Charlie Munger before the Berkshire Hathaway Annual Shareholders Meeting in Omaha Nebraska.
David A. Grogan | CNBC
Warren Buffett is probably the most celebrated investor of our generation, but he could not have won the title without the influence of Charlie Munger.
Munger, that of Berkshire Hathaway The vice chairman, who died Tuesday at the age of 99, was instrumental in directing a young Buffett to buy strong-brand quality companies instead of dirt-cheap failed names he called “cigar stubs.”
The plan that Munger drilled into Buffett was simple: Buy a great business at a fair price, not a fair business at a great price. It became the reason that Berkshire managed to grow into an empire consisting of great businesses in insurance, railroad, retail, energy and manufacturing.
“It took Charlie Munger to break my habits and set the course to build a business that could combine immense size with satisfying profits,” Buffett wrote in Berkshire’s 50th anniversary letter in 2014. “Charlie’s most important architectural feat was the Berkshire design of today.”
The “Oracle of Omaha” compared buying troubled companies at deep discounts to picking up a discarded cigarette butt that had one puff left in it. “Although the stump might be ugly and wet, the puff would be free. Once that momentary pleasure was enjoyed, however, one could wait no longer,” he said.
Straightening Buffett out
Buffett studied under legendary father of value investing Benjamin Graham at Columbia University after World War II and developed an uncanny knack for picking cheap stocks. He said Munger made him realize that this investment strategy could only go so far, and if he wanted to expand Berkshire in a meaningful way, it wouldn’t be enough.
“He actually beat me over the head with a two-by-four for the idea of buying very so-and-so companies at very cheap prices, knowing that there was some profit and looking for really wonderful businesses that we could buy at fair prices,” Buffett said. in an interview.
As Munger put it at the 1998 Berkshire shareholder meeting: “It’s not that much fun to buy a business where you really hope this sucker goes out of business before it goes broke.”
See’s Candies
While Buffett said there was no hard line of demarcation where Berkshire went from cigar butts to amazing companies, the deal to buy See’s Candies marked a significant step in that direction.
In 1972, Munger convinced Buffett to sign off on Berkshire’s purchase of See’s Candies for $25 million even though the California confectioner had annual pretax earnings of only about $4 million.
It later produced more than $2 billion in sales for Berkshire.
“Overall, we’ve continued to move in the direction of better and better companies, and now we have a collection of amazing companies,” Buffett said.
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