Charlie Munger Deep Dive
This week I decided to finish Charlie Munger's letters to his shareholders at Wesco Financial from 1983-2009 and take notes with this question in mind: What makes Charlie Munger such a brilliant businessman?
Let's start with a little history. Before his days as Wesco's Chairman and Berkshire's Vice Chairman, Charlie developed commercial real estate in California successfully in joint partnerships and was also a successful corporate attorney at Munger, Tolles, & Olsen. He also averaged a ~19% annualized return from 1962-1975 in his hedge fund Wheeler, Munger & Co. He parlayed his majority stake in Blue Chip Stamps which he bought for $24M (representing almost 61% of his hedge fund investment assets at the time) into successful investments in See's Candies (99%), The Buffalo Evening News (100%), and Wesco Financial (80%).
What is interesting is that his investments into these three companies were wildly successful over the next 40 years, despite a 67% decline in the market value of Blue Chip Stamps from 1972-1974, which caused a 50% drop in Munger's hedge fund holdings. He wound up his fund in 1975 to concentrate on his larger stakes in Blue Chip, See's, Buffalo Evening News, and Wesco. His investment, alongside Buffett's, in Blue Chip for $24M essentially bought him 3 other businesses - See's Candies (which had outstanding economics), Buffalo Evening News (which performed well into the 1990's until new types of media put pressure on the business model), and Wesco Financial (which became a large financial insurance subsidiary within Berkshire Hathaway).
Once in charge at Wesco, Charlie set to work improving Mutual Saving's and Precision Steel's operations and used each company's excess cash flows to invest in equity securities and other operating businesses as opportunity allowed. Berkshire Hathaway, 80% owner of Wesco Financial, also invested in Wesco's business by starting a reinsurance operation in the mid 80's, where some of Berkshire Hathaway's subsidiaries could lay off risk to Wesco's reinsurance business and allow Wesco to participate in their premium volumes (which generated investment 'float' for Charlie to invest). This insurance operation would go on to be a major force in generating funds for investment for Munger at Wesco.
In 1987, he along with Buffett, invested in Salomon convertible preferred stock which yielded over 9% dividends and were convertible into common equity if the stock traded above a certain price. He would make more investments of the type in Gillette, USAir, and Champion International - all of which would be converted into common equity after receiving substantial dividend payments and sold for big profits (except Champion where he sold the convertible preferreds for a profit). He bought a 4% position in Freddie Mac in the late 80's and compounded his money twenty times over.
He also bought a few more businesses as the years went on. The first was New America Electric, which was an electronics manufacturer. In this case, Munger made the mistake of paying too much for a business that was at peak earnings and in a tough industry. The next business was Kansas Bankers' Surety which insured banking institutions in the Midwest. This company would be rolled into Wesco's insurance operation and continue to add to the investment float over the years. The last business, CORT Furniture, no doubt had its seal of approval from Warren Buffett due to his pleasant experiences with Nebraska Furniture Mart (which still pumps profits out today). However, with this purchase, it is clear that Wesco paid too much for a business that was at its cyclical peak and that didn't perform well in recessions.
When it was all said and done, Munger compuonded book value at roughly 12% from 1983-2009 and turned Wesco into a multi billion dollar conglomerate. So, with all of this said, what makes him such a strong businessman? Here are my eight thoughts from reading through his letters (supplemental notes below) and watching countless speeches and interviews of Munger:
1. The brilliance in his 'latticework of mental models' view of the world is unmatched. He is able to string together the big ideas from all major disciplines and apply them in situations outside of their normal areas to new situations. Shane Parrish has a great link here on what I mean by mental models.
2. The brilliance in understanding what the MAJOR driver(s) are of a particular scenario and paying very close attention to them. To see this, I highly recommend you read the 1990 annual letter where Munger lambastes the current legislative environment for lack of proper regulations for savings and loans institutions and then offers certain cures for the industry's problems.
3. The brilliance of grasping the simple and not the esoteric. As Einstein said, genius is taking something complex and making it simple.
4. The brilliance in his ability to do nothing when nothing is required. One of the benefits of having patient shareholders and capital as partners is that "When there is nothing to do, we are very good at doing nothing." Sometimes doing nothing is better than lots of activity, especially in the stock market.
5. The brilliance of his ability to recognize what kind of exponential value a powerful economic franchise would add to a business over time.
6. The brilliance of his mastery of psychology (as shown in his speech on human misjudgment) allows him to understand what types of biases are inherent in every investment opportunity and to adjust his decision making accordingly.
7. The brilliance of him being a lifelong learning machine and voracious reader. As Munger always said,"in my whole life, I have known no wise people who didn't read all the time."
8. The brilliance of his ability to change his mind when he finds the facts support a new opinion. Too many people paint themselves into corners, whether it be political opinions or investment ideas, and stick to them long after facts have proven them otherwise. Charlie, on the other hand, is a master at constantly reevaluating his fundamental assumptions and opinions based on the facts.