You’ve probably heard the story about Warren
Buffett and his wildly successful Berkshire Hathaway but have you heard the story about
his right-hand man Charlie Munger? Charlie Munger has been the vice-chairman of
Berkshire Hathaway since 1978, but before joining Warren Buffett
he was a successful lawyer, real estate developer, stock market
investor and … hamster breeder? More on this later. Charlie Munger has often said that the most difficult
part of becoming financially independent is to get a hold of those first
$100,000 or $1,000,000. Today, both Charlie Munger and Warren Buffett
are two of the world’s richest men, and none of them inherited their
wealth, they’re both self-made. Also, they’ve both been wildly successful
as stock market investors. A little-known fact about Charlie Munger,
which we’ll talk about more later, is that he operated an investment partnership in the
60s and 70s which has a greater track record than recently acclaimed investors such as Cathie Wood
and even legendary investors such as Peter Lynch. I’ve made a video about how Warren Buffett
made his first $1,000,000 before. While it is basically impossible to even imagine
a straighter path to that tricky first million than the one Buffett took,
Munger’s was a bit rougher. For most of us, and Munger was no exception,
life happens, and the accumulation of wealth may be temporarily interrupted or even take
a U-turn due to unexpected circumstances. Therefore, I think you’ll find that the story about
how Charlie Munger became a millionaire makes for a great complement
to the story of Waren Buffett. This is the Swedish Investor, bringing you the best tips
and tools for reaching financial freedom through stock market investing. Charlie Munger was born on January 1st, 1924
in Omaha, Nebraska, but our story begins in 1930. Munger & Range Perhaps you’ve heard about the would-be golf player
who was taught by his single-digit handicap father how to handle a golf club basically, before he had even
learned how to walk? Who won the Junior World
Championship six times? Who today is tied for the most
PGA tour wins in history? Or maybe you’ve heard about the three daughters of
the father who was determined that he could turn any healthy child into a genius as long as
they were highly specialized by age six. He chose chess for his three daughters and drilled them
intensely until they became the greatest in history. These are the stories of Tiger Woods and
Susan, Sofia and Judit Polgar. They owe their success in life to an early, intense
and narrow focus on a single study. Charlie Munger’s success story
couldn’t be further from this. Munger’s achievements stem from intensive study too,
but instead of being narrowly focused, it span across a wide range of subjects. Munger was moved ahead in Elementary School
due to a fair bit of home-schooling in reading by his mother, Florence Munger. He was known by his teachers
as something of a smartass. Munger didn’t particularly idolize his teachers
as he thought he had found better ones in the many biographies which
his parents bought for him. “Make friends among the eminent dead” is
one of Munger’s most famous quotes and he himself made friends with famous (dead)
writers such as Mark Twain, former American presidents such as Benjamin Franklin
(also dead), and everything in between. Munger has said that for complex and broad
subjects such as stock market investing, a range of skills is required. Though he didn’t necessarily realize this at the time
when he was 6 years old reading biographies which he had received for Christmas. Munger himself has said that: “In my whole life, I have known no wise people
over a broad subject matter area who didn’t read all the time – none, zero.” He is oftentimes referred to as “book-with-legs” Munger the Hamster Breeder Collecting things have always
been human nature. In the 90s, when I grew up, it was
all about Pokémon cards. My parents thought it was a terribly wasteful thing
to do to spend my money on these pieces of paper. I didn’t agree, maybe because
it wasn’t actually my money. In the 30s parents had completely
different things to complain about. A young Charlie Munger was a breeder and
collector of hamsters, yes, the living kind, and at the peak of his collective-days he had as
many as 35 of them living in the family basement. It was cool to have different colours and sizes of
these rodents, so the kids traded them with each other. Apparently, at 35, Charlie’s mother had had enough
and she made him get rid of them. Munger & Buffett’s Grandfather As a young teenager, Charlie Munger worked at
Warren Buffett’s grandfather Ernest’s grocery store. Ernest was very strict – he made young boys
such as Munger work 12-hour shifts without meals or breaks at
the very modest salary of $2. No, not $2 per hour, $2 for the whole day. Charlie used to work here during Saturdays,
so we can use this information to make our first estimate on how far he’d come towards
that first million dollars at this point. Let’s say that his savings ratio
was something like 50%. While I haven’t found any information specifying
exactly how long Munger stayed at the grocery store we could expect that he had something like
$100 saved at the age of 14 in 1938. Due to inflation, this is equal to
more than $1,800 today. Munger has later said that the experience at the
grocery store taught him a valuable life lesson: he needed an easier career. Apparently, Warren Buffett learned the same thing
when he worked in the shop years later. Munger & High School Munger enrolled at the Central High School, a large public school in 1938. Had he been born just a few decades earlier,
we might never had seen a Charlie Munger, as high schools had just
become mainstream in the US. During the period 1910-1940, the number of
15-18 year-olds enrolled in secondary school increased from only 18% to a whopping 73%. Charlie did come from a family of judges and lawyers
though so had he been born a few years earlier he may have belonged to
those lucky 18%, but still. Munger & Physics After graduating from Central High School, Charlie Munger left Omaha and
never looked back. In 1941, at the age of 17, he attended
the University of Michigan where he chose to major in mathematics. Charlie also happened to
enroll in a course in physics and was fascinated with the
problem-solving process there. Answers to questions were given in
the most fundamental way possible. Isaac Newton said that force equals
mass times acceleration. Warren Buffett says that the value of a business
equals the value of its cashflows from now until judgement day. Charlie Munger say that you marry
the best person who is convenient to find and, perhaps most importantly,
who will have you back. Munger the Lieutenant Unsurprisingly, during this period in time, the demand for men for
military service was high and after two years at Michigan,
Charlie enlisted in the Army Air Corps. This was shortly after his 19th birthday. The program would make him a second lieutenant. For a time he studied meteorology, which was
deemed essential to flyers and the time, and he did this at the prestigious university of
California Institute of Technology in Pasadena, also known as Caltech. The acceptance rate to the university
today is approximately 6%. While a few of Charlie’s comrades in the army weren’t
as lucky, Munger himself got dispatched to Alaska. The war wasn’t exactly raging here, and Munger
acquired two important skills as a pleasant surprise. During his military service,
he learned how to play poker. Poker is a game where you must learn to calculate
odds and apply a probabilistic mindset, while simultaneously staying
very opportunistic. Typically, the odds are stacked against you, and
you must learn to throw away most of your hands. However, when the odds
are clearly in your favor, you must realize that opportunities don’t
come very often, so you should bet big. This isn’t just a good lesson in poker,
and of course, what I’m trying to hint at here for investing, it’s a good
lesson for life in general. Munger & Nancy While in the military Munger got married
to a girl named Nancy Huggins, who was introduced to him
through his younger sister. Warren Buffett actually found
his first wife the same way, so I guess I’m probably screwed as an investor
as I found my girlfriend through Tinder. With the 2nd World War ongoing and a constant
threat of long or even permanent separation looming young love became wildly
glamorized by the public. If you’ve seen the movie Pearl Harbor
you’ll know just what I mean. I told you I’d come back. And when it came to love, Munger wasn’t perhaps
contrarian enough for his own good, as this marriage, at least in hindsight,
seems to have been a bit rushed. They got married in 1945 – he 21 and she 19. If there was any material wealth to Charlie’s name
at this point he has failed to mention it. While Charlie knew that compound interest
was a force to be reckoned with, and that, until now, he had kind of let it slip away,
he had been compounding something else. He had been compounding knowledge. And soon enough he was going to leverage
this knowledge to make himself a buck. Munger the Harvard student Charlie’s grandfather Thomas
Charles Munger was a federal judge and Charlie’s father Alfred Munger was a lawyer, so one can say that the next step in
Charlie’s journey was more or less inevitable. He has said himself that “he was born into it”. In 1946 Charlie attended Harvard Law School. He was facing some difficulties getting in as
he didn’t have an undergraduate degree, but he was helped by family friend Roscoe Pound
who used to be the dean of the school. I know, quite practical to have
connections like that. However, he definitely deserved to be there and graduated
in 1948 among the top I think 3%-ish of his class. Munger the Lawyer From here, it was game on. Munger passed the California Bar, a requirement
for lawyers in that jurisdiction, in 1949 and joined the firm Wright & Garrett, now known as
Musick, Peeler & Garrett, in Los Angeles. At this point, he was 25 years old and had saved up
$1,500 and his salary was $275 a month. The median income for the American household
in 1949 was $260 per month. Munger the investor Being an attorney was a foot-in-the-door
for other types of projects, especially for someone as
well-rounded as Munger. In the early 50s, some of the specific dates are
a bit uncertain throughout this story, Munger had a client called Ed Hoskins who
owned a business called Transformer Engineers. The business made highly specialized
transformers for military equipment, which had seen a boom in
demand during the Korean War. After Hoskins and his venture capitalist
investors had a disagreement, Munger saw an opportunity
to invest in the business. The primary lesson from this early investment of
Munger is probably a “via negativa” one – understanding what not to do. Because no sooner than Munger had invested,
the Korean War ended, and the demand for the products of
Transformer Engineers dropped drastically. The lesson? Do not invest in a sloppy business. Munger likes to say that: “The difference between a good
business and a bad business is that good businesses throw up one
easy decision after another. The bad business throws up painful
decisions time after time.” Warren Buffet likes to say that: “When a manager with a reputation for brilliance tackles
a business with a reputation for bad economics it is the reputation of the business
that remains intact.” Hoskins and Munger did manage to sell the
business at a nice profit eventually, in 1961, but only after many years of hardship. The importance of this investment cannot be overstated
as it taught Munger to focus on quality businesses. This would not only allow Munger himself to later create
better returns than people like Peter Lynch and Cathie Wood, it also shaped Warren Buffett’s investment
philosophy to allow him and Munger combined to create the best investment
track-record in history. Munger & Setbacks As stated in the intro of this video, Munger’s path
to his first million wasn’t as linear as Buffett’s and in 1953, Munger had
his first real setback. He and Nancy Huggins had a divorce, and,
as Charlie’s daughter, Molly would recall later, he lost nearly everything
in this separation. Nancy kept the house and the children while Munger
moved into a bachelor accommodation nearby. Also, it appears that the divorce wasn’t
really Charlie’s initiative either. As if that wasn’t enough, Charlie’s son Teddy
got ill with leukemia soon thereafter. Leukaemia back in those days was essentially
a death-sentence, there wasn’t much to do about it. Medical bills weren’t covered by any insurance either
and Charlie was watching his son slowly slip away. Teddy died in 1955. After such a massive hit both mentally and financially,
most people would probably not recover. But this is something which
amazes me about Charlies story. Because Charlie had just begun. “You should never when facing some
unbelievable tragedy, let one tragedy increase to two or
three through your failure of will.” Munger’s Many Mental Models The previous quote is just a stunning example of
someone who is able to see the world as it is, without letting emotions or
biases steer one’s actions. How? How is Munger able to think like this even under
the toughest of circumstances? I think that partly at least, the answer lies in the
fact that Munger has a number of mental models through which he views the world and
analyses particular situations. I will now give you six such models which I know that
Munger has been using it extensively throughout his life. You are going to get a ton of takeaways
in quite a fast pace, so listen up. In fact, the first mental model
has already been revealed – it’s to have many mental models. I know, quite meta. Munger says that “to the man with a hammer
every problem seems to look like a nail”. Occam’s Razor Occam’s Razor is the concept that less is more. Consider this statement: “He is a bad person because
he is a terrible driver he has bad breath, and
he also killed a guy”. Wouldn’t it have been easier (and more accurate) to just
state that he is a bad person because he killed a guy? In many situations, less is more, and you should
always try to narrow problems and their conclusions down to avoid noise. Opportunity costs If you invest your money in company A, you cannot simultaneously invest
that same money in company B. It means that you have a trade-off,
a choice to make. Munger argues that investing is basically the task
of achieving the highest possible opportunity cost. Maybe company A seems attractive
if you only compare it to company B, but boy, if you had known about company C, you would never even have
a look at company A again. LollapaloozaA Lollapalooza effect is achieved when enough
positive variables are combined together. 1+1 suddenly isn’t 2 anymore, but 3. And 1+1+1 isn’t 3 but rather 6 or 7. One could view it as the
compounding of positives. For example, Charlie argues that Coca Cola
has been such a tremendous success because it was able to combine a great product with
powerful stimulants, clever marketing, ease of availability and social proofing. Remove one of these 5 and Coke’s popularity
may fall to that of … Dr. Pepper’s. Remove two and Coke wouldn’t be
on the market at all. Staying opportunistic Most people aren’t lucky enough to have a ton of
opportunities just thrown upon them all the time, so for god’s sake, don’t hang
back like a timid little rabbit when opportunity actually
does present itself. If you remove the 20 best transactions from
Berkshire Hathaway, like GEICO, See’s Candies, Coke, The Washington Post,
National Indemnity etc. its track record would have
been a complete joke. “Invert, always invert” This is one of Charlie Munger’s
favourite lines, coupled with: “All I want to know is where I'm
going to die, so I'll never go there.” To invert something means
to reverse engineer it. It means starting with the end-goal in mind
so that you can then decide how to get there. In the case of Munger’s line it’s of course
with the intent of not getting there. If you think about it, this whole video is inverted. Reaching $1,000,000 is the end goal and we are now
looking at an example of how an investor can achieve that. Invert, always invert. There are many more models which Charlie uses,
such as: using a margin of safety, staying within your circle of competence,
mean reversion etc. So I might have to make a video of its
own about this topic at some point. If you’d like to see such a video in the future, please do me
a favor and like this video for the YouTube algorithm. Also, please comment
“Make Munger’s Models!” down below. Munger & Nancy While I might sound like a broken record now, this is actually a new event in Munger’s life. In 1955, Charlie met Nancy #2,
Nancy BarryBorthwick. They were married in 1956
when Charlie was 32. Charlie had two daughters and Nancy had
two boys from a previous marriage, so you could say that Charlie’s family grew through
mergers and acquisitions at this time. Later, there would be some organic growth too
as the two had four new children together. By the way, I do not recommend
this type of breeding-strategy if you want to reach your first
$1,000,000 as fast as possible. Munger & Buffett Even though Charlie Munger and Warren
Buffett both were from Omaha, and they had both worked at Buffett’s
grandfather Ernest’s grocery store they had never met in person. Well, not until now at least. In 1959 they were introduced to each other through
mutual friends when Munger was returning to Omaha to take care of
his father’s estate. Munger & Buffett hit it off immediately,
and as you say, the rest is history. It has often been emphasized, both on
this channel and elsewhere, how influential Charlie Munger was
for Warren Buffett’s career. And well, as Warren Buffett is the most successful
investor through history, I guess that makes sense. Before Warren Buffett met Charlie Munger,
he had been limiting his investing almost exclusively to something which his mentor
Benjamin Graham referred to as “Cigar Butts”. Companies that were incredibly cheap, but
at the same time, companies with financial metrics that only a mother could love. There are two factors to consider in the investing
process according to Munger: Quality and price. The trick is to get more quality
than you pay for in price. Munger was ready to pay a higher price as long
as he could get outstanding quality, while Buffett had been schooled to get just some
quality, but on the condition that it was very cheap. Charlie, because of his prior experience with
Transformers Engineers had a different viewpoint here and soon Buffett was listening to him. However, Buffett probably had an
even greater influence on Munger, and this hasn’t been discussed
as frequently at all. In fact, you can probably argue that Buffett was
the reason as to why Munger eventually left law and started to focus on investing full-time. He told Charlie that: “Law is fine as a hobby
but I think you can do better.” Munger the Real Estate Developer Real estate as an alternative to investing in
the stock market is something which Munger, in his early days, focused on much
more intensively than Buffett did. In a 2006 Berkshire Hathaway annual shareholder
meeting, Buffett explains what was so attractive about this field to Munger in the 1960s: Charlie started out, you know, in real estate
development because it took very, very little capital, and you could magnify brainpower and energy -- or, I should say, brainpower and energy
could magnify small amounts of capital in a huge way that was not true insecurities. Real estate development – the process of buying land,
building something on it and then selling it – is truly something which can have
a high return on capital if it is done right. It is more of an entrepreneurial
endeavour than investing is, but Charlie Munger had
a knack for this too. All-in-all, Munger made five different deals in
Los Angeles over approximately a decade. The first project was when he and Nancy bought
their first family home together in 1960. They bought a property on
June Street in HancockPark, brought in the wrecking ball to demolish
the old house standing there and sold off a part of the
property as a new lot. Then they built a house for
their family on the other. The second project, which was a lot more ambitious
in its scope, was brought to Charlie through his work as a lawyer. Munger was working for
a man named Otis Booth and he couldn’t keep himself from giving
business advice to Otis too. Otis Booth’s grandfather had owned a property nearby
Caltech where Munger previously had studied. Booth’s father didn’t think they had any use of
the property and so he wanted to sell it. Munger was going to handle the probate
settlement but he had seen that, due to the explosive growth that was
happening in Los Angeles at the time, land developers were
getting rich quickly. And so he advised his clients to build their
own apartments on the property instead, and sell it only later. Otis said that if you think this is
such a good idea Charlie, you should join us with your own money. Charlie agreed and the project was
finished in 1967. It took some time, but they got $500,000
back on a $100,000 investment. Meanwhile, Charlie started his third and fourth
projects with a fellow named Al Marshall. Al Marshall and Charlie invested in properties
near a shopping centre in Alhambra and in additional ones on Huntington Drive,
close to San Marino. Also, after the Caltech project was finished
he did another one with Otis Booth where they applied some of the
learnings from their first one. They had noticed that the ground-floor
apartments were selling like crazy so they decided to focus on that entirely. And … on trees: “Lush landscaping.
That is what sells. You spend money on trees,
and you get back triple.” Guess I was wrong in a sense before, when I hinted
that opportunities do not grow on trees. Charlie Munger did get really wealthy from these
efforts, but we’re getting ahead of ourselves a little bit. Munger – One Foot Out In 1962, aged 38, Munger quit his job
as a lawyer at Wright & Garrett. While Buffett’s clever remark that “Law is fine as a hobby
but I think you can do better” may have had some impact I think the three main reasons as to why Munger
decided to change his career were these: Firstly, Munger had been told
the following by a senior partner: Your duty is to be nomore than the
3rd smartest person in the room. The client is the smartest. I’m the 2nd smartest. Only after that can any cleverness
seem to come from you. This wasn’t Munger’s
style to say the least. Heck, - even Howard Buffett,
Warren’s first-born son, has said that his father is just the
2nd smartest person he knows. Munger is the smartest. Secondly, Munger had noticed a built-in
problem with the profession. The people he enjoyed working for
didn’t get into much trouble, and therefore didn’t generate any work. Meanwhile, the dishonest and distasteful people
got into lots of trouble and generated lots of work but Munger didn’t really want to spend
his time with these people. Thirdly, lawyers face a magnified keeping up
with the Joneses problem. You could call it “keeping up
with the super-Joneses”. Many of the clients of lawyers are wealthy
entrepreneurs who are building up assets in the form of businesses for themselves. Even though lawyers can
get really well-paid, they are typically not building
assets of similar sorts, especially not if they try to compete with
their clients for fancy material stuff. In 1962, after 13 years as a professional lawyer,
Munger allegedly had some $300,000 to his name. He had earned at least half of this
from his investment activities. Before getting out of the business completely in 1965,
he did manage to start a new firm together with a few colleges
from his previous job though. It is now known as Munger, Tolles & Olson
and it is a very successful law firm even today and a quite picky one too. If you didn’t graduate top of your
class from an elite college, you can pretty much
forget about applying here. Munger the Sage of Securities Munger must have had
a terribly busy year in 1962 because besides starting a law firm,
doing real estate development, and producing kids with Nancy, he also decided
to set up an investment partnership, not unlike the one that
Warren Buffett already had. Together with a fellow named Jack Wheeler,
later replaced by Al Marshall, he created Wheeler, Munger & Co. They were joined by some outside investors, but didn’t really focus on expanding
the business in that matter. Here are the yearly results of the investment
returns of the partnership from 1962-1975, compared to the S&P 500
during the same period: Munger’s partnership compounded
at 19.8% per year for 14 years. That is quite impressive, but it is even more
impressive when you consider that the S&P 500 compounded at just 5.9%, with
dividends reinvested, during the same period. It is even so impressive that it beats the legendary
investor Peter Lynch and his track record at the Fidelity Magellan fund
during1977-1990, when you look at relative
performance vs the S&P 500. And it is better than the track record of Cathie Wood
when you look at her Ark Innovation ETF from 2015-2020 and combine it with her
previous management at AliceBernstein’s Strategic
Research from 2006-2013. Unfortunately, there isn’t much
public information available regarding the investments that were
made in the partnerships, but I’ve snapped up some
bits and pieces for you: Alice Schroeder describes in her book “TheSnowball”
that Munger did a huge trade in British Columbia Power, which was selling at around $19 and was being
taken over by the Canadian government at $22. Allegedly, Munger put up all the money of the
partnership and then some in this deal, but only because he was basically
certain that this couldn’t go wrong. Munger’s propensity to leverage his bets
caused his partnership to lag way behind the index in the bear market of 1973-1974, but as you can see,
he made up for it. He had the attitude that if you aren’t rich already,
you might as well take some risk, given favourable odds, to get rich. Another deal comes from Janet Lowe’s
book “Damn Right! Behind the Scenes with Berkshire Hathaway
Billionaire Charlie Munger”. Charlie bought into a company called Fund of Letters,
which was a closed-end investment fund trading at a substantial
discount to its assets, in other words, it was a Benjamin Graham play. Finally, from researching Warren Buffett’s
25 most important investments of all time, I know that Buffett’s and Wheeler & Munger’s
holdings overlapped at times – for example in the companies Diversified Retailing,
BlueChip Stamps & See’s Candies. Munger: Becoming a Millionaire When everything was said and done with
Munger’s real estate developments, he had some $1.4 million
from these activities. It isn’t clear exactly which year
Munger quit this endeavor, and obviously, he became a millionaire some
time before as he also had assets elsewhere, but I think it is safe to say
that it was around 1967. Even though there were some tough
setbacks along the way, Charlie Munger became a millionaire
in his early forties. And there you have it! Let’s have a super-fast recap. Charlie Munger became a millionaire by:
Reading, breeding ham … . Nah, probably not. Learning about odds and probabilities, working as a lawyer, learning the difference between
a good and a bad business, seizing opportunities to create
powerful connections, developing real estate and taking
quite big risks investing with leverage. If you haven’t yet seen how Warren Buffett
became a millionaire even quicker than Charlie Munger did,
check out this video. As Warren Buffett has said: there’s more
than one way to get to investing-heaven. Until next time! Cheers!
muy bueno!