At a 2017 conference, Warren Buffett's partner at Berkshire Hathaway (BRK.A 0.18%) (BRK.B 0.45%), the late Charlie Munger, revealed that almost all of his family's net worth was in just three investments.
Munger, who rejected diversification for savvy and experienced investing professionals, called it a "rule for those who don't know anything." His views echoed Buffett's, who said diversification made "very little sense for anyone that knows what they're doing."
Munger certainly knew what he was doing. Before joining Berkshire, he ran his own investment fund, which generated average annual returns of 19.5% from 1962 to 1975, outpacing the Dow Jones Industrial Average by nearly 4 to 1. After Munger died in November 2023, Buffett lauded him as the "architect" behind present-day Berkshire and credited him with shifting his entire investing philosophy from extreme value hunting to buying "wonderful businesses purchased at fair prices."
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Like Buffett, Munger sought companies with "moats," or entrenched positions that protect them from competition and enable them to thrive in various economic environments. Of course, a few years is an eternity for markets, which are forward-looking. How have Munger's three high-conviction ideas fared since he died?
No. 1: Costco Wholesale
Munger served on the board of directors of the retail giant Costco Wholesale (COST 0.50%) for decades, and called himself "a total addict" of the company. In 2022, he professed to "love everything about Costco" and vowed never to sell a single share. At the time, he was the second-largest shareholder, with over 187,000 shares worth $110 million.
NASDAQ: COST
Key Data Points
Since November 2023, shares of Costco have returned 47%, while the company raised its dividend by 27%. That doesn't include a $15-per-share special dividend paid in January 2024 that amounted to a 2.3% yield all by itself for shareholders on record.
No. 2: Himalaya Capital
In the early 2000s, Munger turned over $88 million of his fortune to a fund manager to invest. Li Lu, known as "the Chinese Warren Buffett" for his success in applying value investing to markets, is the founder of Himalaya Capital, which professes to follow the value investing principles of Buffett, Munger, and Benjamin Graham. Munger's confidence in Li proved well placed, with his initial investment multiplying as Munger heralded "ungodly returns."
As a private hedge fund, Himalaya Capital does not readily disclose its track record. But its top holding, Alphabet (GOOGL 2.05%) (GOOG 2.17%), of which Class A and Class C shares made up almost 40% of the fund's assets under management as of the most recent 13F filing, is up 130% since Munger's death. Another of its top holdings, Berkshire Hathaway, also returned a solid performance in that period. Which brings us to...
No. 3: Berkshire Hathaway
With his net worth of around $2.6 billion, Munger's wealth was a small percentage of Buffett's. Part of the reason for this was that he sold or donated approximately 75% of the 18,829 Class A shares he held in 1996, the earliest date for which records are available. Had he held on to those shares, his net worth would have been an estimated $10 billion.
NYSE: BRK.A
Key Data Points
At the time of Munger's passing, he owned 4,033 Class A shares worth about $2.2 billion, making his stake in Berkshire almost 90% of his net worth. In the two years and one month since, Berkshire Class A shares have jumped 37%.
What the numbers tell us
Since Munger's passing in late November 2023, both Berkshire Hathaway Class A shares have returned 38%, while Costco shares are up 47%, underperforming the S&P 500's 52% rise. While Himalaya Capital's returns in that time frame aren't widely known, the returns of its top holdings as of last quarter suggest strong double-digit returns.
But while Munger's three high-conviction investments haven't quite matched the markets, absolute returns are only one side of investing. These businesses with sterling fundamentals could be seen as considerably less risky than the broader markets, which likely appealed to a conservative investor like Munger. And their ability to deliver robust performance in a stretch where value investments are generally out of favor suggests that, even with Munger gone, the investing principles he lived by are as timeless as ever.
