BUSINESS NEWS - You might have come across the news that Charlie Munger, the longstanding vice chairman of Berkshire Hathaway and a close associate of Warren Buffett, passed away last week at the age of 99.
There is a plethora of posts and articles on Munger and his life philosophies. I’d like to focus on a response he gave to a question from the Wall Street Journal in an interview he did a couple weeks before his passing.
WSJ - Q: If you were starting out today as an investor, are there any things you would do differently than you did back in the 1960s?
Munger: Conditions were quite different then, and there were a lot of what we used to call loaded laggards…. There were two or three times as much in assets per-share value as there was in stock-market value per share. Ben Graham taught us all to buy that kind of stuff. It was underpriced, and hold it as long as it was underpriced, then sell it when the price got more normal and buy another undervalued asset. And you could do that for about four decades in the aftermath of the 1930s Great Depression. That’s gone, all of that low-hanging fruit.
I think that the modern investor, to get ahead, almost has to get in a few stocks that are way above average…. They try and have a few Apples or Googles or so on, just to keep up, because they know that a significant percentage of all the gains that come to all the common stockholders combined is going to come from a few of these super competitors.
If you know Ben Graham, have a sense of what value investing is, and understand that 90% of stock market returns have come from a small group of companies over the past 30 years, feel free to stop reading and take the rest of the day off.
If not, I’m going to dig into this a bit -
Ben Graham was the father of value investing and the mentor or Warren Buffet. The value investor identified companies whose shares were underpriced, and then sold when the price came back to a more normal level.
This practice was more prevalent in the 60s and 70s, as market participants lacked comprehensive access to company data. Consequently, individuals like Buffett gained a competitive advantage over other investors by tapping into information about stocks that others simply didn't have.
Buffet built his early career on identifying these mispricing’s – he would invest heavily in underpriced stocks, wait for the price to normalize, and then sell and look for the next undervalued stock.
The world today is different to what it was back then. Everyone has full information. Immediately. Sometimes before it even comes out.
Think about what happened to the rand when the US ambassador accused South Africa of shipping arms to Russia. The rand blew out an hour before the ambassador made his accusation.
How did it know? Who sold so much of the rand as to cause it to blow out?
The point is that the days of identifying mispriced stocks are behind us.
Munger says that the majority of the growth to come in the future will come from a small group of ‘super competitors’. We see this idea made manifest in Berkshires share portfolio – 50% is made up of Apple stock. Apple is a ‘super competitor’.
This idea is quite different to the traditional ‘buy low and sell high’ philosophy. Perhaps it's time to let that philosophy go. Rather, Munger says we should focus on finding an above average company - a 'super competitor' - buy at a reasonable price, and then never sell.
RIP Charlie Munger
Matthew Matthee has a wealth management business that specialises in retirement planning and investments. He writes about financial markets, investments, and investor psychology. He holds a Masters Degree in Economics from Stellenbosch University and a Post Graduate Diploma in Financial Planning from UFS. MatthewM@gravitonwm.com
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