Charles Munger: biography and principles of investing

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    Чарльз Мангер и Уоррен Баффет
    Charles Munger and Warren Buffett

    Charles Manger is one of the most successful investors in the world, a partner and best friend Warren Buffett and just a good person.

    Despite his friendly relations, Charles is often as if lost in the shadow of Buffett and his fortune, although Munger's contribution to Berkshire Hathaway is hard to overestimate. Therefore, we decided to shed a little more light on his biography and approach to investments.

     

    General Information

    Чарльз Мангер
    Charles Munger

    A complete biography of Charles Munger is set out in his book The Almanac of Poor Charlie, which is available in Russian translation. We only note the most interesting points.

    Manger was born in 1924 in Omaha into a lawyer's family, his grandfather was a federal judge. The family belonged to the middle class, so Charles was able to study at the University of Michigan, and later graduate from Harvard Law School.

    An investor without financial education

    Since Charles was born in the family of a hereditary lawyer, his fate was largely determined, and he received a specialized education at Harvard Law School. Although he created a successful legal practice before founding an investment fund, in 1995 he gave a speech to Harvard graduates, which began with the words “I had to do something with this terrible ignorance with which I left Harvard Law School”.

    With regard to financial education, Magner apparently considers his absence to be an advantage.

    At a meeting of the Daily Journal, he said that his colleagues were taught that it was impossible to replay the market, but because if he didn’t attend business schools, then his mind "is not full of this madness."

    Then Charles added that most people try to be smart, he just tries not to be an idiot, and this is not as easy as it seems.

    Manger more than compensates for the lack of system education with self-education , therefore his approach is devoid of many cliches, and the decision-making algorithm is complex and rather non-standard, but more on that below.

    Meeting with Buffett

    Уоррен Баффет
    Warren Buffett

    The first meeting of Manger and Buffett took place in 1959 introduced Dr. Davis, inviting to a joint dinner. By that time, Charles was the founder of the legal practice of Munger, Tolles & Olson, but Buffett convinced him to switch to investment, as jurisprudence does not allow to fully reveal the talents of Manger.

    In 1962, Charles founded an investment partnership and led it until 1975, until he and Warren acquired a controlling stake in Berkshire Textile, which turned into Berkshire Hathaway.

    ☝️
    Manger is now Vice Chairman of the Board of Directors of Berkshire Hathaway, Chairman of the Daily Journal Board of Directors and has received Buffett's right-hand status.

    However, Buffett and Magnner are not only colleagues, but also good friends. Warren helped Charles reveal his talent, and the latter expanded Buffett's approach to investing, which at first was invested only in undervalued companies. Often they give interviews together, noting that they are not tired of each other’s company, and for 60 years of friendship and partnership they have never seriously quarreled.

    ☝️
    This is interesting! Magner and Buffett worked at Warren's grandfather's store as a child, but their shifts did not match, and until 1959 the young men were not familiar, although both grew up in a relatively small Omaha.

    In 2020, Manger’s fortune is estimated at $ 1.7 billion. Forbes is a little more than nothing, so in the ranking of billionaires he occupies the 1528th position, despite prominent post of vice president of Berkshire Hathaway.

    This is partly due to Charles's generosity - he regularly makes charitable donations and, together with Buffett and Gates, is a party to the Gift Vow agreement, pledging to give more than half of his fortune to charity.

    Investing: opinions, principles and methodologies

    Принципы инвестирования Чарльза Мангера
    Principles of investment by Charles Munger

    Buffett convinced Manger to work together because founded by him in 1962, the investment fund gave an average annual return of 19.2%, while the average figure was 5%. But a more detailed picture of the yield is even more impressive:

    Доходность фонда Мангера в 1962-1975-м
    Manger fund yield in 1962-1975

    Manger is commonly considered [194590338 ] a classic investor , focusing on quality, not quantity of investments. He does not speculate and comprehensively evaluates each investment object, but, as can be seen above, even such an approach does not always guarantee profitability, although in the long run the model justifies itself (at least it justified).

    In 2020, Charles’s public investments are estimated at $ 170 million (approximately 10% of the state), and the portfolio is as follows:

    Структура инвестиционного портфеля Магнера [ 19459004]

    The structure of Magner’s investment portfolio

    As you can see, Magner is true to his approach - only high-quality stocks and relatively low diversification.

    But to cryptocurrencies Charles, like Warren, reacts negatively to the same CNBC , he said that he "hates things like bitcoin that are initially antisocial." In addition, he periodically makes winged statements about bitcoin , something like "those who invest in bitcoin support the life and work of Judas Iscariot."

    In principle, this is not surprising, because A classic view of the market and a conservative approach to investment leave no room for unregulated assets with high volatility and the absence of an issuer.

    Fisher’s 15 questions

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    In many sources, Manger is called a follower of Philip Fisher, one of the most successful global investors.

    In particular, when evaluating the object of investment, Charles uses the questions outlined in Fisher's work “Ordinary shares and extraordinary incomes”.

    A full list of questions can be found at the link above. The essence of their use is that at least 9 out of 15 questions need to be answered positively, then the company is worth it to take a closer look at it. In general, this is a kind of checklist, print and tick off, evaluating the objects of investment.

    And although the questions relate to the company’s activities, the answers to many of them depend on the subjective assessment of the enterprise by the investor, therefore Fisher complements the questions with the decision-making methods listed below.

    Mental models and the psychology of erroneous judgments

    Модель инвестирования Чарльза Мангера
    Charles Manger investment model

    The mental model is a mental process cause-and-effect relationships for solving a specific problem or modeling the further development of the situation. Charles says the following about mental models:

    “You cannot know everything, you just remember individual facts and try to put them together. If this knowledge does not develop into a single theoretical network, you will not be able to put it into practice. ”

    In this case, analyzing the same facts, different approaches can be used. For example, a “circle of competence” model owned by Buffett, or Occam’s Razor with the simplest explanation. There are a huge number of mental models, and the more you can use when analyzing a problem, the more objective the solution.

    As for the psychology of erroneous decisions, this is the Magner system that explains why people often make irrational decisions. He gave a brief outline of his theory in that same speech at Harvard in 1995, listing 24 main causes of incorrect judgments. There is no point in quoting them, because without explanations, not all points are clear, but with explanations it will be too long, so just click .

    These reasons make it possible to minimize the subjective “bias” in answering Fisher’s questions and, accordingly, make the most optimal decision.

    These three concepts allow us to restore the general psychological algorithm of decision-making by Manger:

    1. We take Fisher's questions.
    2. We respond to them using mental models.
    3. We filter answers taking into account erroneous judgments.

    To this, of course, you need to add an analysis of the company's value, assets at the disposal of the fund, profitability, and a whole series of indicators that professional investors are not too willing to share.

    Daily Journal meetings or investment revelation

    Правила инвестирования
    Investment rules

    Buffett annually shares his opinion on the market situation in a letter to shareholders called the Oracle Message, and Manger does this at the annual meetings of the Daily Journal shareholders, which we have already mentioned in passing. Investors can ask Charles various questions, and his answers are then parsed into quotes .

    Reinforced by the authority of Manger and Berkshire Hathaway, they resemble the teachings of a young neophyte by a Buddhist monk. Here are a couple of examples:

    “The whole idea of ​​diversification when you are looking for excellence is absolutely ridiculous. This does not work and gives you an impossible task. What is the pleasure of completing an impossible task again and again? ”

    “People don’t understand because they are so mathematically illiterate that if you earn five percent and pay two of them to your consultants, you don’t lose 40 percent of your future. You lose 90 percent, because over a long period of time this small difference becomes a loss of 90 percent for you. "

    “This business consists in controlling expenses and living simply. It was a secret. Warren and I had little money. We always underestimated our income and invested it. You live long enough, you will eventually get rich, it’s not very difficult. ”

    At the last meeting of shareholders on February 12, 2020, Magner made several comments , indicating that:

    • In the near future expect problems in the market, as too many excesses have already occurred;
    • The Chinese do not know how to handle stocks, preferring short-term speculation over long-term investment. And this is really stupid and strange, because in all other respects the Chinese are very good;
    • The EBITDA metric does not reflect the real income of companies and distorts the general data on profitability;
    • The best technological breakthroughs have occurred in his generation, and overall progress may slow down in the future, as we have already received too much.

    If you have time and desire, you can see the full version of Magner’s speech:

    Charlie Munger Speech at the Daily Journal
     

    See also:

    Bridgewater of billionaire Ray Dalio: is falling or working according to plan?

    Warren Buffett: Omaha oracle predicts crisis?

    Is it possible to be 100% sure that the crisis of 2020 is going to end

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