Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

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 /