Charlie Munger Value Investing Strategy

Charlie Munger, the Vice Chairman of Berkshire Hathaway, former hedge fund manager, and billionaire value investor, was instrumental in changing Warren Buffett’s way of thinking about value investing.

Charlie insisted that the investor would be better served by focusing on better quality businesses, even if the price were higher, because those businesses could be held for decades, continually churning out cash and profits for the owners. In fact, it was this influence that resulted in Berkshire Hathaway shifting from acquiring undervalued “cigar butt” companies such the textile mills for which the firm was named to high-quality companies such as Coca-Cola.

In the book about his value investing philosophy, Poor Charlie’s Almanack, Munger discussed how easy it was to grow rich.  His formula was:

  • Spend less than you earn
  • Put the difference in a tax-advantaged account such as a 401(k), IRA, or pension fund

Charlie Munger’s Modified Value Investing Strategy

Charlie insisted one of the biggest mistakes investors make is they underestimate how difficult it is to earn a good return on capital over decades.  The nature of capitalism is that when a company enjoys high returns on capital employed, competition will inevitably follow as other investors and business owners try to get in on the action.  Eventually, equilibrium is reached and a field will earn mediocre, or sub-standard, returns on money.

[mainbodyad]That’s why Charlie was focused on finding excellent businesses with durable competitive advantages that made it difficult for competitors to hurt the bottom line.  This culminated in his modified value investing approach, which was insightful and wise.  He concluded that value investing is a better way to manage money but if one is forced to spend his entire life staring at ticker tape instead of reading, spending time with family, or pursuing the things you love, the sacrifice isn’t worth it, no matter how rich it makes you.



Header Image Editorial Credit: Kent Sievers /