Charlie Munger: Buffett’s ‘Abominable No-Man’

Sharp as a tack and blunt as Lenny Bruce, Charlie Munger, Warren Buffett’s peppery longtime business partner, is the not-so-secret sauce in the Oracle of Omaha’s extraordinary investing success.

Munger, the curmudgeonly 91-year-old vice chairman of Buffett’s holding company, Berkshire Hathaway, is a humorous, deep-thinking billionaire whose judgment has been indispensable to growing Berkshire into a $360 billion-plus enterprise. Indeed, last year it picked up $18.3 billion in net worth.

Now comes “Charlie Munger: The Complete Investor” (Columbia University Press-Columbia Business School Publishing), by Tren Griffin, a book that neatly ties together the astute nonagenarian’s investing acumen in just under 200 pages.

Studded with Munger wit, it serves up the financier’s wisdom verbatim, as spoken publicly or in shareholder letters and other writings over the years, along with Griffin’s explanatory comments and financial insights.

A software strategist, Griffin, 60, is a senior director at Microsoft and former partner of private equity firm Eagle River. He writes the popular blog www.25iq.com, focusing chiefly on the market and technology.

In an interview with ThinkAdvisor, Griffin discussed the top Munger and Buffett value-investing tenets responsible for making the two men market legends.

“If there’s any secret to Berkshire, it’s that we’re pretty good at ignorance removal,” Munger quipped at Berkshire’s 2014 annual shareholders meeting.

Certainly, wide-ranging savvy and endless self-education are ingredients; but the real trick to making rational investment decisions is being patient and aggressive simultaneously, according to Munger. That means: strike while the iron is hot — meanwhile, restrain yourself and keep studying.

Los Angeles-based Munger, who like Buffett, 85, was born in Omaha, Nebraska, learned business skills playing poker in the Army, then refined them in his initial career as a lawyer. He ran his own investment firm in the 1960s and 70s, and in 1978 joined Buffett as vice chairman. By that time, the pair had been conferring for some 20 years. From 1984 to 2011, Munger was also chairman of Wesco Financial, now a Berkshire subsidiary.

Today, Buffett’s partner still wears a collection of different hats: He is chairman of the Daily Journal Corp., a director of Costco and a real estate developer, too.

ThinkAdvisor chatted recently with Seattle-bred Griffin about Berkshire’s investing approach and why Buffett calls his candid collaborator “The Abominable No-Man.” Here are excerpts:

ThinkAdvisor: How much do Warren Buffett and Charlie Munger rely on forecasts to make their investment decisions?

Tren Griffin: They scrupulously stay away from them. Warren and Charlie try to avoid bets where you have to predict something with specificity. The future is a probability distribution and can’t be predicted. If you make a bet that’s going to pay off only if oil goes back to $100, the bet is contingent on predicting that event. Their bets tend to be: It doesn’t matter if oil is $100 or $40 or $70 – we’re going to do OK.

For example?

Warren just bought Phillips 66, an oil refiner. A refiner will make money regardless of [big fluctuations] in the price of oil because that oil must be made into something. Munger tries to invest only where he has an unfair advantage; otherwise, “he wants to do nothing,” you write. That’s real discipline!

It’s the key. Making rational decisions requires discipline and a long attention span. You need to be patient and aggressive at the same time. In 2008, when everybody was selling everything, that was the time to be aggressive.

So what did Munger buy?

He made a bet on Wells Fargo [early in 2009] with cash that the Daily Journal Corp. [was sitting on]. It was an unbelievable home run. He saw that dollars were on sale for 65 cents. That’s key in the Munger approach: Buy a dollar’s worth of value at a 65-cent price. He concurs with Benjamin Graham [originator of value investing] that the market is bipolar: Sometimes price and value diverge in a really significant way.

How is the market bipolar; that is, manic-depressive?

This is hugely important in the short term: People are ruled by emotions, and emotional swings create opportunity for investors. But you want to be fearful when others are greedy, and greedy when others are fearful, Buffett says. When other people are scared, you’re going to be aggressive. When others are aggressive, you’re going to be scared.

What should investors do when Mr. Market is down in the dumps?

That’s the greatest opportunity to purchase assets. But this requires discipline because as a result of evolution, we’re likely to follow the crowd.

What broad investing approach do Buffett and Munger use?

Buffett analyzes all decisions according to: What’s my most attractive opportunity? If you say, “I want you to buy X stock,” he won’t think, “Should I buy X stock?” Instead, he thinks: “Is X stock the best investment I can make of all the investments I can make in the world?”

What’s the most important lesson to be learned from Munger?

Price and value are very different things. You want to buy an asset that’s substantially mispriced – greatly undervalued – because you can make a mistake and still do well.

Where’s the rub?

Those opportunities don’t arrive very often. Only occasionally, like [during the financial crisis], do assets become available at prices where you can make a mistake and still do great.

What’s a chief variable in Munger’s seven bedrock principles of investing?

How much you diversify. Warren does diversify some. But Munger said that he’d be happy with just Berkshire and Costco. In an [equity] portfolio, he’s very comfortable with a small number of stocks, though he can have some cash and bonds, too.

So Munger isn’t a fan of diversification.

No. In fact, he thinks one of the saddest things is when people who think they’re active investors have so many stocks that they’ve become what he calls “closet indexers.”

What’s Berkshire’s system of “focus investing”?

Charlie and Warren believe that there’s a small number of people who, through diligent application of work and thought, can beat the market. For those, diversification doesn’t make sense. But very few people know what they’re doing, and most overpraise their investing talent. The focus system is designed, in part, for investments to outperform in up markets and overperform in down markets. Please explain.

To outperform the market, you must be different from the market – because if you are the crowd, you can’t beat the crowd. Therefore, at times you must be willing to be a contrarian – and you also must be right.

What’s the upside and downside to being a contrarian?

You’re not going to ride along in the bubble phase. A value investing system will underperform when the crowd is euphoric. But in the flat and the down phases, you’ll do better.

Is there an area where Buffett and Munger diverge in their investing philosophy?