Charlie Munger Value Investing Strategy

Charlie Munger, the Vice Chairman of Berkshire Hathaway, former hedge fund manager, and billionaire value investor, was instrumental in changing Warren Buffett’s way of thinking about value investing.

Charlie insisted that the investor would be better served by focusing on better quality businesses, even if the price were higher, because those businesses could be held for decades, continually churning out cash and profits for the owners. In fact, it was this influence that resulted in Berkshire Hathaway shifting from acquiring undervalued “cigar butt” companies such the textile mills for which the firm was named to high-quality companies such as Coca-Cola.

In the book about his value investing philosophy, Poor Charlie’s Almanack, Munger discussed how easy it was to grow rich.  His formula was:

  • Spend less than you earn
  • Put the difference in a tax-advantaged account such as a 401(k), IRA, or pension fund
  • Buy shares of businesses with durable competitive advantages that generate high returns on equity with little or no debt.  Only pay a reasonable price.  Do not overpay.
  • Reinvest your money and over several decades, compounding will do the work for you.

Charlie Munger’s Modified Value Investing Strategy

Charlie insisted one of the biggest mistakes investors make is they underestimate how difficult it is to earn a good return on capital over decades.  The nature of capitalism is that when a company enjoys high returns on capital employed, competition will inevitably follow as other investors and business owners try to get in on the action.  Eventually, equilibrium is reached and a field will earn mediocre, or sub-standard, returns on money.

[mainbodyad]That’s why Charlie was focused on finding excellent businesses with durable competitive advantages that made it difficult for competitors to hurt the bottom line.  This culminated in his modified value investing approach, which was insightful and wise.  He concluded that value investing is a better way to manage money but if one is forced to spend his entire life staring at ticker tape instead of reading, spending time with family, or pursuing the things you love, the sacrifice isn’t worth it, no matter how rich it makes you.

By focusing on fairly priced excellent businesses, you can live your life as your money compounds through growth in the underlying company.  This drastically cuts down on the number of buy and sell decisions you have to make.  Simply put together a collection of great companies, chosen over time as attractive prices present themselves in the market, and hold on for decades.

As evidence, Munger points out that a single share of Coca-Cola purchased for $19 in 1919 is now worth more than $5,000,000 if you had reinvested the dividends.  A $10,000 investment in Wal-Mart Stores when it went public is now worth more than $10,000,000.  By broadening the definition of value investing to include businesses that earn high returns on equity without a lot of leverage in the capitalization structure, Charlie found a better way to apply Graham’s value investing theory to real-world practice.

Header Image Editorial Credit: Kent Sievers /

  • very slow way to get rich 🙂

    • Kkl

      slow but safe

    • Joel

      The chinese have a saying.. “the way to make money fast is to make it slow”

  • Joshua,

    I’m curious as to how you feel about implementing Charlie Munger’s investing strategy practically and how you feel about his opinions on concentration.

    Let me give some detail as to my thoughts. I know Charlie is a very big proponent on concentration. He has said at times he’d be happy only owning 3-5 companies of his very best ideas. This is based upon the idea that is best ideas have the highest expected return with the lowest risk, so why not go big on them. I have seen that you did something very similar when you originally bought AutoZone. You constantly put new capital solely into Autozone for a long time, as you saw how great of a bargain it was. However, recently you have spoken a lot on the concept of “You only have to get rich once,” and thus spend a lot of time talking about how you are diversifying.

    Are these two ideas compatible or mutually exclusive?

    1. If we’re discussing purely new capital that you have available to invest, including dividends being thrown off from your private companies and stock investments, how do you consider deploying it? Do you throw it all into your best investments at the time only, or do you spread it around to diversify your portfolio?
    2. Would your investing strategy be the same at this moment, if you had yet to make it rich? Would you focus more on concentrated investments instead of diversification, because that will grant you the highest return?
    3. Considering only accounts where transaction costs on long held positions are minimal or zero (such as no-deferred tax liability benefits from retirement accounts) how do you handle allocating your portfolio concentration among your best investments? Let’s say in a taxable account you’d have 20 companies which you’ve bought over time, and couldn’t sell due to the tax benefits of just holding these ideally permanent companies. Instead, you have a retirement account where you own a company like Coca-Cola and a company like Brown and Forman. Both companies which you state you love dearly. If the earnings yield on Coca-Cola was 5% and Brown and Forman had an earnings yield of 20%, would you still not consider selling Coca-Cola in this case to buy Brown and Forman? There are no transaction costs besides a small commission, so it seems obvious to me. I guess this is just an issue of how stringent you are with your “never sell” stocks when it comes to non-taxable accounts.

    Note: I realize that there is a difference between the KRIP and your overall investing strategy. I am just trying to get a feel for how to pursue some of your decision making. There are a lot of companies which I consider great investments. I am trying to decide whether it’s worth diversifying when I know that a few of them are simply multiples of a better investment than others, while I am still trying to become rich.