Here are some words of wisdom I came across about portfolio management and building wealth from billionaire Charlie Munger. We’ve really made the money out of high-quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the…
One of the least discussed secrets of great practitioners of the value investing strategy is the use of cash, cash equivalents, and bonds to augment returns. From Benjamin Graham and Warren Buffett to Wallace Weitz and Marty Whitman, intelligent use of excess funds has as much to do with growing your capital over the long run as does selecting individual common stocks. We’re going to look at some of the techniques that have been used by value investors to manage their reserves, and the role played in the overall portfolio.
There are several common characteristics that often present themselves in stocks that are thought to be attractive to those who follow a value investing strategy. From high dividend yields to low price-to-book values, here’s a list if you are new to the concept of value investing.
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.
Whether or not a business can lavish employees and owners with huge bonuses, paychecks, dividend checks, and profits on a sustainable basis depends upon one metric and one metric only: operating profit per employee.
By Charlie Munger (Warren Buffett’s partner at Berkshire Hathaway) Speech at Harvard Law School (1995) Transcription of The Psychology of Human Misjudgment, comments [in brackets] by Whitney Tilson. Note from Joshua Kennon: I’ve written a lot about Charlie Munger over the years, especially the influence he has had on my life and how we run…