Always Invert: Wisdom From Charlie Munger

Most fans of Warren Buffett, and investors in his investment vehicle Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), are familiar with Buffett's longtime business partner, Charlie Munger. To many, Munger is the modern-day version of Ben Franklin, always striving to increase his worldly wisdom and live a life of continuous self-improvement. While most would agree that Munger is also one of history's greatest investors, he naturally finds himself overshadowed by the world's insatiable fascination with Warren Buffett. Keeping a low profile suits Munger just fine, but there's no doubting the profound effect he's had on Berkshire.

Munger is arguably one of today's most underrated investors. A vast majority of investors associate Munger only with his role at Berkshire, forgetting that he has presided over an amazing investment himself, Wesco Financial (AMEX: WSC). While Wesco might not have the near-mythical history of Berkshire under Buffett, its shareholders have enjoyed years of prosperity under Munger.

Each year after the Berkshire Hathaway annual meetings, which draw in 20,000-plus attendees, Munger holds the Wesco meeting out in California -- three or so of the most enlightening hours that any investor can experience. Though he's famous for his "I have nothing to add" responses at Berkshire, Munger unleashes far more wisdom, advice, and humor at the Wesco annual meetings.

Invert, always invert
One of Munger's invaluable lessons: No two businesses are ever the same, so it doesn't make sense to value every business based on the same rigid formulas. Munger's approach to investing revolves around building as many different mental models as you can. "You need a different checklist and different mental models for different companies," he's said in the past. "I can never make it easy by saying, 'Here are three things.'"

Value reveals itself in many ways, and Munger cautions that if you stick to the same approach every time, you'll miss out on fantastic opportunities. Before Munger, Buffett used the very rigid investment approach Ben Graham taught him. Buffett would stick to businesses selling at certain book and earnings multiples. This approach was fine in its own regard, but price-to-earnings and price-to-book multiples aren't the only crucial factors in in evaluating businesses.

The lessons of Coke
Munger got Buffett to consider such valuation alternatives, and their collaborative effort has greatly rewarded Berkshire shareholders. Look at one of Buffett's most successful investments, Coca-Cola (NYSE: KO), whose real value lay in an intangible asset -- its brand name.

Strict Graham-style value investing didn't lend much weight to intangible assets, but with companies like Coke and Nike (NYSE: NKE) -- a former Buffett investment -- brand values are a very real thing. Coke's powerful brand gave the company the magnificent pricing power that so excited Buffett. Coke could raise (and has been raising) the price of Coke products for decades, yet its volume sales keep climbing as well. After all, who isn't willing to pay an extra dime or quarter for a product that gives you so much instant satisfaction?

Buffett's investing philosophy is constantly evolving. For years, he has methodically shunned capital-intensive businesses generating low returns on invested capital. Yet now, Buffett owns more than 15% of railroad operator Burlington Northern (NYSE: BNI). Sure, the magnitude of Berkshire shrinks the pool of available investments, but Buffett has never hesitated from holding cash.

Munger sums it up nicely: "There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn't awash in cash -- and I don't want to go back."

Simply focus on finding value
Munger's priceless wisdom would span hundreds of articles, and unlike Munger, I will have "more to add" in the future. One can never tire from learning from the best. Curious investors would benefit tremendously from Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, a wonderful compilation on the life of Munger.

In the end, investors need to focus on one priceless bit of advice from Munger: "All intelligent investing is value investing -- acquiring more that you are paying for. You must value the business in order to value the stock."

Remember that advice. Buy a business based on its merits only, not on what the stock price is or isn't doing. If you incorporate this businesslike mentality in your investing decisions, you'll do well over time.

Further Foolish wisdom:

• In Investing, Size Matters
• Succeeding Unconventionally
• All Intelligent Investing Is Value Investing