Real Estate & Retail

BULLS & BEARS: Buffett colleague Munger is also a man of wisdom

December 5, 2005

I am reading the book "Poor Charlie's Almanack," edited by Peter Kaufman. It's mostly a compilation of advice from Charlie Munger, vice chairman of Berkshire Hathaway and chairman of Wesco Financial, which is 80-percent owned by Berkshire. Munger, 81, owns Berkshire Hathaway stock worth $1.6 billion.

Like Berkshire Chairman Warren Buffett, Munger hails from Omaha and as a youngster worked at the Buffett and Son grocery owned by Warren's grandfather. The two were reacquainted in the early 1960s and became business partners at Berkshire Hathaway in 1975, when Blue Chip Stamps and Diversified Retailing, companies in which both men had an ownership interest, were merged into Berkshire.

The title of the book mimics Benjamin Franklin's "Poor Richard's Almanack," and is appropriate since Munger is passionate in his admiration of Franklin and has, in many ways, tried to emulate him.

Franklin was a voracious reader and Munger still is. Like Franklin, Munger can entertain a crowd spouting original maxims about life and business, sometimes laced with humor, to drive home a point.

At one Berkshire meeting, when asked about the value of stock market forecasts, Munger responded, "People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the kings hired the guy to look at the sheep guts. It happens over and over and over."

Aside from his sharp wit, Charlie Munger is known for his cutting criticism of unethical business practices-that is, when he has something to say. During the question session at the Berkshire Hathaway annual meetings, he regularly follows a long-winded Buffett answer with his trademark response, "I have nothing further to add," drawing a roar from the crowd.

Buffett has called him the "abominable no-man," referring to Munger's penchant for discarding most investment ideas.

But deep intellect is clear in Munger's writings. He describes how investors should strive to build a set of "mental models" from a variety of disciplines. Thinking through problems backward is a trait he finds useful, quoting the algebraist Carl Jacobi, who said, "Invert, always invert."

Wise decision-making also will draw on principles derived from such subjects as engineering, physics, chemistry and biology. In sum, this body of knowledge forms a "latticework" of ideas for clear and simple thinking. When they all come together, you get what Munger calls a "Lallapalooza effect."

When such a result occurs with an investment decision, Munger's counsel is to make a large, decisive bet. He has described his investment style as focused investing: "extreme patience combined with extreme decisiveness."

Charlie Munger has made money during his lifetime practicing law, investing in real estate, and making concentrated purchases of common stocks-or businesses that possess a competitive advantage and have wide economic "moats." The book contains 10 "talks" Munger has given. And if you ever get the chance to attend a function where Munger speaks his mind, I highly recommend it.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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