Published on December 17th, 2017
Charlie Munger is Warren Buffett’s business partner and vice-chairman of Berkshire Hathaway.
Berkshire Hathaway is one of the world’s most well-regarded corporations and owns a diversified portfolio of high-quality dividend stocks. Berkshire’s long-term track record is also second-to-none, which means there’s plenty to learn from studying its stock holdings. You can download Berkshire Hathaway’s stock portfolio below.
Warren Buffett tends to get much of the fame when it comes to the discussion of Berkshire’s remarkable performance over the long run. With that said, Munger has certainly played an important role.
Munger managed his own investment partnership before partnering with Buffett to grow Berkshire Hathaway. Munger’s partnership averaged returns of 19.8% a year from 1962 to 1975 versus just 5% a year for the DOW over the same time period.
This article provides an overview of Munger’s most interesting quotes as a medium for readers to learn from his actionable insights into both business and personal life.
Table of Contents
You can jump to a particular section of this article with the links below:
- Video: Charlie Munger’s Wisdom on Business, Investing, and Life
- Charlie Munger’s Life & Investment Partnership Results
- Munger, Buffett, & Investing
- Mental Models
- On Learning
- On Psychology
- On When To Buy
- On Diversification
- On When To Sell
- On Risk
- On Accounting
- On Investing Fees
- On Living a Virtuous and Fulfilling Life
- Charlie Munger on Warren Buffett
- What Other People Have To Say About Charlie Munger
Video: Charlie Munger’s Wisdom on Business, Investing, and Life
Charlie Munger’s Life & Investment Partnership Results
Charlie Munger has had a long life (he is currently 93 years old and still working!). His life is best summarized with the following from the acclaimed book Poor Charlie’s Almanack:
Source: Poor Charlie’s Almanack
As mentioned, he previously ran his own investing partnership. Looking at his remarkable track record can help us to understand why we might be able to learn from this fantastic investor. The track record of the Charlie Munger investing partnership is shown below.
Source: Poor Charlie’s Almanack
Munger’s limited partners realized 19.8% annualized returns during the lifetime of the partnership (before fees), comparing very favorably to the 5.0% return realized by the Dow Jones Industrial Average. Clearly, we have a lot to learn from this great investor.
Munger, Buffett, & Investing
Charlie Munger heavily influenced Warren Buffett’s investment style. Munger believes in holding a hyper-concentrated portfolio of extremely high-quality businesses. Munger eschews diversification – he is comfortable holding as few as 3 securities at a time.
Munger’s philosophy of buying and holding high-quality businesses for the long-run clearly rubbed off on Buffett. Before Munger, Buffett was much more of a traditional value investor. After Munger, Buffett focused on high-quality businesses trading at fair or better prices.
One of the main differentiators between Warren Buffett and Charlie Munger is Munger’s insistence on thinking through “mental models”, which we explain below.
Charlie Munger’s interests go far beyond investing. He is a generalist with broad knowledge across multiple fields. Munger is perhaps best known for his ‘mental models’ approach to solving problems.
Warren Buffett says Munger has “the best 30 second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you even finish the sentence“.
Munger advises you understand the ‘big ideas’ from a wide range of subjects – from philosophy, science, physics, investing, and so on. This ‘latticework’ of mental models will help you come to correct conclusions by viewing the problem from multiple vantage points.
Charlie Munger’s mental models approach to life gives him a unique perspective. If there is anyone who offers better investment quotes than Warren Buffett, it is Charlie Munger. The remainder of this article is dedicated to presenting and analyzing quotes from Charlie Munger as they apply to business, investing, and living a fulfilling life.
Munger is perhaps best-known as a devoted life-long learner in a wide number of disciplines. Munger thought that universities should include a class called “Remedial Worldly Wisdom” that taught all the concepts that students should have learned prior to enrolling.
Because of Munger’s reputation as a passionate learner, it’s useful to understand his definition of wisdom:
“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.
You’ve got to have models in your head. And you’ve got to array your experience – both vicarious and direct – on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and fail in life. You’ve got to hang experience on a latticework of models in your head.”
As this quote suggests, Munger relied heavily on mental models in his pursuit to understand the world around him. Munger thought it was important to understand the “big ideas” from the “big disciplines,” and generalize from there:
“You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.”
If mental models are so important, this begs the question – how does one learn them?
Munger believes that the best way to learn is by mastering the best that other people have figured out:
“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart…”
To learn from others, Munger’s favorite medium was reading.
Source: Poor Charlie’s Almanack
Reading and understanding the great ideas in philosophy, economics, science, and other disciplines slowly opens your mind to different possibilities in a way that staying in one narrow field alone will never be able to accomplish.
It’s also important to have the inborn temperament to always learn more. Munger describes how some people have an internal disposition for learning in the following passage:
“How do some people get wiser than other people? Partly it is inborn temperament. Some people do not have a good temperament for investing. They’re too fretful; they worry too much. But if you’ve got a good temperament, which basically means being very patient, yet combine that with a vast aggression when you know enough to do something, then you just gradually learn the game, partly by doing, partly by studying. Obviously, the more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be. I don’t know anyone who did it with great rapidity. Warren Buffett has become one hell of a lot better investor since the day I met him, and so have I. If we had been frozen at any given stage, with the knowledge hand we had, the record would have been much worse than it is. so the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”
When it comes to learning, Munger particularly emphasized the hard sciences. He studied mathematics as an undergraduate student (though he never completed that degree), and maintained his bias toward quantitative subjects for the rest of his life.
“If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one–legged man in an ass–kicking contest. You’re giving a huge advantage to everybody else.”
Munger believed that permutations and combinations (which come from the field of math known as combinatorics that helps answer questions like “how many ways are there to order a group of numbers?”) were especially useful.
“And the great useful model, after compound interest, is the elementary math of permutations and combinations.”
Munger is clearly an unorthodox learner. Given this knowledge, it is unsurprising that he thinks the current postsecondary education system is broken:
“There’s a lot wrong [with American universities]. I’d remove three-fourths of the faculty – everything but the hard sciences. But nobody’s going to do that, so we’ll have to live with the defects. It’s amazing how wrongheaded [the teaching is]. There is fatal disconnectedness. You have these squirrelly people in each department who don’t see the big picture.”
This poor teaching is especially present in the field of investing, as the following quotes illustrate:
“Beta and modern portfolio theory and the like – none of it makes any sense to me. We’re trying to buy businesses with sustainable competitive advantages at a low, or even a fair, price.”
“How can professors spread this [nonsense that a stock’s volatility is a masure of risk]? I’ve been waiting for this craziness to end for decades. It’s been dented, but it’s still out there.”
“Warren once said to me, “I’m probably misjudging academia generally [in thinking so poorly of it] because the people that interact with me have bonkers theories.”
Munger’s ability and willingness to learn is one of the reasons he became such a great investor. Another reason is his patient temperament. Munger’s thoughts on the importance of psychology in life and investing are discussed below.
Charlie Munger loves psychology. In a speech called The Psychology of Human Misjudgement that Munger delivered to Caltech students in 1995, he outlined his perspective on the 25 cognitive biases that have the greatest ability to impair human decision-making. The 25 biases are:
- Reward and Punish Superrespone Tendency
- Liking/Loving Tendency
- Disliking/Hating Tendency
- Doubt-Avoidance Tendency
- Inconsistency-Avoidance Tendency
- Curiosity Tendency
- Kantian Fairness Tendency
- Envy/Jealousy Tendency
- Reciprocation Tendency
- Influence-from-Mere-Association Tendency
- Simple, Pain-Avoiding Psychology Denial
- Excessive Self-Regard Tendency
- Overoptimism Tendency
- Deprival-Superreaction Tendency
- Social-Proof Tendency
- Contrast-Misreaction Tendency
- Stress-Influence Tendency
- Availability-Misweighting Tendency
- Use-It-or-Lose-It Tendency
- Drug-Misinfluence Tendency
- Senescence-Misinfluence Tendency
- Authority-Misinfluence Tendency
- Twaddle Tendency
- Reason-Respecting Tendency
- Lollapalooza Tendency – The Tendency to Get Extreme Consequences From Confluences of Psychology Tendencies Acting in Favor of a Particular Outcome
Each of these ideas is outside the scope of this article. If you’re interested in learning more about them, we recommend reading Poor Charlie’s Almanack. With this said, you will likely notice Munger’s emphasis on psychology throughout the rest of this article, as we explore how more of his quotes apply to other areas of business and life.
On When To Buy
As we saw earlier, Munger ran his own investment partnership that beat the market over a meaningful period of time. He has also has a strong impact on Berkshire Hathaway’s investment decisions to this day. Accordingly, his thoughts on when to buy stocks are worth discussing.
Munger’s investment strategy is very boring. Keeping a cool head and investing in high-quality businesses with long histories of rewarding shareholders may not be as exciting, but it will generate solid returns over time with less risk than investing in ‘the next big thing’. When the crowd moves on, large losses often follow large gains. Munger seeks opportunity that are attractive when adjusted for risk. In other words, he’s looking for mispriced gambles.
“You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.”
Usually, this entails buying businesses below their intrinsic value. Buying businesses below their fair value requires you have an idea of what fair value is. When the crowd becomes overly pessimistic they focus on negative possibilities and discount positive possibilities. Having a better estimate of the real probabilities gives an investor a sizeable edge that can be exploited.
Unfortunately, severely ‘mispriced gambles’ don’t come along often. Munger recommends waiting for the best opportunities to come around. When they do, move quickly and decisively.
“If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.”
The opportunities Munger looks for are great businesses trading at a discount to their fair value.
“A great business at a fair price is superior to a fair business at a great price.”
So what defines a great business? Munger thought that a key characteristic of a good business was one that required minimal reinvestment. Said differently, Munger appreciates the ability to withdraw cash from a strong performing business.
On the surface, it might seem like this is always the case. The following passage explains why this isn’t true in practice:
“There are two kinds of businesses: The first earns twelve percent, and you can take the profits out at the end of the year. The second earns twelve percent, but all the excess cash must be reinvested – there’s never any cash. It reminds me of the guy who sells construction equipment – he looks at his used machines, taken in as customers bought new ones, and says “There’s all of my profit, rusting in the yard.” We hate that kind of business.”
Munger uses the economic concept of opportunity cost to filter through investment opportunities.
“Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter out buying opportunities.”
Indeed, it’s hard to overstate the importance of opportunity cost in Munger’s investment philosophy. The Berkshire investment managers eschew academic investment analysis techniques like weighted average cost of capital (WACC), instead preferring the far-simpler opportunity cost. The following exchange between Warren Buffett and Charlie Munger at a Berkshire Hathaway annual meeting illustrates this:
Buffett: Charlie and I don’t know our cost of capital. It’s taught at business schools, but we’re skeptical. We just look to do the most intelligent thing we can with the capital that we have. We measured anything against our alternatives. I’ve never seen a cost-of-capital calculation that made sense to me. Have you, Charlie?
Munger: Never. If you take the best text in economics by Mankiw, he says intelligent people make decisions based on opportunity costs – in other words, it’s your alternatives that matter. That’s how we make all of our decisions. The rest of the world has gone off on some ckick – there’s even a cost of equity capital. A perfectly amazing mental malfunction.
Munger also believed that a compelling competitive advantage was one reason to be interested in a stock. What stands out about Munger’s analysis of competitive advantages is how he relates them to disciplines outside of the world of investing. As an example, Munger relates geometry to scale-based competitive advantages (often called economies of scale) in the following passage.
“Let’s go through a list – albeit an incomplete one – of possible advantages of scale. Some come from simple geometry. If you’re building a great circular tank, obviously, as you build it bigger, the amount of steel you use in the surface goes up with the square and the cubic volume goes up with the cube. So as you increase the dimensions, you can hold a lot more volume per unit area of steel.
And there are all kinds of things like that where the simple geometry- the simple reality- gives you an advantage of scale.”
It’s also worth mentioning that Munger (and, by extension, Berkshire Hathaway) does not make investment decisions based on macroeconomics. In response to the question “What macro statistics do you regularly monitor or find useful in your attempt to understand the broader economic landscape?” Munger has said:
“None. I find by staying abreast of our Berkshire subsidiaries and by regularly reading business newspapers and magazines, I am exposed to an enormous amount of material at the micro level. I find that what I see going on there pretty much informs me of what’s happening at the macro level.”
We’ve seen that Munger likes to buy great businesses with sustainable competitive advantages when they trade at fair or better prices. The next section discusses his thoughts on portfolio diversification.
As mentioned earlier in this article, Charlie Munger ignores diversification in the traditional sense. Munger was comfortable owning as little as three stocks.
Munger’s concentrated approach to investing flows from the idea of using your capital on your best ideas. The cost of diversifying is forgoing putting more capital to work in your best idea. Viewed in this manner, a concentrated portfolio is logical – if you have a high conviction your forecasts are accurate.
“The idea of excessive diversification is madness.”
Munger believes that taking money you could invest in your best idea and putting it into your 100th best idea doesn’t make sense. The greater degree of certainty you have in your investing skill, the fewer securities you need to own in your portfolio.
Moreover, less diversification means a greater focus on the few especially important opportunities that come around in someone’s lifetime.
“Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime.
A few major opportunities, clearly recognized as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables.
And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past. “
Munger’s behavior with respect to diversification is highly unusual. His decisions on when to sell stocks are similarly atypical and discussed in the next section of this article.
On When To Sell
Charlie Munger is a notoriously long-term investor. This is because there are a number of significant benefits that coem from owning great businesses for long periods of time. Munger’s thoughts on long-term investing can be seen below.
“We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing.”
Munger holds for the long-term partially because his conservative, low-risk investment strategy works best when applied for very long periods of time. His investments are slow-and-steady decisions that, in aggregate, outperform competitors with more irrational risk tolerance. This naturally brings the tortoise-and-the-hare analogy to mind:
“It is occasionally possible for a tortoise, content to assimilate proven insights of his best predecessors, to outrun hares that seek originality or don’t wish to be left out of some crowd folly that ignores the best work of the past. This happens as the tortoise stumbles on some particularly effective way to apply the best previous work, or simply avoids standard calamities. We try more to profits from always remembering the obvious than from grasping the esoteric. 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.”
As implied above, Munger’s risk tolerance is very conservative. The next section discusses Munger’s risk tolerance in detail.
Munger has little risk tolerance and is a very conservative investor. With that said, he recognizes that there is some risk inherent in any investment, and anyone who says this isn’t true should be avoided.
“When any guy offers you a chance to earn lots of money without risk, don’t listen to the rest of his sentence. Follow this, and you’ll save yourself a lot of misery.”
Munger realizes that there are far too many people looking to take advantage of less informed investors. There are also many people who mean well but don’t understand the risk they are taking. If something is too good to be true, it probably is.
This certainly holds when it comes to derivatives and other complicated financial instruments. Munger says the following on derivatives:
“It’s easy to see [the dangers] when yo utalk about [what happened with] the energy derivatives – they went kerflooey. When [the companies] reached for the assets that were one their books, the money wasn’t there. When it comes to financial assets, we haven’t had any such denouement, and the accounting hasn’t changed, so the denouement is ahead of us.”
Munger’s aversion to using derivatives comes from a lack of knowledge about their intrinsic value. While the Black-Scholes model is often used to value stock options for accounting purposes, this model is flawed. Munger explains this below:
“Black-Scholes is a know-nothing system. If you know nothing about value – only price – then Black-Scholes is a pretty good guess at what a ninety-day option might be worth. But the minute you get into longer periods of time, it’s crazy to get into Black-Scholes.”
Separately, Munger said:
“For example, at Costco we issued stock options with strike prices of $30 and $60, and Black-Scholes valued the $60 ones higher. This is insane.”
Note: Charlie Munger is a long-time member of Costco’s Board of Directors.
Munger’s risk-averse is a key component of his investment philosophy, and translates to his opinion on current accounting schemes – discussed below.
Munger finds the creative accounting employed by many corporate managers to be highly distasteful. An explanation of this (in the context of the Enron accounting fraud) is shown below.
“Creative Accounting is an absolute curse to a civilization. One could argue that double-entry bookkeeping was one of history’s great advances. Using accounting for fraud and folly is a disgrace. In a democracy, it often takes a scandal to trigger reform. Enron was the most obvious example of a business culture gone wrong in a long, long time.”
Munger especially dislikes EBITDA as a proxy for corporate earnings:
“I think that, every time you see the word EBITDA, you should substitute the words “bullsh*t earnings.”
If there is anything that Munger dislikes more than creative accounting, it’s high investing fees. We discuss Munger’s stance on investing fees below.
On Investing Fees
In Poor Charlie’s Almanack, there are plenty of passages that describe Munger’s stance on high investing fees. In particular, Munger dislikes the investment management business because he believes that it doesn’t add anything to society in aggregate. He also believes that the probability that a client is being harmed by their investment manager is commensurate with the fees they’re paying.
“Everywhere there is a large commission, there is a high probability of a rip-off.”
Outperforming the market is very difficult. When investors pay large fees, it becomes virtually impossible. The lower your investing costs, the more money you can put to work in the stock market for yourself. ‘Just’ 1% or 2% a year adds up to a tremendous amount of lost money over the course of an investing lifetime.
Munger believed that the best way to minimize investment fees was to invest for the long-term. Munger succinctly summarizes the cost benefits of long-term investing below:
“You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra, one, two, or three percentage points per annum.”
Thus, Munger’s dislike of investing fees and his long-term investing style are connected.
Thus far, we have focused on discussing Munger’s wisdom as it relates to business and investing. The remainder of this article will focus on Munger’s wisdom as it relates to personal life.
On Living A Virtuous and Fulfilling Life
Munger and his business partner Warren Buffett stand out among successful businessmen because of their character, honesty, and integrity. We’ll discuss the character-related principles of Charlie Munger’s life step-by-step in this section.
Munger believes that avoiding envy was an integral component of living a happy and prosperous life. When it comes to building wealth, he warns against the jealousy that may come from other people outperforming you.
“Someone will always be getting richer faster than you. This is not a tragedy.”
There will always be a subsector of the economy that is ‘on fire’. The investors who happen to be in this subsector will show phenomenal results – for a time.
A great business at a fair price compounds investor wealth year after year. A fair business at a great price only offers the potential to compound investor returns when it reaches fair value – then it must be sold. A great business potentially never needs to be sold.
Another component of Munger’s personality is a strong belief that people should be reliable. In other words, people should do what they say they’re going to do. The following quote, written by Munger in Poor Charlie’s Almanack, illustrates this point nicely:
“Indeed, I have often made myself unpopular on elite college campuses pushing this reliability theme. What I say is that McDonald’s is one of our most admirable institutions. Then, as signs of shock come to surrounding faces, I explain that McDonald’s, providing first jobs to millions of teenagers, many troubled, over the years, has successfully taught most of them the one lesson they most need: to show up reliably for responsible work. Then I usually go on to say that if the elite campuses were as successful as McDonald’s in teaching sensibly, we would have a better world.”
Munger also believed that honesty is one of the most important characteristics an individual can have.
“I think track records are very important. If you start early trying to have a perfect one in some simple thing like honesty, you’re well on you way to success in this world.”
This extends to his behavior as a steward of shareholder capital at Berkshire Hathaway. Munger would rather honestly underperform than report dishonest financial results that pleased his investors.
“Today, it seems to be regarded as the duty of CEOs to make the stock go up. This leads to all sorts of foolish behavior. We want to tell it like it is.”
The job of a CEO is to maximize long-term value for shareholders. Often, long-term value maximization comes at the expense of short-term profits.
CEOs who seek to boost the stock price at all costs will repurchase shares at the worst possible times and pursue short-term profits above all else, destroying shareholder value in the process. It also harms the manager’s reputation.
“Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.”
In the short-run people and businesses can get richer faster by being dishonest. In the long run, honesty and integrity build a reputation that is worth more than the quick gains that come from trickery. Being honest and acting with integrity makes it easy to sleep at night.
“Our ideas are so simple that people keep asking us for mysteries when all we have are the most elementary ideas.”
Like other great investors, Charlie Munger advocates simplicity. Keeping things simple greatly reduces errors. The more complicated an idea or investment thesis, the more likely it is to be wrong. This is because there are simply too many moving parts and too many estimates that are all prone to error.
Lastly, Munger also has some valuable career advice:
“I have three basic rules. Meeting all three is nearly impossible, but you should try anyway:
- Don’t sell anything you wouldn’t buy yourself.
- Don’t work for anyone you don’t respect and admire.
- Work only with people you enjoy.
I have been incredibly fortunate in my life: with Warren I had all three.”
Charlie Munger on Warren Buffett
Munger is often cited as having had a profound impact on Warren Buffett’s investment strategy. With that said, Munger often states that he receives too much credit for this.
“I think those authors give me more credit than I deserve. It is true that Warren had a touch of brain block from working under Ben Graham and making a ton of money – it’s hard to switch from something that’s worked so well. But if Charlie Munger had never lived, the Buffett record will still be pretty much what it is.”
“I think there’s some mythology in the idea that I’ve been this great enlightener of Warren. He hasn’t needed much enlightenment. But we know more now than five years ago.”
Munger also believes that Buffett’s exceptional competency means that his successor likely will not be as intelligent. To be fair, Buffett’s successor will have large shoes to fill.
“I think the top guy won’t be as smart as Warren. But it’s silly to complain: “What kind of world is this that gives me Warren Buffett for forty years, and then some bastard comes along who’s worse?”
What Other People Have To Say About Charlie Munger
Charlie Munger is adored by many other members of the professional investment community. The following set of quotes illustrates the excellent reputation that Munger has crafted over the decades while also providing additional insight into his personality and investment philosophy.
“I was in New York City with Charlie to attend a Salomon Brothers board meeting. We had come out of the building and were standing on the sidewalk, discussing what had transpired at the meeting. At least, that‘s what I thought we were doing, for suddenly I realized that I had been talking to myself for some time. I looked around for Charlie, only to see him climbing into the back of a taxicab, headed off to the airport. No goodbye, no nothing.
People think it‘s Charlie’s eyes that cause him to miss seeing things (Charlie lost his vision in one eye many years ago due to complications from cataract surgery). BUT IT’S NOT HIS EYES, IT’S HIS HEAD! I once sat through three sets of traffic lights, and plenty of honking behind us, as Charlie discussed some complex problem at an intersection.”
“I would say everything about Charlie is unusual. I’ve been looking for the usual now for forty years, and I have yet to find it. Charlie marches to his own music, and it’s music like virtually no one else is listening to. So, I would say that to try and typecast Charlie in terms of any other human that I can think of, no one would fit. He’s got his own mold.” – Warren Buffett, CEO and Chairman of Berkshire Hathaway
I can attest that Chalie has a combination of characteristics that I have never seen in any other single individual. He has an extraordinary and deep intelligence across a broad range of interests, and he never seems to forget anything, no matter how arcane or trivial. On top of these attributes is his absolute commitment to honesty, ethics, and integrity – Charlie never “grabs” for himself and can be trusted without reservation. If that’s not enough, he has a temperament toward investing that can only be described as ideal: unyielding patience, discipline, and self-control – Charlie just doesn’t crack or compromise on his principles, no matter how stressful the situation.” – Louis A. Simpson, President and CEO, Capital Operations, GEICO Corporation
When Charlie is in deep thought, he often loses track of a lot of what’s going on around him, including social niceties. I remember that when we were negotiating with CenFed to have them take over our savings and loan business, Charlie and I went over to their offices to meet with their CEO, Ted Lowrey. We had a perfectly wonderful meeting – Charlie can put on the charm if he puts his mind to it – and we were winding things up very satisfactorily.
“Ted walked us to the elevator. Just as we got there, the elevator door opened, and Charlie walked directly inside. He never said goodbye, never shook hands, nothing. Tad and I were left standing there, smiling and speechless.” – Bob Bird, President, Wesco Financial. Also Munger’s friend and business asscoiate since 1969.
“When it comes to being curious and focused, when Charlie gets interested in something, he REALLY gets interested in it. I remember three talks he prepared and presented to our law firm on some of what he referred to as ‘the eminent dead‘ he had encountered through his extensive reading: Isaac Newton, Albert Einstein, and Simon Marks. In particular, I remember the central message of the talk on Simon Marks (of retailer Marks and Spencer): ‘Find out what you’re best at and keep pounding away at it.’ This, of course, has always been Charlie’s basic approach to life.” – Dick Esbenshade, Munger’s friend and business associate since 1956.
“For years, I would see Charlie at our Southern California beach house. I remember having ‘conversations’ that were essentially one-sided, feeling like I should have a dictionary at my side to look up all the word I didn’t understand. I remember not saying much, being scared to ask a question and appearing stupid. He’s so darned smart, like my father, in the stratosphere.” – Howard Buffet, Warren Buffett’s son.
“Charlie had a desire to understand exactly what makes things happen. He wants to get to the bottom of everything, whether it’s something of serious interest to him or not. Anything that comes to his attention, he wants to know more about it and understand it and figure out what makes it tick.” – Roy Tolles, co-founder of Munger’s original law firm.
“He knows how to take all of his brains and all of his energy and all of his thought and focus exactly on a single problem, to the exclusion of anything else. People will come into the room and pat him on the back or offer him another cup of coffee or something, and he won’t even acknowledge their presence because he is using one hundred percent of his huge intellect.” – Glen Mitchel, Munger’s friend since 1957.
Charlie Munger’s mental models approach to investing has produced phenomenal success for Munger himself and for Berkshire Hathaway. His unique perspective is a combination of the wisdom of several fields. At its core, Charlie Munger’s approach is similar to Warren Buffett’s – invest in high-quality businesses that generate above-average returns.
Businesses that generate above-average returns must have a competitive advantage that prohibits competitors from undercutting the company. Patents, strong brand names, and economies of scale can all result in above average returns.
The Dividend Aristocrats Index is an excellent place to look for high-quality businesses. To become a Dividend Aristocrat, a business must pay increasing dividends for 25 or more consecutive years in a row. Not surprisingly, the Dividend Aristocrats Index has outperformed the S&P 500 by an average of over 3 percentage points a year over the last decade. In some ways, this is unsurprising; the Aristocrats have many characteristics that would make Munger smile.