Warren Buffett and Charlie Munger are both known as disciples of value investing. Every investor can relate to these two gems when they enter the equity market. Many investors idolize Warren Buffett and often take inspiration to learn from him.
When we ask about the partnership between Warren Buffett and Charlie Munger, many of us won’t have a clearly answer. So, let me take this opportunity to break this article down into three distinct categories:
- Investment journey of both individuals
- Their Partnership from building Berkshire Hathaway
- Learnings for Investors from these two Gem of Value Investing
Invest Journey of Warren Buffett:
Buffett was born in Omaha in the year 1930 and if often regarded as “Oracle of Omaha”. He is currently amongst the top 10 wealthiest individuals in the world (as per Forbes).
His wealth (as of 18th December 2020) is ~$ 84.2 Billion. He was very fond of businesses and growing wealth even at age 6. At that age, he collected 5-6 packs of Coco-Cola bottles from his grandfather’s store and sold them to generate a 5% profit.
This ambitious vision towards a business later made him create his own kingdom in the stock market as a value investor. The great value investor purchased his 1st share at the age of 11. At the age of 13, he filed his first tax returns.
He was a proud student of Benjamin Graham and has quoted Graham’s book, “The Intelligent Investor” as the best book on investment. Later, Graham called Buffett to work with him.
It was around the 1950s when a conflict in philosophies on picking a company clashed between Graham and Buffett. Graham only looked at numbers as per the balance sheet and income statement. Rather, Buffett was focusing on how the company is working, how they are superior in competition, corporate governance etc. along with the balance sheet and other financial statements and ratios.
Once, he left working for Graham, he built a wealth of $140,000 from $9800 during 1950-1956. In May 1956, Buffett formed an association with 7 partners as “Buffett Associates”. In the same year, the associates were managing about $300,000.
Later in 1965, Warren accumulated 49% of stakes in Berkshire Hathaway and became the Chairman of the organization by 1970. In the year 1978, Warren and Charlie Munger’s partnership started and later Munger was announced as the vice-chairman of Berkshire.
On countless occasions, returns generated by Berkshire Hathaway have surpassed the returns generated by Dow Jones Index holdings.
Besides this, he was a huge supporter of the Index fund in accordance with Vanguard. In his Personal life, he has promised to donate 99% of his wealth to a charitable trust. Till now he has donated almost $41 Billion to Gates and his Kid’s foundations.
Investment Journey of Charlie Munger:
Charlie Munger, a billionaire investor now, was born on 1st January 1924. He was a part of the United States army in the second world war as an Air Force officer.
Besides this, he is also a Chairman of Daily Journal Corp and is a board member of retailer Costco.
Around 1943, he joined the US Army and became an officer during the war. Once the war gateway closed, it was the time Munger thought of his future.
After the 1st divorce, he lost everything including his home, and was responsible to take care of his 3 children. It was the toughest moment of his life when his first child passed away at the age of 9 due to leukemia. Life gave him more tough times to shape his destiny.
Later, Charlie left his job and started his own law consulting firm for the real estate business. While he was pursuing law practice, he completely focused on investment management.
As a result of his research and sharpen skills towards investments. He could attain an annual return of more than 20%+
He did have some futile experience in the investment journey as faced heavy losses in consecutive two years. Even after many failures in investment, his eagerness towards learning from the previous mistakes over investments increased.
He was calm, composed, careful in taking calculated risks. In due course of time, Charlie mastered the investing strategies and became a trusted advisor for many investors in the US.
As we discussed earlier, Charlie joined with Buffett and started building a multi-billionaire company.
Warren Buffett and Charlie Munger in Building Berkshire Hathaway:
Both these gems are from Omaha, born 6 years apart. Warren is 90, and Charlie is aged 96. Surprisingly, they both have worked in the supermarket owned by the Grandfather of Buffett during they younger days.
It was at age 54 when Charlie became the Vice-Chairman of Berkshire Hathaway. He is proudly called as a partner, by Buffett. Their effort of building a company has continued over four decades.
They have almost 60 top companies in their portfolio and the real growth of their investment was during the 2008 market crash. The company is currently holding assets of $485 Billion.
In 1955, both Manufacturing company Hathaway and Fine Spinning company Berkshire merged to form Berkshire Hathaway. In 1962, when the company was in deep trouble, Buffet believed in the company and started accumulating the shares at $7.6 per share.
In 1965, he owned almost 14 million shares in the company and took charge of the company as Chairman in May 1965. During that period, the company only had 2 manufacturing centers and 2000 employees. It was a textile company till 1967.
Buffett then in 1967, took the company into a different direction as an investment and insurance management company.
The first Insurance share Berkshire bought was National Indemnity Co., in the year 1970. They still continue to invest in GEICO (Government Employees Insurance Company).
During 1970-1980, they diversified the portfolio on investing across many industries. Buffet and Munger followed what they preached and held securities with a very long term view. They could provide a CAGR of 21% per annum to their investors from 1965 to 2006. Besides this, the company has invested in many companies like,
- Benjamin Moore Paints
- Dairy Queen
- Fruit of the Loom
- Business Wire
- Helzberg Diamonds
- American Express
- The Coco Cola Company
- Bank of America
- Apple
- Microsoft
Buying Class A stock of Berkshire Hathaway would cost $340,000 per share. They attained a landmark asset of nearly $500 Billion in FY2019-20. Berkshire Hathaway is considered to be the 12th largest company in the world in terms of revenue.
Their simple secret was “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” said Buffett.
Whenever, the total equity world thought it’s the end of Buffett, Munger, and Berkshire Hathaway – They bounced back. The only reason behind their continuous growth is due to picking the right business at a fair price.
Buffett always calculates the intrinsic value of the share as taught by Graham’s institute of investing. Even further, Buffet and Munger always calculate the margin of safety for any valuation.
They have been successful as they always,
- Try to understand the business
- Industry Growth predictions in the next 10 years
- Competitors performance and business models
- Strength of the company over the competitors
- Calculating Intrinsic value with Margin of Safety
- Always buying the stock at a fair price, even for the world’s best companies
Lessons for Investors from Gems of Value Investing:
When it comes to value investing, both Buffett and Charlie comes to our mind. There are many lessons to be learnt from these two gentlemen.
- Provide a long runway in Investment Journey. So, start your investments at a young age. The best day to start your investments is today.
- Whatever the company is, buy the shares only at a fair price. Every share price has its own upward and downward movement. There is always opportunity in every market cycle
- As Buffett always prefers, find the opportunity in the Bear market
- You should learn from Charlie Munger, how life can take you down. Stay calm, learn, and overcome the obstacles
- Life always provides many chances. You have to be ready to fail, learn, and not commit the same mistake
- Never buy any company without understanding the nature of business. It is not about investing in many companies but investing businesses you understand intricately
- Friendship always matters, joining hands with like-minded people will yield high success
- Value investing can help you create wealth in long term
Finally, be ready to serve humanity as you grow wealth
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