com. We don’t have a stock every day, or every week. We are constantly doing research trying to find the ideas that are going to work. We then wait for the right price, just waiting until the stock comes to us. Sometimes they come down to our buying levels, and when they do the price movements are big and dramatic, and beautiful. If you would like to know more about our work, just click the button below and begin reading.
Richard Stoyeck’s background includes being a limited partner at Bear Stearns, Senior VP at Lehman Brothers, Kuhn Loeb, Arthur Andersen, and KPMG. Educated at Pace University, NYU, and Harvard University, today he runs Rockefeller Capital Partners and StocksAtBottom.com.
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