Economist Writing Every Day

A big piece of news in the investment world has been the passing of Charlie Munger on Nov 28 at age 99. He was vice chair of Berkshire Hathaway, and Warren Buffett’s right-hand man there.

Munger grew up in Omaha, Nebraska, which is Warren Buffett’s hometown as well. They met at a dinner party there in 1959, and hit it off with one another personally.  Munger was a really smart guy. After joining the US Army Air Corps in1943, he scored highly on an intelligence test and was sent to study meteorology at Caltech. After the war he was accepted into Harvard Law School despite lacking a formal undergraduate degree, and graduated summa cum laude.

In his 50s, Munger lost his left eye after cataract surgery failed. A doctor warned he could lose his right eye too, so he began learning braille, but the condition improved.

He entered law practice, and eventually started his own firm, but he became more interested in investing. He racked up 19.8% annual returns investing on his own, between 1962 and 1975. Buffett convince Munger to give up law and join him as vice-chairman of Berkshire Hathaway in 1978.

Perhaps Buffett’s most famous investing saying is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. He credits this approach to Munger: “Charlie understood this early – I was a slow learner.”  Before being influenced here by Munger, Buffett had been more inclined to buy very low-priced shares in mediocre companies.  

Munger was heavily involved with Buffett’s decisions. “Berkshire Hathaway could not have been built to its present status without Charlie’s inspiration, wisdom and participation,” Buffett said following Munger’s death. That tribute is no overstatement: from the time Munger joined Berkshire Hathaway in 1978 till now, shares of the company soared 396,182% (i.e.,  $100 invested in Berkshire Hathaway in 1978 is worth $396,282 today). This performance dwarfs the 16,427% appreciation of the S&P 500 over the same time period. When he died, Munger was personally worth $2.6 billion.

(See more on Berkshire Hathaway’s formula for success at: Warren Buffett’s Secret Sauce: Investing the Insurance “Float” )

Quotations From Vice-Chairman Charlie

The internet is rife with sites displaying memorable or useful quotes from Charlie Munger. For example, “I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do”;   and three rules for a career: “1) Don’t sell anything [to others] you wouldn’t buy yourself; 2) Don’t work for anyone you don’t respect and admire; and 3) Work only with people you enjoy.”

Some of these quote lists focus on sayings which provide guidance to individual investors, such as this from CNBC:

“I think you would understand any presentation using the word EBITDA, if every time you saw that word you just substituted the phrase,  ‘bull—- earnings.’ ″

The 2003 Berkshire shareholder meeting was one of the many occasions Munger called out what he saw as shady accounting practices, in this case EBITDA — a measure of corporate profitability short for earnings before interest, taxes, depreciation and amortization.

In short, Munger felt that companies often highlighted convoluted profitability metrics to obscure the fact that they were severely indebted or producing very little cash.

“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested — there’s never any cash,” Munger said at the same meeting. “It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.”

To invest like Munger and Buffett, don’t fall for the flashiest numbers in the firms’ investor presentations. Instead, dig into a company’s fundamentals in their totality. The more a company or an investment advisor tries to win you over with esoteric terms, the more skeptical you should likely be.

As Buffett put it in his 2008 letter to shareholders: “Beware of geeks bearing formulas.”

Munger’s Secret to Happiness

Out of all these witty and helpful quotes, I’ll conclude by zeroing in on what Charlie Munger thought was the single most important factor in achieving personal happiness. He said it a number of different ways:

The secret to happiness is to lower your expectations. …that is what you compare your experience with. If your expectations and standards are very high and only allow yourself to be happy when things are exquisite, you’ll never be happy and grateful. There will always be some flaw. But compare your experience with lower expectations, especially something not as good, and you’ll find much in your experience of the world to love, cherish and enjoy, every single moment.

and

The world is not going to give you extra return just because you want it. You have to be very shrewd and hard working to get a little extra. It’s so much easier to reduce your wants. There are a lot of smart people and a lot of them cheat, so it’s not easy to win.

and finally:

A happy life is very simple. The first rule of a happy life is low expectations. That’s one you can easily arrange. And if you have unrealistic expectations, you’re going to be miserable all your life. I was good at having low expectations and that helped me. And also, when you [experience] reversals, if you just suck it in and cope, that helps if you don’t just stew yourself into a lot of misery.