Charlie Munger: Life, Berkshire Hathaway, Investments

Billionaire Charlie Munger, former vice chair and second-in-command to Warren Buffett, died on Nov. 28, 2023, at age 99. As Buffett’s closest business partner and “right-hand man” for over four decades, Munger was instrumental in the growth of Berkshire Hathaway into a giant diversified holding company with a market capitalization of over $780 billion (as of November 2023) and subsidiaries operating in insurance, freight rail transportation, energy generation/distribution, manufacturing, and retail.

In addition to serving as independent director of Costco Wholesale Corporation, Munger was chair of the board of Daily Journal Corporation, a Los Angeles-based legal publisher with a software business in the automated court reporting market. From 1984 through 2011, he served as chair and CEO of Wesco Financial Corporation, a subsidiary of Berkshire Hathaway.

Education and Early Career

Born in Omaha in 1924, as a teenager, Munger worked at Buffett & Son, a grocery store owned by Warren Buffett's grandfather.

During World War II, he enrolled in the University of Michigan to study mathematics but dropped out a few days after his 19th birthday in 1943 to serve in the U.S. Army Air Corps, where he was trained as a meteorologist and promoted to second lieutenant. He later continued his studies in meteorology at Caltech in Pasadena, Calif., the town that became his lifelong home.

After entering Harvard Law School—without an undergraduate degree—he graduated magna cum laude with a J.D. in 1948. As a real estate attorney in those early years, he founded Munger, Tolles & Olson, a renowned California law firm.

Transition From Law to Finance

After meeting at a dinner in Omaha in 1959, Munger and Buffet stayed in touch over the years as Buffett continued building his investment firm and Munger continued working as a real estate attorney.

On Buffett’s advice, Munger gave up on the practice of law in the 1960s to concentrate on managing investments, including a partnership with the billionaire newspaper executive, Franklin Otis Booth, on real estate development.

Prior to joining Berkshire, Munger ran his own investment firm, which—as his friend Buffett pointed out in his 1984 essay, "The Superinvestors of Graham-and-Doddsville"—generated compound annual returns of 19.8% between 1962 and 1975, far better than the 5% annual appreciation rate for the Dow during that time frame.

In 1962, Buffett began to buy shares of Berkshire Hathaway; by 1965, he had taken control of the company as chair and CEO; in 1978, Munger became vice chair of Berkshire Hathaway.

From “Cigar-Butt” to Buffet-Munger Value Investing

Buffett was always been a value investor—actively seeking and analyzing stocks trading for less than their true value—a strategy he learned from his mentor, Benjamin Graham.

However, in his 1989 letter to shareholders, Buffett credited Munger with setting him straight on the fact that Berkshire should not pursue the "cigar-butt" version of value investing—a term to describe investors who buy a dying business currently worth $1 for $0.75 just “to get the $0.25 of free puff” that’s left in the business.

As Buffett explains it, he began his own career as that kind of cigar-butt investor—and it was Munger who understood the foolishness of that approach long before he did: “Charlie understood this early; I was a slow learner.”

Working with Munger, what he finally learned was that the bargain price for a troubled business with multiple flaws too often turned out to be a false discount in the end, and any immediate gain would soon be eroded by low returns. Instead, Munger and Buffett would rather buy “a great business for $1.25, when it is currently worth $1 but is definitely going to be worth $15 in 10 years.”

In other words, the Berkshire version of value investing became phenomenally successful by following Munger’s mantra: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

Berkshire Hathaway’s “Four Giants”

As vice chair, Munger was also second-in-command of all assets, including what Buffett calls Berkshire's "Four Giants"—the four investments that account for the bulk of Berkshire’s value.

Insurance Float: Heading the list in 2021 is a cluster of wholly-owned subsidiary insurance companies that have made Berkshire the world leader in insurance float—an investment term for all the money from insurance premiums that Berkshire can hold for years and invest for their own benefit before paying it back on claims. During Munger’s tenure, Berkshire’s insurance float grew from $19 million to $164 billion, as of 2023. Even with periodic underwriting losses from catastrophic events (for example, the terrorist attacks on September 11, 2001), enormous, long-term value creation is the reason insurance float heads the list of Berkshire’s four giants.

Apple, Inc: A close runner-up to insurance float is Berkshire’s investment in Apple, Inc. Unlike the company’s wholly-owned investments, Berkshire owns only 5.8% of Apple as August 2023, which makes it an atypical holding for the company. However, Apple meets the very high Munger-Buffett investment bar for the simple reason that their 5.8% ownership stake is due solely to Apple’s repurchase of their own stock.

BNSF (Burlington Northern Santa Fe Corporation): Berkshire’s third giant, BNSF, operates one of the largest freight railroad networks in North America, with 8,000 locomotives and 32,500 miles of rail across the western two-thirds of the U.S. This investment is a classic example of the Munger-Buffet preference for investing in companies with an economic moat—a built-in competitive advantage that protects long-term profits and market share from competitors. In the case of railroads, the enormous amount of start-up capital required to lay railroad tracks across the U.S. protects railroads from rivals, just like a moat around a medieval castle.

BHE (Berkshire Hathaway Energy): The fourth giant, BHE, a portfolio of locally managed businesses in the utility sector, is another classic example of the Munger-Buffet preference for companies with an economic moat—the massive capital required to lay power lines across the U.S. protects BHE from competitors. Under Munger’s leadership, not only did BHE earn a record $26.3 billion in 2022 (up from $122 million in 2000, when Berkshire first purchased a stake), but it has also grown from zero renewable energy capacity into a leading player in wind, solar, and hydro transmission throughout the U.S.

The Bottom Line

As Buffett’s “right-hand man,” Munger was instrumental in the growth of Berkshire into a giant holding company with a market capitalization of more than $780 billion.

As vice chair, Munger was also second-in-command of all assets, including what Buffett calls Berkshire’s “four giants”—the four investments that account for the bulk of Berkshire’s value: 1) “insurance float” from subsidiary insurance companies; 2) Apple, Inc; 3) BNSF (Burlington Northern Santa Fe Corporation); 4) BHE (Berkshire Hathaway Energy).

Buffett credited Munger with ensuring that Berkshire value investing adhered to Munger’s mantra: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

Munger often stated that high ethical standards were integral to his philosophy—and to his success.