How to become a billionaire investor

Charlie Munger has had a tremendous influence on Buffett's investment decisions.Many credit Munger as helping Buffett move away from the "cigar butt" style of investing to one where there is a constant emphasis on buying quality businesses.Here is a old Munger lecture from Harvard Law Bulletin where he shares his insights into investing.Sometimes the best investment advice comes from value investors such as Charlie Munger rather than overpaid financial planners.

In the Money

Alumni financiers take stock of the market and careers spent trying to beat it

By Margie Kelley
[Summer 2001]

Charlie Munger gave up law to pursue his fortunes as an investor. Jim Cramer never even tried to be a lawyer, and went straight to Wall Street. Jim Donovan and Todd Buchholz saw law school as an imperative step on the road to a successful business career. Sean Healey, who once dreamed of teaching law, discovered his place was in the investment world instead.

But these five HLS alumni would never say they abandoned their legal training. They just redirected it toward the place they each found more alluring: the world of high finance.

Today, they have nearly 100 years of combined experience in investing and business, and have been responsible for billions of dollars in assets. Each is wealthy in his own right and has, directly or indirectly, helped others to become quite comfortable too. And while each is at a different place in his career--one is more than half a century out of HLS, another not even ten years--all share an appetite for taking big risks for big gains. Yet, they also possess the coolheaded confidence that is essential when millions are at stake on a regular basis and market fluctuations send shivers down Wall Street.

Investment Values

The cultish devotion of Berkshire Hathaway shareholders is legendary in the financial world. After all, more than a few people have become independently wealthy as a result of the investing genius of CEO Warren Buffett.

But while Buffett's name alone has long been synonymous with Berkshire Hathaway, there is one person in the company even he looks up to: his partner and old friend from Omaha, Charlie Munger '48.

"I call myself the assistant cult leader," joked Munger.

The pair has had a prosperous partnership--spanning four decades--and they've done more together than just build a holding company worth billions. They have been stalwarts of ethical business practices, have rooted out fraud, and have even championed abortion rights and the establishment of Planned Parenthood.

Primarily involved in property and casualty insurance, Berkshire Hathaway has smaller holdings in publishing, candy, footwear, and furniture. By the end of 2000, its revenues had ncreased to $34 billion, its profits to almost $3 billion. Shares in Berkshire, just $12 each in 1965, hit $71,000 by year's end.

Munger, who is Berkshire's vice chairman, now finds himself a very wealthy man. A voracious reader and devotee of great thinkers like Ben Franklin and Samuel Johnson, he credits their wisdom for his success. "They were both utterly brilliant men. And powerful communicators. Both have helped me all the way through life. Their lessons are easy to assimilate."

Berkshire has its own interesting lessons for the world, he says, and they come from the company's high standard of ethics and its bottom-line achievements.

"I'm proud to be associated with the value system at Berkshire Hathaway," Munger said. "I think you'll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich--who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich--in money--not just in reputation."

Even so, Munger does not pretend that what he and Buffett have accomplished is just a matter of being good guys. It also takes sharp wits, strategy, and a lot of discipline. Still, Munger contends that more people could do well in investing than actually do, if they'd employ some of the basic "mental methods" he and Buffett have used.

"The number one idea," he said, "is to view a stock as an ownership of the business [and] to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than 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 bet only when the odds are in your favor."

And Berkshire, he says, is not in the business of making money by calling macroeconomic swings. "We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years."

At 77, Munger is busier than ever. Aside from his work with Buffett, he is chairman of the L.A.-based legal publisher the Daily Journal Corporation and CEO of Wesco Financial Co., a subsidiary of Berkshire Hathaway. He has a large family and spends a great deal of time with his wife, children, and grandchildren. He's also a long-standing philanthropist who has bolstered education and health care causes in Los Angeles, where he has lived for five decades.

Munger quit practicing law in 1965 after 17 years, because "sometimes you're on the wrong side. Often you're dealing with unreasonable people where you can't fix things fast. It's inefficient. I like the discipline of backing my own judgments with my own money. It suits my temperament better. Of course, I also realized that the upper potentialities were better outside of law."

Now a billionaire, Munger seems somewhat surprised by just how successful he has been in his life. When he graduated from HLS, Munger said, "Practically nobody expected to be rich, or had any examples that would lead him to expect to be rich. That has totally changed. We've had the most massive creation of wealth for people a lot younger than those who formerly got wealth in the history of the world. The world is full of young people who really want to get rich, and in those days nobody thought it was a reasonable possibility."

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