Last week, on Nov. 28, Charlie Munger, who represented one-half of Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) dynamic duo, passed away less than five weeks shy of his 100th birthday.
Without question, Munger will be remembered for his investing prowess. Although Berkshire Hathaway CEO Warren Buffett receives most of the attention from Wall Street and investors, Munger helped oversee a 19.85% annualized return in Berkshire's Class A shares (BRK.A), equating to an aggregate gain of better than 345,000%, in his 45 years as executive vice chairman.
However, Munger's greatest and longest-lasting contribution isn't going to be what investments he correctly called. Rather, it's the culture he instilled in Berkshire Hathaway's investment team -- including CEO Warren Buffett.
Image source: Getty Images.
Charlie Munger was an astute investor
Don't get me wrong: Charlie Munger was a phenomenal investor and a true stickler for value. He believed in buying great businesses that required little oversight, and wasn't afraid to sit on his hands until the valuation for said businesses made sense.
Perhaps the investment Warren Buffett's "right-hand man" is best known for is encouraging the Oracle of Omaha to pull the trigger on See's Candies when it was put up for sale. The sweet-tooth retailer was ultimately purchased by Berkshire Hathaway for $25 million in 1972, which was below its $31.3 million in sales that year and close to 12 times its after-tax profits of $2.1 million.
During Berkshire's 2019 annual shareholder meeting, Buffett commented that "[W]e put $25 million into it [See's] and it's given us over $2 billion of pre-tax income, well over $2 billion." Conservatively, See's has returned north of 7,900% since Munger gave Buffett the nudge he needed to buy this high-quality chocolate retailer.
Charlie Munger has also been credited by Buffett as a driving force behind Berkshire's investment in credit-services provider American Express (AXP -0.62%). AmEx, as American Express is more commonly known, benefits from being able to play both sides of the transaction aisle, and has done a good job of navigating turbulent economic climates by focusing on higher-earning clientele.
Based on a cost basis of roughly $8.49 per share in American Express, Buffett's company is sitting on an unrealized gain of 1,947% (not including dividends), and netting a 28.3% annual yield, relative to its cost, thanks in part to Charlie Munger.
These astute investments have certainly played a role in helping Berkshire Hathaway run circles around the broader market for decades. They've also made Berkshire's faithful shareholders richer over time.
Munger's lasting legacy is the ethos he instilled at Berkshire Hathaway
While Munger greatly valued his own financial independence, as well as making the lives of Berkshire's shareholders better (including himself), it's the culture he instilled at Berkshire Hathaway that will long transcend his passing.
Prior to Munger becoming a proverbial fixture at Berkshire Hathaway, Warren Buffett had a different investment style than most folks are familiar with today. For instance, he was known to go after perceived-to-be-cheap, struggling businesses that he believed could be turned around.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Perhaps even more of a jaw-dropper, Buffett wasn't always focused on the long term. For example, in 1966, Buffett and a consortium of investors put $4 million to work in Walt Disney (DIS -0.04%), which was a media company and burgeoning theme park operator at the time. This $4 million investment gave Buffett and his team a 5% stake in Disney.
Just one year later, Buffett disposed of this investment for around $6 million (a 50% gain). Although a profit is a profit, a 5% position in Walt Disney would be worth well over $9 billion today, including aggregate dividends paid.
But Munger helped Warren Buffett see the light, so to speak. Even though Berkshire's dynamic duo wasn't infallible, Munger's staunch takes on value, as well as analyzing companies rather than numbers on a piece of paper, steadily encouraged Buffett to invest in higher-quality businesses with sustained competitive advantages.
To add to this point, Buffett's right-hand man brought a true long-term investing ethos to Berkshire. One of the more memorable quotes shared by the late Munger was, "The big money is not in the buying and selling, but in the waiting."
Munger's buy-and-hold philosophy helped ingrain just how powerful compounding can be over the long run. Likewise, holding great businesses over extensive periods removes emotional investing from the equation. It's why industry-leading businesses like American Express and Coca-Cola have been continuous holdings in Berkshire's investment portfolio for more than three decades.
American Express and Coca-Cola have been big-time moneymakers over the past 30 years, including dividends paid. KO Total Return Level data by YCharts.
Perhaps most important, Munger conveyed the importance of continually learning and bettering oneself as an investor. Specifically, he encouraged others to learn through "voracious reading." It was no secret that Buffett and Munger required time throughout their day to reflect, think, and read.
Munger recognized that there was always going to be something new to learn, and that history could be an amazing teacher. Although Wall Street doesn't repeat to a "t," it does often rhyme. Munger knew this, and his fascination for reading and bettering himself rubbed off on those around him.
Charlie Munger's candidness at Berkshire Hathaway's annual shareholder meetings will undoubtedly be missed. But he's left Berkshire with an unwavering ethos that can endure for decades. The company's $363 billion investment portfolio is packed with cyclical, time-tested, brand-name, high-quality companies that appear poised to grow in value with the U.S. and global economy over the long run.
The framework of success has been laid for future generations -- and that's exactly what Charlie Munger would have wanted.
