Charlie Munger (Trades, Portfolio) is a billionaire investor and the vice chairman of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), the world's largest investing conglomerate. In a rare interview at the Redlands forum in 2020, sponsored by GIS Mapping, Munger pulled back the curtain on his investment strategy and revealed new details about his real estate investments, which he rarely discusses. Munger also offered advice on how to negotiate and revealed how to be successful in business and life. In this article, I have summarized this talk, which was over one hour long, and provided my own notes;, let’s dive in.
Ultimate investment strategy
Munger reiterates his investment strategy for stocks and companies. He says he aims to buy an “intrinsically good business" which an “idiot could run” and do alright. If he has to choose between a “good person” and a “good business," he would choose the good business. This is not related to the character of the person but related to the strength of the business. For example, you could also have a great entrepreneur but they may be managing a bad business.
This goes back to Warren Buffett (Trades, Portfolio)’s philosophy of investing in “simple businesses” which are easy to understand. Management is still an important part of the equation and Munger looks for a “wonderful person” to be in charge. For example, Munger identified the founder of Chinese EV maker BYD (HKSE:01211, Financial) as being a “wonderful person," describing him as a cross between “Bill gates and Thomas Edison." Due to this, he urged Buffett to invest in BYD.
“Figure out what works and do more of that,” said Munger.
Should you time the stock market?
Munger believes in the classic saying “time in the market is better than trying to time the market." He is “continuously invested” even though he has seen his Berkshire Hathaway stock decline by over 50% more than four times. Therefore as retail investors we can apply this same philosophy to our own stocks and investments which may also decline by significant sums, especially in the current market environment. The problem with timing the market is that if we buy and sell at the wrong times, it can easily backfire, which is why it's usually better to stay invested according to Munger.
Referencing the poem “If” by Rudyard Kipling, Munger says it's a great idea to “keep your head when everyone else is losing theirs” and treat “success and failure” all the same. Remember the goal of investing is to buy low and sell high. However, most investors get spooked at the slightest decline in the share price of a stock. I personally believe it's best not to check your portfolio daily and always make sure you invest into businesses you understand.
How to negotiate
Munger believes the best negotiation strategy for business or life is win/win. You are aiming for both sides to have a perceived gain, or one side will likely feel scorn and not be interested in repeat business. To accomplish a win/win strategy, it requires “sensitivity” to the other person's style of “thinking, wants and needs." As trust is built over time, amazing things can be accomplished.
For example, Munger is on the board of Costco (COST, Financial) and states the company uses the win/win strategy, with its customers, employees and suppliers. This is despite Costco being known for its hard bargaining position with its prospective suppliers. Munger also praises Peter Kaufman, the CEO of Glenair and author of Munger's Almanack, as Kaufman looks after his customers and aims to create a win/win situation.
Munger and real estate investing
Munger is an Omaha native like Buffett, but unlike Buffett, he prefers the warmer temperatures of California. He first moved to Los Angeles, California in the 1940s in order to practice law and has stayed ever since.
Munger’s home is on one of the best streets in Pasadena and nearby to other financial figures such as economics expert Jeff Leitzinger and even “Wayne Manor” from the Batman movies. Pasadena is also home to Cal-tech, one of the most prestigious universities in the world and the university where Munger studied meteorology in 1943.
Munger is not just an investor, he also finances the building of real estate as a “side hustle." Munger has previously financed and designed student residence halls at the University of Michigan and UC Santa Barbara. Some of his projects have been criticized for their windowless design, but that's another story.
In 1989, Munger developed the coastal Sea Meadow community in the swanky town of Montecito. This area has an average home sale value of $5.5 million today and is home to celebrities such as Oprah and Ariana Grande. Munger recently returned to Sea Meadow and purchased a second home worth an estimated $11 million. Munger has also invested into Redlands, California previously, hence the talk at this event.
Munger said a key trait to his success in real estate is he focuses on actually caring for the properties. He criticizes many apartment management companies which just milk the properties. In the first year, Munger spent an estimated $600,000 on just trees to make the area look nicer. Although this is a great thing to do, Munger admits there is also financial interest. He likes to identify projects where a “confluence of two factors," namely doing good and being profitable, work together seamlessly.
Munger also believes you don’t need to be a genius to do well in real estate. He admits to using “old-fashioned horse common sense and a little arithmetic” to be successful. Although, it is clear both Munger and Buffett are very humble about their success traits. They make the exceptional look easy.
Similar to stocks, with real estate investing you make your money when you buy it… if you paid below fair value. There are a couple of extra factors I personally love about real estate investing, the first of which is cash flow from rental income. The second is you can “add value” to the property and market it better in order to obtain a higher selling price. However, with stocks, this is of course not possible, except for investment banks helping with a company IPO.
Importance of having fun in business
Both Buffett and Munger have always expressed the importance of having “fun” in business and life. Buffett has stated in the past he “tap dances to work.” In this interview, Munger stated he has had fun fixing up apartments and reselling them.
He believes “the best way to get what you want in life is to deserve what you want,." In business, this means taking care of the customers and clients in order to generate goodwill and referrals for the future.
Success hacks
There are many so-called "hacks" to Munger's success. A notable hack Munger uses regularly is “inversion." When he wants to solve a problem, he simply flips it around. A notable time Munger used this tactic was when he was a weatherman in the Airforce. He asked what risks would kill the pilots, then he highlighted that type of weather pattern as a focused area to avoid.
Munger’s general happiness has also been helped by letting go of hate and resentment because it has no benefit to the bearer. Munger also recommends falling in love with problem-solving as this can be a huge advantage in life. I personally agree and have gotten through college and my previous careers by tricking my brain into being interested in even the most dry subjects.
Specialist or generalist?
Munger is a modern-day renaissance man and a true “generalist” at heart. His knowledge includes investing, architecture, law, science, psychology and much more. Munger believes its a great idea to know the “big ideas” in all the major disciplines. However, he does believe being a “specialist” is the safest way up for most people. For example, a specialist surgeon knows “more and more, about less and less," but often gets paid more as a result.
The power of reading
Munger believes reading lots has enormously helped him to be successful. He reportedly reads a “book a day," but usually “skim reads” mostly these days. Munger tends to read factual non-fiction books as opposed fiction books, which are often more entertaining. He believes the most important thing is to “learn the method of learning.”
Final thoughts
Munger is a 99 -year-old billionaire who still takes time to reveal insights into his brilliant mind. Munger recognizes that success and happiness in life aren't easy, but if we can start with avoiding bad habits and half the battle is done. The stock market is challenging to predict in the short term, but in the long term, buying assets below intrinsic value has proven to be successful in both the stock market and real estate.
