“There are many great investments that Munger has made, but arguably none was more important than the purchase of See’s Candies. It was the first investment made by Munger and Buffett for which they paid a purchase price reflecting a bargain based on qualitative factors.” — Tren Griffin
This week our featured book is Charlie Munger: The Complete Investor, by Tren Griffin. Today, we are happy to present an excerpt from an interview with Tren Griffin, conducted by Ky Trang Ho and originally posted at Forbes. In the interview, Griffin and Ho discuss the inspiration behind the book, some of Charlie Munger’s greatest investment hits, Munger’s greatest investment failures, and much more!
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Berkshire’s Charlie Munger: The Legendary Investor’s Strategy And Best ETF, Mutual Fund Picks
Ky Trang Ho and Tren Griffin
Ho: What inspired you to write a book about Charlie Munger?
Griffin: During the peak of the Internet bubble I began to search for an explanation of what was happening in the world since it made little sense to me at that time. Far too much paper wealth was being created far too quickly for what was happening during this bubble to be real. I had for many years been aware of the work and writing of Warren Buffett but decided at that time to re-read his work and think about it much more deeply.
I took off a full week from work to re-read everything he had ever written and think about it. As part of that process I was attracted more and more to the ideas and methods of Charlie Munger who was mentioned and talked about in this material written by and about Buffett. To understand Munger better I decided to compile his work from various sources into a private book written just for me. Writing about anything helps you understand the topic better. It forces you to think everything through from start to finish.
Warren Buffett has said that if you can’t write it down, you have not thought it through. As I compiled the material and wrote about Munger I began to understand his methods better and that they are applicable far beyond investing.
As I learned more about Charlie Munger I discovered that his methods and approach also improved my understanding of the business world. WarrenBuffett describes why someone involved in a business must understand investing with a very simple phrase: “I am a better businessman because I am an investor.” If you don’t understand investing, most notably how to allocate capital, then the odds that you will be a successful manager of a business are vanishingly small. The managers of any successful business are both capital allocators and investors. Everyone involved in a business should have an investing mindset.
Charlie Munger’s Biggest Investment Wins and Losses
Ho: What is Charlie Munger’s investing track record?
Griffin: Charlie Munger’s record as Warren Buffett’s partner at Berkshire Hathaway is well known and can be seen in the rise of Berkshire’s market capitalization. Less well-known is Munger’s record at the investment partnership that he ran from 1962 to 1975. In an article entitled The Superinvestors of Graham-and-Doddsville, published in 1984, Warren Buffett revealed that Munger’s investment partnership generated compounded annual returns of 19.8% during the 1962–75 period. The comparable annual rate of appreciation for the Dow during that period was 5%.
Ho: What are some of Charlie Munger’s best investments and what was the rationale behind those purchases?
Griffin: There are many great investments that Munger has made, but arguably none was more important than the purchase of See’s Candies. It was the first investment made by Munger and Buffett for which they paid a purchase price reflecting a bargain based on qualitative factors. Buffett has called See’s Candies a “dream business.” The business has low overhead, needs little new capital, flows ample free cash and can raise prices each year, thanks to brand loyalty. The only significant limitation is that it is hard to expand the existing franchise geographically.
Ho: Charlie Munger must have had some failures. What were some of his biggest investment mistakes and what did he learn from them?
Griffin: Charlie Munger is quite open about having made many errors in his career but says that he has made less than his statistical share. He likes to say he rubs his nose in his mistakes when they happen. Charlie Munger believes that making rational decisions is hard work and requires constant practice and lifelong effort. Making some mistakes is inevitable, but you can learn to make fewer and less damaging mistakes.
Charlie has said: “Hochschild Kohn, the department store chain, was bought at a discount to book and liquidating value. It didn’t work [as an investment.]” For Buffett, buying Berkshire Hathaway itself can arguably be put into the mistake category. The New England textile mill, when bought in the 1960s, was a lousy business that wasn’t worth putting any new capital into since it would never generate more return on capital investment than alternative investments available to Buffett.
Buying Dexter Shoes was definitely a multi-billion dollar mistake for Berkshire. In doing the Dexter due diligence analysis Buffett and Munger made the mistake of not making sure the business had what they call a “moat” and being too focused on what they thought was an attractive purchase price. Buffett said once about Dexter: “What I had assessed as durable competitive advantage vanished within a few years.”
Two quotes from Munger come to mind related to mistakes:
“The most extreme mistakes in Berkshire’s history have been mistakes of omission. We saw it, but didn’t act on it. They’re huge mistakes — we’ve lost billions. And we keep doing it. We’re getting better at it. We never get over it.” There are two types of mistakes: 1) doing nothing; what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.”
“After nearly making a terrible mistake not buying See’s, we’ve made this mistake many times. We are apparently slow learners. These opportunity costs don’t show up on financial statements, but have cost us many billions.”
Best Charlie Munger Quotes
Ho: What are your favorite gems of worldly wisdom from Charlie Munger?
Griffin: These two Munger quotes are the best sources of insight on worldly 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 in life. You’ve got to hang experience on a latticework of models in your head. What are the models? Well, the first rule is that you’ve got to have multiple models. Because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does.”
“Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group … then to hell with them.”
One great aspect of worldly wisdom process is that it is great fun if you like to learn. Thinking about thinking is fascinating for people who love to learn since it provides you with an endless set of puzzles to solve.
The full interview can be read at Forbes.