The house of value that Charlie Munger co-built

Berkshire Hathaway Chairman Warren Buffett (left) and Vice Chairman Charlie Munger in 2019. REUTERS/Scott Morgan
Berkshire Hathaway Chairman Warren Buffett (left) and Vice Chairman Charlie Munger in 2019. REUTERS/Scott Morgan

Summary

  • A compounded average annual return of 19% over 58 years: that’s what Charlie Munger co-built with Warren Buffett at Berkshire Hathaway, using first principles of investing.

In March 1980, a sum of $1,000 would have bought 3.44 shares of Berkshire Hathaway, the conglomerate holding company of Warren Buffett and his trusty aide Charlie Munger, who passed away last week. Today, 33 years on, that investment of $1,000 would be worth $1.88 million—an annual return of 19%, about double of what a benchmark American stock index delivered in the same period. But that would be a pithy, numerical summation of the life’s work of Munger.

Punctuating that sterling performance is a tenet of investing that Munger and Buffett embraced, articulated and, most importantly, put into practice at Berkshire for about six decades. That tenet was ‘value investing’, and it rested on a set of foundational principles.

In Value We Trust

One, buy into businesses, not into companies. Two, buy good businesses at good prices. Three, good businesses build a competitive moat around them, be it through utility, branding, customer stickiness, or regulatory construct. Four, don’t buy a business you don’t understand, and that’s why Berkshire has rarely bought a technology business in spite of living through three decades of a digitalizing world. Five, besides growth, emphasize on cash flows and profitability while assessing a business. Six, don’t overpay for a business. Seven, give it time. Eight, ignore the stock market. Nine, empower your chief executive officers (CEOs).

It was simple, unglamorous, silent, slip-under-the-radar stuff. And it delivered returns that were way superior to the noisy, moody, hyperactive stock market that draws investors to it, and makes them dance to its tune.

Every year, Buffett sends out a letter to shareholders that outlines Berkshire’s performance in the last year, or dives deep into a company’s performance, or owns up to mistakes, or nudges shareholders to the annual Berkshire retreat. It’s an easy read stripped of jargon, backslapping and pontificating. A word cloud of the top 75 operative words that appeared in 45 annual letters between 1977 and 2022 underscore how enshrined value investing and first principles have been at Berkshire Hathaway.

 

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Making of a Conglomerate

Originally, Berkshire Hathaway was neither an investment company nor a conglomerate. It was a textile company in trouble that Buffett bought 7% of in 1964, with the aim of profiting from an exit. He ended up staying on and bought more. He gradually started realizing his vision of turning it into a holding company, even as Charlie Munger joined him, an able foil. “The blueprint he (Munger) gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices," wrote Buffett famously in a 2014 note when Berkshire turned 50.

Berkshire moved on two tracks. The first was as a holding company, wherein it bought businesses, usually 100%, and gave full autonomy to their CEOs. The second was as an investment company, wherein it invested in listed stocks.

In 1980, Berkshire had about $1 billion in assets. Of this, about $525 million, or roughly half, was in stocks, and the remaining was part of the businesses run by it. These companies were principally in six sectors: insurance, textiles, retailing, candy, promotional services and newspapers.

In 2022, Berkshire’s assets stood at about $948 billion—a compounded annual growth of 17%. Of this, about $308 billion, or about 30%, was in listed businesses run by others. The rest was housed in businesses owned by it. Berkshire is now a sprawling conglomerate of about 70 companies across multiple sectors, with additions including rail transport, power, natural gas, apparel, aviation services and fast food. In all this while, despite being oblivious to the market, Berkshire has had a positive return in 47 of the 58 years since 1965.

 

Back Them—Big

A big reason for this is the Buffett-Munger partnership, and how they married fundamental principles of investing with execution. They deliberated on buy decisions. But once they chose a business, they committed in a big way—and for the long haul. For example, the top five holdings in the Berkshire stock portfolio regularly account for 60% of its total value, even more. It’s held on to businesses like Coca-Cola and American Express for 30-40 years.

Buffett was effusive in his praise for Munger. In his letter marking Berkshire at 50, he wrote: “…Charlie has a wide-ranging brilliance, a prodigious memory, and some firm opinions. I’m not exactly wishy-washy myself, and we sometimes don’t agree. In 56 years, however, we’ve never had an argument. When we differ, Charlie usually ends the conversation by saying: ‘Warren, think it over and you’ll agree with me because you’re smart and I’m right.’" They were smart and right—an awful lot.

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