Secrets of the Money Masters – Warren Buffett – Charlie Munger

Charles T. Munger is Vice Chairman of Berkshire Hathaway, the same company of which Warren Buffett is Chairman. Born in 1920, he is five years older than the most famous president. Although he does not have a college degree, he does have a degree from Harvard Law School and was a successful lawyer for several years before joining Buffett many decades ago.

If you ask people who really know both of them, they will probably tell you and you will be surprised that Munger is the smarter of the two, while Buffett is the better investor. They would also tell you that Munger made Buffett a better investor than Buffett was, before he met Charlie Munger.

When Charlie Munger is pressed on this subject, his response is that Warren Buffett would have come to this way of investing anyway; It was only a matter of time. Charlie helped him get there earlier. What is this way of investing that Munger is famous for? After all, Munger is an investment billionaire in his own right. It can be summed up in a few sentences.

“The number one idea is to view a stock as property of the business and judge the continuing quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than what you’re paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to only bet when the odds are in your favor.”

Let’s break down this philosophy and see where it leads us. “View a stock as business property.” Charlie Munger says that he doesn’t like to trade stocks. He buys and holds, but wants to hold the right stock for the right reasons. I’ve seen people buy stocks in seconds that, if they were buying a car, would take days of intense reasoning back and forth. Let’s say you’re going to buy a car, you end up going to different dealerships, you do test drives. You read about the car in the consumer report, you look at the JD Powers surveys. You probably look at other car magazines. You can even go out and test drive other cars in the same price range as the car you have in mind to make a value comparison. Meanwhile, you buy a stock, you barely know more than the symbol, and you’re out there investing, and you want to know why some people lose money in the market. As far as these gentlemen are concerned, trading stocks makes no sense.

These people are taking out their game instincts in the market. Charlie Munger wouldn’t do that. Charlie talks about the “permanent quality of the business in terms of its competitive advantage.” What is a competitive advantage for him? it’s what we call that quality that keeps you consistently ahead of your competition, so you can charge a premium price. It is the value of the franchise. Is there anyone in the world who doesn’t know the name Pepsi-Cola or Disney?

You put the name Coca-Cola on a soda bottle, guess what, it sells. It has been sold for the last fifty years and it will be sold for the next fifty years. This represents the competitive advantage of a company. It’s what Munger loves to watch and what he invests in. He wants to nurture that competitive advantage and do everything he can to improve it. That is why ethics is so important to him. Don’t do anything to risk the franchise.

“Look for more value in terms of discounted future cash flow than what you’re paying for.” Buy shares at the right price. You don’t have to buy cheap, cheap, cheap. This is something that Munger has criticized Buffett about. He believes that Buffett before he met him would only buy what is really cheap, what Buffett calls cigarette butts. Charlie has taught Warrem that it’s okay to pay for a stock, as long as you believe that over time, you’ve got a money machine with a great franchise that has predictable staying power.

Wait, there’s more!!!!!

“Only move when you have an edge. You have to understand the odds and have the discipline to bet only when the odds are in your favor.” This is brilliant, absolutely brilliant. There are great companies out there, sometimes they fail, but the basic business is intact. When they fail, and institutions are bailing out because they don’t want to be associated with a front-page story at the end of the quarter, you can sometimes buy a fabulous company at a BARGAIN PRICE. “Move only when you have the advantage.” Now you know what Munger is talking about.

“Bet only when the odds are in your favor.” You don’t become a billionaire by starting from scratch by buying a different stock every day, or even every month. It’s like a beater standing on the plate. Only in this case, you wait; you keep waiting for the perfect pitch to come to the plate, and then boom, home run. Wait until the odds are in your favor. Wait until you hear the next one, it’s fabulous!!!

Both Warren and Charlie have talked about an interesting concept. If you have ever traveled on a commuter train, most people buy what is called a commuter ticket. In other words, the commuter realizes that he will be traveling to and from work all month, so he buys a monthly ticket because it saves money. There are 31 numbers on the ticket and the ticket changes every month.

When the traveler boards the train, the conductor at some point punches the ticket indicating that it has been used on the day in question. Munger likes to say, and Buffett agrees with this, “Wouldn’t it be nice if you were given a stock ticket at birth that allowed you to buy no more than, say, 15 or 20 shares in your lifetime?” Investors would be much more careful in their choices if they knew they were limited to a certain number. It would end daily or even monthly trading. Most likely, its performance will benefit greatly on the upside.

We love Charlie Munger, because much of what he says is very appropriate for our own work at StocksAtBottom.com. We do not have stock every day, or every week. We are constantly researching trying to find the ideas that are going to work. Then we wait for the correct price, just waiting until the action comes to us. Sometimes they drop to our buying levels, and when they do, the price moves are big, dramatic, and beautiful. If you want to know more about our work, just click the button below and start reading.