Charlie Munger’s Investment Partnership

For twelve years Charlie Munger’s investment partnership outperformed the broader stock indexes by double digits.  The history of the partnership began with Warren Buffett encouraging Charlie to start his own partnership.  Later on, Warren Buffett had this to say of Charlie Munger’s investment partnership in The Superinvestors of Graham and Doddsville, “Table 5 is the record of a friend of mine who is a Harvard Law graduate, who set up a major law firm. I ran into him in about 1960 and told him that law was fine as a hobby but he could do better. He set up a partnership quite the opposite of Walter’s. His portfolio was concentrated in very few securities and therefore, his record was much more volatile but it was based on the same discount-from-value approach. He was willing to accept greater peaks and valleys of performance, and he happens to be a fellow whose whole psyche goes toward concentration, with the results shown. Incidentally, this record belongs to Charlie Munger, my partner for a long time in the operation of Berkshire Hathaway. When he ran his partnership, however, his portfolio holdings were almost completely different from mine and the other fellows mentioned earlier.”

TABLE 5 – Charles Munger
Year Mass. Inv. Trust (%) Investors Stock (%) Lehman (%) Tri-Cont. (%) Dow (%) Overall Partnership (%) Limited Partners (%)
Yearly Results (1)
1962 -9.8 -13.4 -14.4 -12.2 -7.6 30.1 20.1
1963 20.0 16.5 23.8 20.3 20.6 71.1 47.8
1964 15.9 14.3 13.6 13.3 18.7 49.7 33.1
1965 10.2 9.8 19.0 10.7 14.2 8.4 6.0
1966 -7.7 -9.9 -2.6 -6.9 -15.7 12.4 8.3
1967 20.0 22.8 28.0 25.4 19.0 56.2 37.5
1968 10.3 8.1 6.7 6.8 7.7 40.4 27.0
1969 -4.8 -7.9 -1.9 0.1 -11.6 28.3 21.3
1970 0.6 -4.1 -7.2 -1.0 8.7 -0.1 -0.1
1971 9.0 16.8 26.6 22.4 9.8 25.4 20.6
1972 11.0 15.2 23.7 21.4 18.2 8.3 7.3
1973 -12.5 -17.6 -14.3 -21.3 -13.1 -31.9 -31.9
1974 -25.5 -25.6 -30.3 -27.6 -23.1 -31.5 -31.5
1975 32.9 33.3 30.8 35.4 44.4 73.2 73.2
Compound Results (2)
1962 -9.8 -13.4 -14.4 -12.2 -7.6 30.1 20.1
1962-3 8.2 0.9 6.0 5.6 11.5 123.4 77.5
1962-4 25.4 15.3 20.4 19.6 32.4 234.4 136.3
1962-5 38.2 26.6 43.3 32.4 51.2 262.5 150.5
1962-6 27.5 14.1 39.5 23.2 27.5 307.5 171.3
1962-7 53.0 40.1 78.5 54.5 51.8 536.5 273.0
1962-8 68.8 51.4 90.5 65.0 63.5 793.6 373.7
1962-9 60.7 39.4 86.9 65.2 44.5 1046.5 474.6
1962-70 61.7 33.7 73.4 63.5 57.1 1045.4 474.0
1962-71 76.3 56.2 119.5 100.1 72.5 1336.3 592.2
1962-72 95.7 79.9 171.5 142.9 103.9 1455.5 642.7
1962-73 71.2 48.2 132.7 91.2 77.2 959.3 405.8
1962-74 27.5 10.3 62.2 38.4 36.3 625.6 246.5
1962-75 69.4 47.0 112.2 87.4 96.8 1156.7 500.1

Average Annual
Compounded Rate

3.8 2.8 5.5 4.6 5.0 19.8 13.7

 

Charlie Munger’s Investing Strategy

With Charlie Munger, and his investing style, concentration in your best ideas is key.  This strategy falls under the heading of a “focused value” portfolio.  Focused value investing is where there may only be 5 or 6 stocks in your portfolio.  The advantage of this strategy is that if you know what you are doing you can make a killing because you only put money in your best ideas, and you avoid “diworsifying” into companies and ideas that you don’t understand as well.  However, this strategy can leave you bankrupt because you HAVE to understand what you are doing.  If you can’t read a balance sheet or income statement this strategy isn’t for you because if you pick one wrong stock, there goes a substantial part of your standard of living.   Charlie Munger has stated in the past that he would be ok holding only two stocks, Wesco and Berkshire Hathaway.  This strategy of extreme concentration isn’t for beginners, or the faint of heart.  When Charlie goes all in, he goes ALL IN.

In Damn Right (pg. 105), by Janet Lowe, Charlie Munger at one point had almost 84% of his partnerships assets in two stocks, Blue Chip Stamps and New America Fund.  By employing leverage, Charlie was able to vastly amplify the potential gains if the prices of these two businesses went up.  Unfortunately, the 1973-74 period knocked his portfolio down by more than 50%.  There are important lessons there.  By the 1980s both of those businesses would have multiplied the money you invested in them by 20 or more.  Instead, leverage combined with a bear market, made the losses worse than they otherwise would have been.  Another example of the concentration Charlie uses would later roll around in the Great Recession was Wells Fargo.

Back in 2009 as the world was teetering on the brink of financial oblivion, Wells Fargo was insanely cheap relative to anyone’s analysis of intrinsic value.  Warren Buffett was buying gobs of its stock for Berkshire Hathaway, and a little known company called the Daily Journal Corporation was buying stocks well.  As you might suspect, Charlie Munger is the Journal’s chairman.  When Wells Fargo stock hit around $8 a share, Charlie was able to buy gobs of the stock that help make the overall portfolio today worth hundreds of millions of dollars.  Those shares are now sitting on the companies balance sheet sending the Daily Journal Corporation millions of dollars a year in dividends that the business can use to help expand, and ensure that quality legal content continues to be produced.  Concentration continues to be a factor because Charlie now indirectly owns Wells Fargo through his Berkshire stake, and through his share of the Daily Journal.  By sitting on cash for long periods of time Charlie was able to buy stock in several businesses that were at fire-sale prices.  Sometimes it pays to wait for that perfect pitch that you can knock out of the park.

Using Charlie Munger’s Investment Partnership for Lessons We Can Use

Some of the lessons that we can learn from using Charlie Munger’s Investment Partnership  include whether to employ leverage in our stock decisions.  It also includes lessons on concentration, and the role that cash plays in ensuring we invest in our best ideas.  In many ways I think it is important for any serious investor to understand how Charlie uses his investment ideas to help themselves on the path to financial independence.