How to Buy Stocks Like Warren Buffett's Right-Hand Man Charlie Munger

Nearly every investor in the world is familiar with Warren Buffett and his unbelievable investing track record, but less well known is his intellectual sidekick, Charlie Munger. Munger is well known for dramatically shifting Buffett’s investing ideology, and Buffett credits him for his success in the second half of his career.

Warren Buffett famously quotes Munger, “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.” This would alter the approach Berkshire’s investment, but likely ensured the long-term success of the conglomerate.

Below, I will go over the duo’s history and successes, and at the end cover a new and very different investment they bought in the most recent quarter.

Berkshire Hathaway

The long-term success of Berkshire Hathaway BRK.B cannot be understated. But after his amazing run though the 1960s and 70s Buffett knew, his capital was growing too large to execute his cigar-butt investing strategy. Influenced by his Columbia professor Benjamin Graham, Buffett was focused on buying $1.00 for $0.50, to get what he called a “free puff” through this period.

This type of arbitrage, like many other trading strategies, would eventually run out of alpha as the strategy became more well known, and the opportunities too small for Buffetts capital. And that is where Charlie Munger became pivotal to BRK.B success. Munger advocated for buying great businesses, and holding them forever, very different from Buffett’s style. This new approach would lead to investments in American Express AXP, Moody’s MCO, and Apple AAPL and catapult Berkshire into the investing record books.

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If you remember during the post-Covid rally, many were calling Buffett and Berkshire out of touch for underperforming the market. Then 2022 came and wiped out all the easy money and speculators. This is where Berkshire showed just how robust it really is and outperformed the market, posting positive returns during one of the worst years in the stock market.

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Charles T Munger – Elementary, Worldly Wisdom

Munger, like Buffett grew up in Omaha Nebraska, and even worked at the Buffett family grocery store, although they wouldn’t be introduced until adulthood.

At Harvard Law Munger became an avid poker player where he developed what he called an “important skill,” which would benefit his business career.

He would go on to start the well-known law firm, Munger, Tolles & Olson. But law wasn’t enough for Munger, and he would begin his investing career with several very successful real estate developments in California. Following that he started his own stock investment company which was very successful in its own right, compounding at 20% over 13 years.

At the time when he met Buffett, Munger was still practicing law in addition to his investing career, but Buffett would convince him to quit and join him, to focus all his time on investing. The rest is history.

Munger credits much of his success to his interest in history, philosophy, and his penchant for “uncommon sense.” He believes good businesses are ethical businesses.

If you ever watched Munger speak publicly you will know that he is very crotchety and extremely funny. But then he will say things that are so incredibly profound, often quoting many historical thinkers.

He is also very well known for his concept of inversion. The principle can be well defined by his quote, “All I want to know is where I’m going to die, so I’ll never go there.” 

Munger’s Investments

This concept of “buying wonderful businesses at fair prices,” would be the guide for a number Berkshire’s best investments.

Possibly one of the greatest investments of all time was when Berkshire bought Apple. When Munger and Buffett bought AAPL stock in 2016, the company was quite mature, and expectations for future returns were not exceptional. The iPhone had already been a success, so what else could push the stock higher.

It also seemed unconventional because it was a technology business, and the duo had always shied away from technology. But it was a great franchise, and a “wonderful” company. At the time of investing AAPL traded at a P/E of 13x, not a deep value bargain, but fair.

The investment would go on to earn the Berkshire $160 billion, and Buffett often cites Charlie as a very important factor in the investment.

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Another legendary Munger style investment was Coca-Cola KO. The crash of 1987 produced a number of investment opportunities, and KO was one of them. At the time Berkshire invested $1 billion, equivalent to a 6% stake in the company. It has since grown to $22 billion, and a 9.2% stake.

This investment was also one of the earliest departures of Buffett’s original investment strategy. KO was a great company, trading at a fair valuation. Coca-Cola dominated the beverage industry, had global recognition, and was a nearly 100 year old brand at the time. There were huge opportunities in 1987 to trade “cigar butts,” but instead they opted to make a long-term investment.

Berkshire’s Newest Investment

Berkshire’s most recent 13F report shows it built a $4 billion stake in Taiwan Semiconductor TSM, the world’s largest producer of semiconductors. TSM is an amazing company, with a long history of success. The stock has returned 15% annualized since 1998 and is essential to the technology industry.

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The stock has fallen out of favor over the last year though, at the worst point correcting 60% off its 2021 high. It has since recovered but is still well off its highs.

TSM along with the rest of the semiconductor industry is experiencing some painful drawdowns after an exceptional couple of years. The boom that followed Covid led to a tremendous oversupply of semis, which is what has hit the industry. But there are few sectors that have tailwinds like semis do. The digital economy is one of the strongest secular trends there is.

Munger and Buffett have invested when sentiment on the stock is low, a brilliant contrarian decision further favoring the investment decision.

TSM is a very well-known franchise and an amazing business. The stock currently trades at a one year forward P/E of 17X, just below is 5-year median of 19x. This isn’t a crazy bargain, but great companies rarely trade at deep discounts. Just as Munger says, buy great businesses at good prices.

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Charlie Munger is a sage investor, worth exploring and learning as much as possible from. His method is simple, rooted in reasonable thinking, and history. His approach to buying great companies at good prices influenced one of the greatest investors of all time to completely change his approach to markets.

Munger is also the chairman of a small legal publication and software company called Daily Journal Co DJCO. Not surprisingly he has used his philosophy to dramatically improve the company, and set it on a path to success.

DJCO reports earnings Friday, February 10 after the market close, and Munger often uses the report to make a public statement about the markets. If interested I highly recommend tuning in.

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Apple Inc. (AAPL) : Free Stock Analysis Report

CocaCola Company (The) (KO) : Free Stock Analysis Report

Moody’s Corporation (MCO) : Free Stock Analysis Report

American Express Company (AXP) : Free Stock Analysis Report

Berkshire Hathaway Inc. (BRK.B) : Free Stock Analysis Report

Taiwan Semiconductor Manufacturing Company Ltd. (TSM) : Free Stock Analysis Report

Daily Journal Corp. (S.C.) (DJCO): Free Stock Analysis Report

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