Learning Charlie Munger’s Investment Strategy Through a Case Study

If you had to pick one sentence to describe Charlie Munger (Trades, Portfolio)’s investment philosophy, it would have to be: Have patience and be willing to act with conviction when the time is right.

The billionaire investor and vice chairman of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has made only a handful of investments in recent years, but each one of them has gone on to generate huge returns, which has saved the investor a lot of time and effort trying to find other stocks or businesses that may fall into his circle of competence.

Munger is quite happy to wait for months or even years for an opportunity to come along. And when an opportunity that he feels comfortable with eventually arrives, he’s quite happy to invest a significant percentage of his net wealth into the enterprise.

Munger on his deep-value investment

At the 2017 annual meeting of Daily Journal (NASDAQ:DJCO) shareholders, Munger offered listeners an excellent example of his investment strategy in action through a real-life historical case study.

Munger explained that in 50 years of reading investment magazine Barron’s, he’d found one stock that he liked. “In 50 years, I found one investment opportunity in Barron’s, out of which I made about $80 million. For almost no risk,” he explained.

While the billionaire could not remember the name of the business he invested in, he did say:

“The stock was $1, and the junk bonds were cheap, too. I bought the junk bonds, they paid me the 35%, and they went to 107%, and they called. The stock went from one to 40, but I sold my stock at 15.” He also added that the stock was a “cigar butt.”

When asked if he could add some more color to what attracted him to the company in the first place, Munger explained:

“I kind of knew based on experience how sticky some of the secondary auto market was and how many old cars needed Monroe shock absorbers. And I just knew it was too cheap. People were afraid it was going to go broke obviously if their bonds were selling at 35.”

Put quite simply, it looks as if Munger found a dirt-cheap stock and then loaded up the truck, buying as much as possible.

The investor said he made $80 million from the trade (although he didn’t reveal how much he invested in the first place). But it’s what he did with the money next that is the important part.

Rather than dumping the money back into the market, Munger gave his funds to the next great opportunity that came along, Chinese value investor Li Lu. Munger said in 2017:

“I took the $80 million and gave it to Li Lu, who turned it into $400 million or $500 million. So I have made $400 million or $500 million out of reading Barron’s for 50 years and following one idea. That doesn’t help you very much, does it? I’m sorry, but that’s the way it really happened. If you can’t do it, I didn’t have a lot of ideas. I didn’t find them that easily, but I did pounce on one.”

The bottom line

For this one example, we can see how Munger’s style has helped him grow his wealth over the years. The value investor only acts when he sees a compelling opportunity that has little or no risk. When these opportunities emerge, he acts quickly and with conviction.

This might not be the best strategy for many investors because it requires lots of patience, but it has worked exceptionally well for Munger. Even if we don’t follow it exactly, there’s still a lot that can be learned from this systematic approach to investing and business.

Disclosure: The author owns shares of Berkshire Hathaway.

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