How Charlie Munger saw the global financial crisis looming
The quiet man of the Berkshire Hathaway double act, Charlie Munger usually let Warren Buffett do the talking, but in May 2008, he couldn’t keep a lid on his unease.
It was May 2008 and the 84-year-old Charlie Munger was worried.
Better known as the long-time partner of billionaire investor Warren Buffett, Munger, who passed away on Tuesday at the age of 99, was always the quiet one at the Berkshire Hathaway meetings in a basketball stadium cum convention centre in Omaha, Nebraska, each May.
After his friend Buffett had given an entertaining discourse in answer to a question, Munger would sit on the stage next to him, often munching See’s candies and sipping Coke – one of the many businesses owned by the conglomerate – often saying, dryly: “I have nothing to add.”
But in years gone past, there was a diehard group of Berkshire Hathaway followers who would head to Munger’s home town of Pasadena, a few days later, for the annual meeting of Munger’s company, Wesgo, to hear more of what he had to say.
Answering questions from the floor in 2008, in his much more direct, acerbic manner than Buffett, Munger was clearly worried about the state of financial markets.
He kept warning of the dangers of “mark to market” – that if there was to be a downturn in financial markets companies and banks would need to downgrade the value of their assets, which could see markets tumbling down in a downward spiral.
Buffett has always been a cheerleader for the US economy, conscious that investors hang on his every word, which can move markets. But Munger, who studied mathematics and graduated from Harvard Law School, has always been more direct – and more politically incorrect.
I left the meeting with a clear sense of unease. While Munger kept talking about “mark to market”, it was clear that he had a much broader concern about financial markets that he couldn’t quite articulate.
Months later, friends in the banking and financial markets were facing a new crisis – as global liquidity dried up in the wake of the subprime mortgage crisis and the collapse of Lehman Brothers.
Munger stopped his individual meetings in Pasadena after that, his age being a factor, and his interest in dealing with the public much less than the outgoing
At the 2008, Berkshire Hathaway annual meeting the weekend before, attendees had all crowded around an electric car on display, made by Chinese company BYD, and wondered when these space-age vehicles would ever come to America. It was Munger, a long-term enthusiast for China, who had convinced Buffett to buy into the company that is now the world’s biggest manufacturer of electric vehicles.
A few years later, in 2014, I attended the 50th anniversary meeting of Berkshire Hathaway as the two celebrated their amazing career in building up the conglomerate, which ranges from railroads and energy to candy, insurance, and housing.
It truly was a remarkable achievement. The pair developed a simple approach to investing – buy good companies at a fair price, look for companies which have big “moats” around them, don’t over leverage and always maintain enough cash on hand to get you through any downturn.
They rejected the virtues of “diversification”, calling it “deworsification” and insisted investors were better off backing fewer, good companies, particularly those with high-quality managers – and stick with them rather than try a scattergun approach to laying off risk. They are not traders, but investors who buy and hold. Berkshire Hathaway does not pay out a dividend.
Their down-to-earth, conservative approach to investing has seen them miss out, some say, on the tech boom, only more lately becoming investors in Apple.
The California-based Munger has always been more of a tech stock fan than Buffett.
The pair have very different backgrounds. Munger, the older one, was born in Omaha and worked in the grocery store owned by Buffett’s grandfather, Ernest Buffett, but after serving in the army, ended up in California becoming a lawyer.
Munger co-founded law firm, Munger Tolles & Olsen in the early sixties. Their friendship began in 1959 when Munger was on a visit back to his hometown.
While Munger was a supporter of the Republican Party (think George Bush Sr rather than Donald Trump), it was a testament to the open-mindedness of the firm that it went on to hire lawyer Jeff Bleich in 1992, promoting him to partner in 1995. Bleich went on to work with President Barack Obama and then become US ambassador to Australia.
Buffett has retained his Midwesterner background. He went to Columbia Business School in New York, where he studied under Benjamin Graham, before coming back home to Omaha.
Buffett credits Munger with getting him to drop his approach of looking for cheap unloved companies at bargain prices, or “cigar butts”, to instead invest in good companies selling at a reasonable price. But the reality may be more complicated than that, with the two of them continually challenging each other as they discussed investment ideas and developing their joint approach.
Their lifelong partnership provides good lessons to any would-be investor. Always sharpen your ideas by testing them out with someone else, hopefully a friend with similar values, but one who thinks a bit different to you and is smarter than you.
My interest in Berkshire Hathaway goes back to an interview with Buffett in his modest office in Omaha in 1985. At the time, I remember thinking that Berkshire Hathaway’s shares seemed too expensive to buy at $US2470 each.
Berkshire Hathaway A shares are now worth a cool $US546,869.
The no-nonsense Munger has been a long-time critic of derivatives, which he has criticised as “financial weapons of mass destruction”.
In December 2021, the then 97-year-old Munger was interviewed by Mark Nelson, executive chairman of fund manager Caledonia, a long-time Berkshire Hathaway fan, by video from his home for the annual Sohn Hearts & Minds conference.
In that interview, Munger repeated his sharp criticism of cryptocurrencies, praising China’s decision to ban them. He also spoke positively about BYD, describing it as “one of the best companies in the world”, which had gone from success to success as the global demand for electric vehicles took hold, but also singled out low-cost retailer Costco as a stock of interest.
Munger was a big fan of the push towards renewable energy. He was also a big fan of Australia, which he said had done well out of its trade relationship with China.
Munger is well known for some of his sharp comments and dry observations of the world. My favourite is: “Tell me where I am going to die, and I won’t go there.”
It is a comment I think about often when I listen to debates about superannuation and whether investors have enough money to retire on – and disparaging remarks that some Australians are dying with money left over in their super fund.
Munger found the answer to that question this week, dying in a California hospital, having inspired generations of people saving for the life they want to lead before they get to that place.
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