Charlie Munger's place in history is almost destined to be "the other Berkshire guy," a second fiddle to the legendary investing virtuoso that is Warren Buffett. Frankly, the public at large probably doesn't give Munger enough credit for his own investing and business acumen, and certainly takes for granted the significant influence he has had on Buffett.
It's hard to quantify the exact value Munger has brought to the partnership, but his role in Buffett's transition from focusing heavily on finding value, to an emphasis on investing in the earnings power of a great business, has added billions of dollars to Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) returns.
Here are some of my favorite five quotes about -- or from -- Charlie Munger.
He might not be smarter than Buffett, but he's definitely different
"Howard Buffett, Warren's eldest son, has said that his father is the second smartest man he knows. He says Charles Munger is the first." -- from Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, by Janet Lowe.
Okay, so it's not really clear who's smarter, but despite their similarities in background (both are from Omaha) and philosophy on business (which Munger influenced in Buffett, they are very different. Buffett is known to have few interests beyond business and Bridge, and is a Democrat. Munger, a Republican, has spent much of his time leading organizations like the Harvard-Westlake School of which he's been a trustee for decades, and Good Samaritan Hospital, of which he has been chairman of the board of trustees for more than a decade.
Buffett has spent the majority of his life in Omaha, except for a few years after college working for Benjamin Graham in New York, while Munger has lived in Southern California since the 1950s. While their similarities in business and investing made it possible for the partnership to work, it's very likely that it has flourished because they have differing perspectives, but mutual respect. There's huge value to having close relationships with people who might view things a little differently than you do. It's certainly worked for Buffett and Munger.
His role in shaping Buffett's investing philosophy
From the foreword that Buffett wrote for Damn Right:
With his "Mungerisms" he has been highly entertaining, and he has also shaped my thinking in a major way. Though many would label Charlie a businessman or philanthropist, I would opt for teacher. And Berkshire clearly is a much more valuable and admirable company because of what he has taught us.
From a 1988 Carol Loomis article in Forbes:
So in conversations with Buffett over the years he preached the virtues of good businesses, and in time Buffett totally accepted the logic of the case ... ''I have been shaped tremendously by Charlie,'' says Buffett. ''Boy, if I had listened only to Ben, would I ever be a lot poorer.''
The Graham that Buffett was talking about was Benjamin Graham, Buffett's teacher, employer, and mentor for many years. Graham's The Intelligent Investor remains one of the most important and influential books on investing, more than six decades after its first publication.
Buffett would likely still have been quite successful if he had stuck to Graham's investing style, a so-called "cigar butt" approach based on finding businesses trading for less than the liquidation value of their assets, like finding a cigar butt on the sidewalk with one or two puffs left. While this is a proven method for generating returns, it doesn't provide for the kind of huge returns Buffett and Munger have generated by focusing on great businesses first, and paying fair value for them.
As Buffett has said, "price is what you pay, value is what you get."
Berkshire's "hands-off" management of its subsidiaries
Berkshire Hathaway subsidiaries employ more than 300,000 people, according to the company's most recent annual report. However, there are less than 30 at the company's headquarters. While corporate governance at most companies often means complex processes and layers of control, Berkshire is pretty much the opposite. From the company's 2014 annual shareholder meeting:
By the standards of the rest of the world, we over-trust. And so far, our results have been far better, because we carefully selected people who should be over-trusted. I think a lot of organizations work better when there is a culture of trust. And in modern organizations, where there are tight controls and monitoring, I think they're going to be worse for it. -- Munger, from the company's 2014 annual shareholder meeting.
Munger's influence on Buffett's investing approach is key to this aspect of Berkshire. It was Munger's urging that led Buffett away from looking for "cheap" assets, and instead investing in great businesses. Since great businesses require great leaders, identifying solid management became a key part of Buffett's process of finding great investments. It didn't matter whether he was buying stock, or buying the whole company.
Avoiding wrestling pigs
Never wrestle with a pig because if you do you'll both get dirty, but the pig will enjoy it.
Another gem from Damn Right, Munger talks about the importance of dealing with people you can trust, versus those you can't. Munger built a very successful law practice as he was finding his investing legs, and probably would have been quite wealthy even if he'd never met Warren Buffett. But it's his understanding of the importance of strong and trustworthy partners -- a trait he shares with Buffett -- that has been key to the shared success of both men. And the compounding result of their partnership has vastly altered the prospects of every long-term Berkshire investor.
Applying the lessons of Munger
There's nothing wrong with trying to emulate the best characteristics of successful people we admire; Munger himself is a great admirer of Ben Franklin, and has attempted to follow his ethos in honesty and integrity. What can we learn from Munger's words and actions? In short, there's a lot of good that comes from surrounding ourselves with trustworthy, smart people, even -- no, especially -- if they have differing views than we do.
All the pithy advice and one-liners are great, but the fundamentals of the success these two men have shared is based on mutual trust, knowing where their competence lies, and a willingness to walk away from risk. Do you have people in your investing life playing the role of Charlie? If not, that might be why you're not getting the returns you want.
With that, I'll leave you with a bonus quote, Munger's most famous. I think it's a fitting way to end:
I have nothing to add. -- Charlie Munger.