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Charlie Munger leaves behind an enduring legacy

By Yuehai Xiao, Jingyi He, and Tianyu Zhang | | Updated: 2023-11-30 09:51
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Berkshire Hathaway Chairman Warren Buffett (left) and Vice Chairman Charlie Munger are seen at the annual Berkshire shareholder shopping day in Omaha, Nebraska, US, May 3, 2019. [Photo/Agencies]

The recent passing of Charlie Munger at the remarkable age of 99 marked the end of an era in the world of stock investment. As Vice Chairman of Berkshire Hathaway and Warren Buffett's trusted business partner for decades, Munger made significant contributions to the field.

Charlie Munger's role as Warren Buffett's right-hand man was instrumental to their combined success. As vice chairman of Berkshire Hathaway, Munger brought his unique perspective, expertise, and unwavering support to the table. Their partnership demonstrated the power of collaboration and the importance of trust in achieving shared investment goals. For instance, during the 2008 financial crisis, Munger's steady presence and strategic guidance helped Buffett navigate turbulent times. Together, they seized opportunities and generated substantial returns for shareholders.

Munger shared Buffett's commitment to value investing, which involved identifying undervalued stocks with strong fundamentals and long-term growth potential. By seeking out companies trading below their intrinsic value, Munger and Buffett aimed to capitalize on market inefficiencies. For example, Munger recognized the potential of the Coca-Cola Company when its stock price dipped in the late 1980s. Despite market skepticism, he saw the enduring value of Coca-Cola's brand, distribution network, and global reach. The subsequent performance of this investment showcased the wisdom behind their value-based approach.

Munger emphasized the significance of investing in high-quality businesses with durable competitive advantages, commonly referred to as economic moats. By seeking companies with sustainable competitive positions, Munger and Buffett aimed to build long-term wealth. An exemplar of this strategy was their investment in See's Candies. While the business itself may seem unremarkable, Munger recognized the strength of its brand and customer loyalty. They acquired See's Candies in 1972 and let the compounding effect work its magic over time. This investment has consistently provided Berkshire Hathaway with stable cash flows, illustrating the importance of identifying businesses with enduring competitive advantages.

Munger was a staunch advocate for using mental models from various disciplines to enhance investment decision-making. He believed that drawing insights from psychology, mathematics, economics, and other fields could lead to better outcomes. For instance, when assessing potential investments, Munger applied concepts like behavioral finance to understand market psychology and make rational decisions amidst irrationality. His multidisciplinary approach enabled him to evaluate investments more comprehensively and identify potential risks or opportunities that others might overlook.

Both Munger and Buffett emphasized the value of taking a patient, long-term approach to investing. They recognized that short-term market fluctuations should not drive investment decisions. Instead, they focused on understanding the intrinsic value of businesses and their long-term growth prospects. Munger often referred to the power of compound interest, emphasizing the importance of allowing investments to grow steadily over time. This patient approach is evident in Buffett's long-standing investments in companies like American Express and Coca-Cola, where he held his positions for decades, reaping the benefits of their sustained success.

Munger stressed the significance of risk management in the investment process. He encouraged thorough research, understanding of the business, and awareness of potential pitfalls. Munger's emphasis on avoiding costly mistakes aligns with Buffett's famous two rules of investing: "Rule No. 1: Never lose money; Rule No. 2: Never forget Rule No. 1." Their disciplined approach involved carefully evaluating risks and seeking a margin of safety. One example of their risk management mindset was their decision to avoid the technology bubble in the late 1990s. While many investors succumbed to the euphoria surrounding the dot-com boom, Munger and Buffett focused on businesses they understood and steered clear of speculative ventures.

Upon reflection on his career, it is believed that there are a few takeaways from Munger's long-term partnership with Buffett.

Munger and Buffett's partnership was built on a foundation of trust, mutual respect, and a shared investment philosophy. They trusted each other's judgment and decisions, allowing them to work together towards common goals. For example, when Buffett made major investment decisions for Berkshire Hathaway, he often sought Munger's input and valued his opinions, showcasing the trust they had in each other's expertise.

Munger's multidisciplinary thinking and analytical prowess perfectly complemented Buffett's investment acumen and capital allocation expertise. Munger's background in law and psychology brought a different perspective to their investment decisions. For instance, Munger's understanding of human behavior and psychological biases helped them avoid irrational investment decisions during times of market volatility.

Munger's ability to challenge conventional wisdom and bring a different perspective enriched the decision-making process within their partnership. He encouraged critical thinking and was known for questioning assumptions and seeking alternative viewpoints. For instance, Munger's skepticism towards popular investment trends or "fads" prevented them from making impulsive investments based solely on market hype.

Both Munger and Buffett emphasized the importance of continuous learning and expanding knowledge to improve investment outcomes. They were voracious readers and constantly sought to deepen their understanding of various industries and businesses. This commitment to lifelong learning allowed them to stay ahead of the curve and make informed investment decisions. For instance, Munger's habit of reading widely across disciplines helped him develop a broader mental model that contributed to their success in identifying undervalued investment opportunities.

To recapitulate, Charlie Munger's passing marks the end of an era for stock investment. His contributions and partnership with Warren Buffett have left an indelible mark on the investment community. Munger's unwavering commitment to value investing, his emphasis on quality businesses, multidisciplinary thinking, long-term mindset, and risk management principles continue to inspire investors worldwide. As we bid farewell to this extraordinary investor, we must remember his invaluable takeaways. These takeaways highlight the importance of collaboration, open-mindedness, and continuous improvement in achieving long-term investment success.

Dr. Yuehai (Mike) Xiao is currently a professor of English at Hunan Normal University. Jingyi He and Tianyu Zhang are both sophomores in the English department of Hunan Normal University. The views do not necessarily reflect those of China Daily.

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