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Charlie Munger – How To Invest?

Charlie Munger – How To Invest?

Trading for Beginners - Charlie Munger – How To Invest - Cover

First Published: 17 October, 2022
Last Updated: 23 November, 2022
Fact-checked by Adrian Müller

Charlie Munger is the Vice Chairman of the incredibly successful investment firm Berkshire Hathaway. Apart from his extraordinary success in investments, he is also well-known for being one of Warren Buffett’s closest friends.

This guide will discuss everything you need to know about Charlie Munger. His philosophy, current portfolio, views on different assets, and relationship with the legend Warren Buffett himself. So, let’s get started.

Table of Content

About Charlie Munger And A Short Biography

While many people have heard about Warren Buffett, they may not have heard of Charlie Munger. However, Charlie Munger is a juggernaut in the investment scene. He’s the second-in-command to Warren Buffett himself.

Charlie Munger has an illustrious career as an investor. Currently, he’s the Vice Chairman of Berkshire Hathaway. Below is a short biography of Charlie Munger.

He was born in 1924 in Omaha, Nebraska, but we don’t know much about Munger’s childhood. He enrolled at the University of Michigan, although he soon dropped out when the US declared war. That was when he joined the United States Army Air Corps.

During his time in the army, he married his wife, Nancy Huggings, and had three children with her. Charlie Munger had some hardships pretty early on. Following his time in the army, Charlie Munger enrolled in law school.

However, his marriage was in shambles. After 8 years of being together, they got divorced. Things still didn’t look great at that point. He lost his 8-year-old son, including all of his life savings. But as you can tell, he was resilient.

He didn’t let all these things get the better of him. He wanted to fight on and turn his life around, and that’s precisely what Charlie Munger did.

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Charlie Munger returned to California and opened his law firm, which mainly catered to the real estate market. After some time, Charlie Munger started to focus most of his time and skills on investing.

That’s when he co-founded an investment firm with Jack Wheeler named Wheeler, Munger, and Company. However, the firm didn’t run off to the races from the beginning.

Charlie Munger faced a lot of losses during his early investment career. Between 1973 and 1974, he made a fair few losses. This eventually led him to stop the partnership.

After some time, Charlie Munger got back on the investment horse, wiser and more patient, and started again. Things would be different now. Warren Buffett started investing with Charlie Munger and became his investment advisor too! In 1978, Charlie Munger became the Vice President of Berkshire Hathaway.

Investment Career

Being the VP of one of the world’s most valuable and wealthiest companies means that you would have some serious investment chops. To no one’s surprise, Charlie Munger did.

Although, just like many early investors, he made tons of losses. But that didn’t stop him from getting back up. Every time he made a loss, he became wiser and had more knowledge of his craft.

As we mentioned, Charlie Munger started his law practice before focusing entirely on investing. He gave up the practice and focused on real estate development and investment.

His partner during this time was Otis Booth. Charlie Munger also partnered with Wheeler to form his own investment company. Initially, he took substantial losses. Charlie Munger made a staggering 32% and 31% loss in 1973 and 1974, respectively.

Charlie ran his partnership from 1962 to 1975. He generated compound returns of over 19% during this period. Before this, Munger was also the chairman of another company called Wesco Financial Corporation.

Trading for Beginners - Charlie Munger – How To Invest - Investment Career

Now, the company is a fully-owned subsidiary of Berkshire Hathaway. Wesco Financial was a solid player as well. It held over $1.5 billion in equity portfolios of notable companies that include Coca-Cola, P&G, Wells Fargo, and Goldman Sachs.

Charlie Munger strongly believed that holding onto some selective stocks that he had extensive knowledge of would pay off later. The next big step in Charlie Munger’s investment career was with The Daily Journal.

Munger is known to make significant and highly leveraged bets. One key factor is that Charlie Munger’s portfolio was never remarkably diversified. To this day, he still doesn’t plan to diversify it that much, either. The secret to his success is many.

But the keen-eyed may notice that he acts with conviction and takes his time working on opportunities. When the right opportunities present themselves, he’s always the one to take action.

Munger’s Current Role At Berkshire Hathaway

Currently, Charlie Munger is the Vice Chair of Berkshire Hathaway. That means he’s the second in command of the company.

This includes all assets and the four giants—Insurance Float, Apple Inc., Burlington Northern Santa Fe Corporation, and Berkshire Hathaway Energy. Because of this, Charlie Munger bears significant responsibility for the company.

This is a role that he’s doing very well with. He’s become critical to the overall success of the company. So much so that Berkshire Hathaway is now valued at $601.14 billion.

Investment Philosophy

Charlie Munger’s investment philosophy is talked about a lot. He is a value investor and firmly believes that anyone using this particular investment style is an intelligent investor. There’s an interesting bit here.

Munger’s view and definition of value investing differ from Warren Buffett’s. Charlie Munger was the one who convinced Warren Buffett to alter his investment style. His wife is also where the advice of looking for great companies at low prices comes from.

Charlie Munger believes that if you know a particular business, you see the long-term and short-term risks and potential. This eventually gives you a more substantial return in the long run compared to holding a more diversified portfolio.

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Lollapalooza Effect

We can’t talk about Charlie Munger without mentioning the lollapalooza effect. It’s a term he coined himself. Simply put, it means an extreme outcome. The main crux of the term is that humans are prone to biases.

Several of these effects can have a severe impact. But of course, there’s a bit more nuance to it all. He came up with this term after reading some psychology textbooks. He discovered that some of the books he was reading failed to consider one thing: other biases are also at play.

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He noticed that this lollapalooza effect was created when 3 of 4 tendencies were in effect. However, the books he was reading didn’t discuss this because it made their books more complicated. As a result, they couldn’t be published.

So, what causes the lollapalooza effect? In essence, when many forces move in the same direction, it causes a lollapalooza effect. The key takeaway is when forces combine, they don’t simply add up.

Each effect adds on and builds upon the previous effect, building on the strength of the previous one. Thus, it can lead to huge implications with significant results. He says this is one of the ways you can win in today’s market.

You need to get more forces working together to get explosive results for yourself. Charlie Munger has some very popular examples of this effect in action.

One of the best examples of demonstrating the lollapalooza effect is Coca-Cola. It doesn’t just combine food effects. It gets more forces working on it. In this case, it’s caffeine as well. By doing this, you have a much bigger effect by combining the food effect and the combined force of a stimulant—caffeine.

Charlie Munger’s Current Portfolio

Everyone’s interested in knowing what kind of portfolio a legendary investor has. Well, we don’t blame you. Studying the portfolios of other hugely successful investors can give you some solid ideas and direction in tweaking or adjusting your strategy.

So, what does Charlie Munger’s portfolio look like? His portfolio consists of a couple of pretty high-profile stocks: Costco, Daily Journal, Berkshire Hathaway class A, and class B shares.

We need to pay some attention to the Daily Journal portfolio here as it’s quite important. It’s a publication-based business, and it contains legal and information as well. 

Charlie Munger also managed the investment portfolio for the Daily Journal. This portfolio itself has a value of $200 million. This portfolio can be seen below.

CompanyValue
Bank of America Corp71,599,000
US Bancorp6,442,000
Wells Fargo & Co62,351,000
Posco ADR434,000
Alibaba Group Holding Ltd34,104,000

Charlie Munger aggressively purchased a lot of Alibaba Group stock. It was for the Daily Journal’s corporate portfolio. The last purchase was in Q4 2021. However, since then, the stock’s value has declined.

Munger doesn’t appear to be concerned by it, though. However, he sold off half of the stocks in early 2022.

Charlie Munger’s Views On Cryptocurrencies

While much of the world is tied up and buying into the crypto hype, Charlie Munger isn’t; he’s known to be quite critical of the asset. He has a famous quote: “crypto investment is an investment into nothing.”

He also believes that anyone who sells crypto is either delusional or evil. Charlie Munger stated publicly that he would never invest in it. So, it’s fair to say that Charlie Munger isn’t a fan of cryptocurrencies.

One of the reasons is that Charlie Munger isn’t keen on undermining the world’s national currencies.

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He called it a mass folly and said the only solution is to avoid cryptocurrencies altogether.

Instead of investing in crypto or buying cryptocurrencies, Charlie Munger believes investing or buying shares in companies that do ‘real business’ is better than buying cryptocurrencies. As we mentioned, he is famously known to say that crypto is an investment in nothing.

Those who want people to invest in nothing say they have a special kind of nothing. But it’s difficult to make more of that ‘nothing.’ Munger is known to be pretty proud that he never invested in crypto, and it looks like he doesn’t plan on changing his stance either.

Charlie Munger’s Views On Bonds

Charlie Munger isn’t a particular fan of bonds, either. He said that long-term treasuries are losing the battle, as it gives you, the investor, little purchasing power. There have been claims that Charlie Munger believes there’s a bubble in treasury securities.

That isn’t true. But Munger thinks they’re a bad investment overall. Additionally, the interest rate is low. It isn’t a big problem, but his main problem with bonds is the ambiguity of the low-interest rates.

Moreover, no one knows what the suspiciously low-interest rates will do. Charlie Munger thinks that investors’ money is best invested elsewhere besides in bonds.

Charlie Munger’s Views On Commodities

Alright, so we’ve talked about cryptocurrencies and bonds. What about commodities? What does Charlie Munger think about that? Well, both Charlie Munger and Warren Buffett avoid investing in commodities.

However, Charlie Munger thinks that the advantages should come from the customers for commodity businesses that give a substandard return. So, both Charlie Munger and Warren Buffett tend to avoid commodities.

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Munger’s Relationship With Warren Buffett

Charlie Munger is also known to be very close to Warren Buffett. He has a long-standing relationship with him, and they have been business partners for over 40 years.

They even started out together at the same grocery store. That’s how old their relationship is. Even more impressive is that they have allegedly never fought in all these years. This goes to show how well the understanding between the two is.

But Charlie Munger and Warren Buffett’s investment styles haven’t always been the same. There were times when Charlie Munger influenced Warren Buffett to change his style for the better.

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For example, Charlie Munger had different views while investing in companies such as Wells Fargo and Costco. We’ll discuss both of their investment philosophies in more detail later.

Together, Munger and Buffett have amassed a lot of wealth. Not only that, they turned their company, Berkshire Hathaway, into the investment giant that it is today. But Warren Buffett said that what they desired was independence.

Explaining further they wanted the independence to associate themselves with whomever they wanted to on a day-to-day basis. Buffett has always been the company’s more public-facing persona.

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But this has never been a problem. Their relationship is still as strong as ever, even though they don’t see things eye-to-eye all the time. Charlie Munger is well known for his knowledge, humor, and business savviness.

The relationship between Warren Buffett and Charlie Munger is quite a rare gem. This is something we’re sure will continue for years to come.

Do Munger And Buffett Have The Same Investment Philosophy?

If you’re looking into Warren Buffett and Charlie Munger, some differences in their investment styles and philosophy are pretty apparent. But that doesn’t mean that you need to pick a side.

It’s always good to know about their differences in investing. Take the best of both styles and see which one fits you best.

Charlie Munger is mainly known for his value investing, whereas Warren Buffett isn’t. Many people believe that Warren Buffett is a value investor. You can summarize their differences by saying that Warren Buffett is a businessman and an investor.

In comparison, Charlie Munger is an investor and a former lawyer; apart from that, although there are some differences in investment philosophies, there isn’t much of a stark difference. They both believe firmly in working with ethical businesses.

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Both of them focus on investing in businesses they know of. In some cases, Charlie Munger even influenced Warren Buffett to reconsider some of his investments and strategies.

Key Lessons From Munger For Investment Portfolio

You can learn a ton from Charlie Munger and his investments. There is no doubt about that. We wanted to summarize it into an easy-to-understand and relevant piece for you.

All of these aren’t directly related to investing. But it’s more of a mindset change. Some other life lessons that’ll help you in the long run, are also included.

1. Learning To Unlearn

Charlie Munger is an avid reader; it is something he encourages a lot. You need to unlearn some things to make suitable investments in some cases. There can be many different solutions to a problem.

But how will you find the perfect one if you cannot think of any other approach? You need to create a new investing strategy when investing in something new – not just piggybacking on an old one.

2. Be Honest

There’s no success without honesty. It’s as straightforward as that. Charlie Munger believes it. When investing in an honest company, you save your investment in more ways than one. By doing this, you can almost guarantee a favorable return.

What if the company isn’t honest with its investors? Then the pay-offs might be highly manipulative.

3. Cloning Great Ideas

There’s no reason to reinvent the wheel. So, if you want to copy an idea or strategy that was successful in the past, there’s absolutely no shame in that. If you think about it, it makes sense.

When you know something and a strategy that works or has worked for someone else, you don’t need to go against the grain and completely rethink the strategy from the ground up. It’ll just waste a lot of time. It’s always best to stick with the winning formula.

4. Get Rid Of Bad Ideas

If you’re meant to go after great ideas, you should remove the bad ones. That’s how you keep your mind fresh and ready for new, innovative, and good ideas. There’s no need to occupy yourself with an idea once you are convinced it’s bad.

5. Be Disciplined

Charlie Munger is a big believer in plain old hard work. His three pillars of investment are honesty, discipline, and ethics. He thinks those who are disciplined and work with honesty will amass huge wealth in the forms of structure, knowledge, or money.

6. Being Vivacious

Charlie Munger has a famous quote, out of many, that goes, “If anyone can help you out of a difficult situation, it’s you. If you aren’t successful in an investment, you move on. If you are successful, you celebrate. It is quite simple.”

7. Know The Business

Invest in businesses you know. That’ll give you confidence and learn the sector’s ups and downs and pros and cons. In other words, you’ll have more knowledge to act when facing different scenarios.

That’s pretty important because if you stick with businesses, you know, over time, you’ll eventually get a good return.

8. Avoid Super-specializing

Although you should know the business, you must also avoid becoming hyper-specialized. This doesn’t mean just in terms of your portfolio. It is meant in terms of work and career. Charlie Munger recommends that 20% of your daily time be focused on broadening your knowledge.

Wrapping Up

If you’re a beginner investor and trader, figures like Charlie Munger are some of the best people to gain knowledge and expertise. They’ve been through many ups and downs and know the world of investing well.

You can check out Trading for Beginners for more awesome tips on trading and investing. We have excellent in-depth knowledge pieces like these that’ll broaden your horizons. Following these will make you a better trader overall.

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About the author – D. Schmidt

I’m a German stock trader who has lived around the world. I travel extensively and believe that my experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.

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