Warren Buffett is one of the greatest and most famous investors of all time. Perhaps lesser known is Buffett's right-hand man, Charlie Munger. That's unfortunate because Munger is an incredible investor in his own right and, like Buffett, has a knack for simplistically distilling profound truths for anyone who also aspires to become a great investor.
Buffett and Munger are top directors at Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%). This year at the company's annual meeting, Munger briefly told the story of when he made a $1,000 investment in 1962 that still pays him $70,000 in annual royalties today. A sense of awe seemed to sweep the crowd after he revealed this investment.
This story might have surprised shareholders of Berkshire Hathaway. But it wouldn't have taken a shareholder of the Daily Journal (DJCO 1.75%) by surprise at all. In 2016, Munger went into more detail regarding this $1,000 investment at Daily Journal's annual shareholder meeting. And it has major implications for all investors today.
Munger's blockbuster investment
At Berkshire Hathaway, Charlie Munger is vice chairman. But at the Daily Journal, Munger was chairman from 1977 through 2022, just as Buffett is chairman at Berkshire Hathaway today. The annual meetings at the Daily Journal aren't as big as the annual meetings for Berkshire Hathaway. But they do provide an avenue for Munger to share investing wisdom with the world.
At the 2016 annual meeting, Munger was asked if he had a favorite investment story. He responded by saying he indeed had one -- a story he had never told before:
He was approached by a friend in 1962 who wanted help bidding on royalty interests in oil-producing properties at an auction. These are typically bid on by oil royalty brokers. And Munger had many...ahem...colorful adjectives for this class of people. But among his descriptions for the brokers, Munger used the word "cheap."
Image source: Getty Images.
Munger and his partner apparently outbid these cheap brokers with a bid of $2,000 -- $1,000 from each of them. These royalties gave Munger an economic interest in any oil produced from those fields. And as the fields have produced oil, Munger has received regular royalty payments ever since. These are now up to $70,000 annually. Not bad.
It's more than not bad -- this oil investment has been downright sensational. The website Markets Insider estimates that Munger has cumulatively earned about $1 million from this $1,000 investment over the past 60 years. For those keeping score, that's a 1,000-bagger. But it's a level of success that Munger doesn't believe he'll ever have again. And that's entirely the point of the story.
The lesson for investors today
In case you're wondering, 1,000-bagger investments are rare even if you have 60 years to work with. Indeed, Munger lamented after telling this story by saying: "The trouble with that story is that it only happened once. That's true of most investment stories."
When speaking at the University of Michigan in 2010, Munger said his investing philosophy is guided by his great-grandfather Eames, who would say, "Assume that your really major opportunities in life are going to be few, and when you get a lollapalooza, for god sakes, don't hang by like a timid little rabbit."
In that speech, Munger went on to say that Berkshire Hathaway's amazing investment track record would be a "joke" save for about one good stock pick every couple of years.
Buffett is even more critical of Berkshire's success than Munger is. In Buffett's 2022 letter to shareholders, he wrote, "Our satisfactory results have been the product of about a dozen truly good decisions -- that would be about one every five years."
The lesson for investors is not to blindly throw $1,000 at every investment opportunity, hoping to luckily strike a 10-bagger, 100-bagger, or even Munger's elusive 1,000-bagger. As author and economist Morgan Housel writes, "Good investing isn't necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can't be repeated."
Munger made his blockbuster investment 60 years ago. He recognized then that it was a rare opportunity that likely wouldn't be replicated in his lifetime. But that didn't deter him from continuing to be an investor throughout this time. To the contrary, he holds on to past successful investments and researches new ideas daily, anticipating another good opportunity eventually.
Moreover, since there aren't many great opportunities out there, he stays patient to avoid rash, ill-informed decisions. As he says, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."
In summary, Munger stays in the game of investing by making reasonable decisions and avoiding stupid ones. He knows that if he does this consistently, then sooner or later he'll have a chance at a rare life-changing opportunity. And when it finally comes, he takes it.
In my view, it's an approach that would make us all better investors as we look for top stocks to buy.
