Charles Thomas Munger
Born 1924 in Omaha, Nebraska, and still living locally
“Take a simple idea and take it seriously”
The inimitable Charlie Munger, vice chairman of Warren Buffett’s Berkshire Hathaway, is best known as the Sage of Omaha’s accomplice and an important sounding board for the multi-billionaire. In practice, though, Munger has always been more of a complementary intellectual force than a fellow traveller. Although the two men claim never to have had an argument, their styles and characters differ – as do their politics and some of their principles.
Almost a lawyer’s career
Like Buffett, Munger was born in the city of Omaha, but seven years earlier. And the two men both worked, at different times, for Buffett’s family grocery business. But the similiarities might have ended there. Munger’s Harvard law degree in 1948 took him to California for 14 years with a local law firm. But in 1962 his interest in investment led him back to founding his own partership, which Buffett says generated a compound annual return of 19.8% during the 1962–75 period compared to just 5.0% annually for the Dow Jones Insustrial Average. By the mid-1970s he was working with Buffett as chairman of Wesco Financial Corp, now majority-owned by Berkshire Hathaway.
Munger is, by instinct, a Republican, whereas Buffett tends toward Democrat. And his generalist range of interests contrasts with Buffett’s full-time devotion to his investment business (from which he currently plans to retire). More importantly, Munger tends to be more tightly focused on the performance of an underlying business than on the investment itself. In this, he is credited – not least by Buffett, the value investor – with having questioned and focused his friend’s early approaches, with hugely beneficial effect.
Munger’s adoption of the phrase "Elementary, Worldly Wisdom" has encapsulated his approach to business and finance, and it has featured in a series of academic addresses and theoretical papers. Essentially, Munger believes that most critical business problems can be resolved using a modular set of mental models framed as a latticework. But the ultimate test, he believes, is common sense. That and an enormously wide-ranging and unrestricted reading habit, which he regards as the cornerstone of an investors gut-feel.
The "Lollopalooza Effect", first described by Munger during a 1995 address at Harvard, attempts to account for herd behaviour in terms of attraction, rather than the usual fear of failure.
According to Munger, you tend to find that events are shaped by multiple biases or reciprocating mental models which just “happen to coincide” – and which can sometimes go on far beyond the point of reason, so that the participants lose sight of what’s logical and their brains turn to “mush”.
Tupperware parties and open outcry auctions are two good examples of this self-affirming process. At the parties, the participants experience a mood of warm goodwill toward their hostesses which may well sway their decision to buy. At auctions, the actions of other bidders provide ready confirmation that the goods must surely be of escalating value and worth bidding ever-higher for? Here, the natural human urge to compete is counterbalanced by a subliminal sense that failing to bid might involve loss – and the result is often a poor decision, at either the micro or the macro level.
But Munger’s commitment to buying strong businesses rather than merely good investments goes right to the core. When considering an investment, he says, you should think primarily in terms of the healthy business rather than the potential investment return. You can’t get much further from Ben Graham’s value approach than that.