Charlie Munger is the lessor known half of the partnership team that built Berkshire Hathaway. Prior to that, he was a lawyer, before giving up law to run his own investment partnership.
He started Wheeler, Munger & Company in 1962. The partnership was wound up in 1975. Back-to-back 31% losses in 1973 and 1974 made investors squeamish and in need of capital. Yet, despite the losses, Munger outperformed the market, earning a 19.8% annual return over the 14-year period (compared to 5% for the Dow).
Munger teamed up with Warren Buffett three years later (1978) as vice chairman of Berkshire. In his spare time, he chairs the Daily Journal, designs buildings, and plays the part of a walking, talking encyclopedia. He’s a learning machine who built his own system of mental models to reduce errors in this complex world. His unique view of uncommon sense, as he calls it, can be seen in how he invests.
Extreme concentration and inaction best describe Munger’s approach. He’s comfortable with only three or four wonder businesses in his portfolio. That’s far short of the popular broad diversification strategies recommended today.
Except, extreme concentration is not for everyone. First, finding a handful of wonderful companies worth owning is never as easy as it sounds. Someone not skilled in the art is likely to find awful companies more often than wonderful ones. Continue Reading…