April 29, 1999

Charlie Munger: Warren's Right-Hand Man

by Dale Wettlaufer (TMF Ralegh)

Vice-Chairman Charlie Munger is the lesser known of Berkshire Hathaway's dynamic duo, but Munger has had a significant, almost unquantifiable impact on the way Warren Buffett thinks and on the fortunes of Berkshire Hathaway's shareholders.

Like Buffett, Charles T. Munger is a product of Omaha and, indeed, worked at the same grocery in Omaha as Buffett did, but not at the same time. The grocery, incidentally was Buffett & Son -- Warren Buffett's grandfather's store. They met in 1959 when the two were introduced by a mutual friend. They immediately hit it off. At the time, Munger was a lawyer, but within a decade he would move onto other things completely.

Charlie Munger is somewhat unusual in that he received his law degree from Harvard without having attained an undergraduate degree. The Los Angeles-based law firm of Munger, Tolles, & Olson is one of the most powerful on the West Coast, though Munger isn't involved any longer. He spends his time mainly as the Chairman and CEO of Berkshire subsidiary Wesco Financial (AMEX: WSC) and as the constant and longtime collaborator with Warren Buffett.

At the urging of Buffett, Munger set to managing money full-time, and he burned up the track with the Munger Partnership (see below). Munger came to own a considerable chunk of Berkshire through the merger of companies he and Berkshire both owned, and he became Vice-Chairman of Berkshire in 1979.*

Munger is a unique intellectual talent, which is manifest in the Berkshire Hathaway of today. Buffett acknowledges that Charlie was the person to get him to buy high quality companies at a fair price and move away from the cigar-butt, short-term value arbitrage approach practiced by Ben Graham and his employees at Graham-Newman Corporation and then elsewhere.

If Charlie Munger left nothing else on earth but the transcript of a talk he gave at USC in 1994 (available through subscription to Outstanding Investors' Digest), he would have led a successful life. In this address, titled "A Lesson on Elementary, Worldly Wisdom as it Relates to Investment Management and Business," Munger lays out what can stand alongside Benjamin Graham's The Intelligent Investor and Phil Fisher's Common Stocks, Uncommon Profits as great and enduring statements of investment philosophy.

I think I could reasonably sum up a central tenet of Charlie Munger's investment philosophy as "make fewer decisions, make better decisions." While the Buffett Partnership did extremely well engaging in value arbitrage, Buffett and Berkshire have done best capitalizing on a few important big insights rather than a number of small insights. In the 1994 address, Munger said, "We've really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high quality businesses."

That hasn't happened as the result of Munger and Buffett being timid about allocating small amounts of capital to their best ideas. It has come from concentrating their capital in the big ideas. Munger addressed this issue in a 1998 speech to directors of charitable foundations: "In the United States, a person or institution with almost all wealth invested, long-term, in just three fine domestic corporations is securely rich. And why should such an owner care if at any time most other investors are faring somewhat better or worse. And particularly so when he rationally believes, like Berkshire, that his long-term results will be superior by reason of his lower costs, required emphasis on long-term effects, and concentration in his most preferred choices."

Charlie Munger and Warren Buffett believe that "time is the best friend of the great companies and the enemy of the poor ones." Fiddling around with low-quality businesses entails paying the opportunity costs of not allocating that capital to the world-class investment opportunities that make themselves available from time to time.

One thing that must be understood about Berkshire is that Buffett and Munger let a lot of ideas pass through their brains. If their brains were gold pans, they would have highly permeable screens in them, and only the biggest chunks of gold are trapped by the screens. As Buffett says, there are no "called strikes" in investing. They can wait for the great businesses to come to them, which is an "emotional IQ" attribute that can be attributed to Warren Buffett's training with Ben Graham as well as mind melding with Charlie Munger over the last four decades.

As a footnote, readers might be interested in the following data from Robert Hagstrom's latest book, The Warren Buffett Portfolio, a rangy look at diversification and risk, behavioral finance, and really, the way the world works for some of the country's best investors. This is the track record of the Charles Munger Partnership, year-by-year, versus the Dow Jones Industrial Average:

                Annual percentage change
                Partnership        DJIA
          1962     30.1            -7.6
          1963     71.7            20.6
          1964     49.7            18.7
          1965      8.4            14.2
          1966     12.4           -15.8
          1967     56.2            19.0
          1968     40.4             7.7
          1969     28.3           -11.6
          1970     -0.1             8.7
          1971     25.4             9.8
          1972      8.3            18.2
          1973    -31.9           -13.1
          1974    -31.5           -23.1
          1975     73.2            44.4

Average Return     24.3             6.4
Standard Deviation 33.0            18.5
Minimum           -31.9           -23.1
Maximum            73.2            44.4
[Compound annual
 return]           19.8             4.9

The data alone is pretty good evidence that this is an unusual individual. The readings I have suggested in this article, however, are a far better look into Charlie Munger's outstanding mind, as primary materials, than I can deliver to you.

* This background information relies heavily on Andy Kilpatrick's 1998 Edition of the 30 billion-pound gorilla, Of Permanent Value.

Next -- Berkshire Hathaway: The Makings of a Diversified Conglomerate