Home Value Investing How To Invest Like… Charlie Munger, Warren Buffett’s Right-Hand Man

How To Invest Like… Charlie Munger, Warren Buffett’s Right-Hand Man

Here’s a great article at The Telegraph discussing one of our favorite value investors here at The Acquirer’s Multiple, Charlie Munger. The article provides some great insights into Munger’s relationship with Buffett, his investing strategy, and his ten point investing checklist.

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Here’s an excerpt from that article:

The world’s most famous investor, Warren Buffett, is renowned for pithy yet wise one-liners. His business partner, Charles Munger, is less well known – but just as skilled as getting to the heart of the matter.

Like Mr Buffett, Mr Munger hails from Omaha, Nebraska, an unfashionable part of America’s Midwest. As vice-chairman of Berkshire Hathaway, Mr Buffett’s phenomenally successful conglomerate, 94-year-old Mr Munger is in effect Mr Buffett’s lieutenant.

Both are disciples of Benjamin Graham, the father of “value” investing.

Unlike many wealthy and successful investors, the two men do not seek to shroud their strategies in mystery. And Berkshire Hathaway makes a point of not promising to outperform the broad stock market in all market conditions. In fact, investors are given a warning that in rising markets the company is likely to underperform.

By contrast with the complex theories used by hedge fund managers, for instance, the pair’s philosophies and approach can be applied by ordinary “DIY” investors. Mr Munger, in particular, is almost obsessed with simplicity and the power of understanding our limitations as investors.

For decades, academics as well as private and professional investors have picked over the words of both men, delivered in open letters and at Berkshire’s annual shareholder meetings.

In an annual report for Wesco, a mutual savings association that Mr Munger led before Berkshire took it over, he wrote: “It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

Berkshire Hathaway’s rise has been remarkable: its share price rose by more than 4,000pc between 1990 and 2017, compared with a 659pc increase in America’s S&P 500 index over the same period. And that’s not taking dividends into account.

But Mr Munger’s success pre-dates his formal involvement at Berkshire. Between 1962 and 1975 he ran a partnership for a group of investors, producing annual returns of around 20pc against less than 5pc for the Dow Jones Industrial average.

In his 1984 essay The Superinvestors of Graham-and-Doddsville, Mr Buffett described his first meeting with Mr Munger, who was a lawyer at the time, and his investing style.

“I ran into him in 1960 and told him that law was fine as a hobby but he could do better. His portfolio was concentrated in very few securities and therefore his record was … volatile but it was based on the … discount-from-value approach.”

This “discount-from-value” approach was, like that of Mr Buffett, based on Benjamin Graham’s theories on value investing.

Graham’s system rests on the premise that companies have a true or “intrinsic” value that may be slightly, or greatly, different from their market price. Once an opportunity has been identified, investors should factor in a “margin of safety” – Graham was happy with a 33pc discount.

The whole approach was based on understanding the bipolar personality of “Mr Market”. This embodiment of stock market sentiment sways between overly confident and fearful while the underlying company remains the same.

You can read the full article at The Telegraph here.

For more articles like this, check out our recent articles here.

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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