One of my favourite investment thinker and theorist is Charlie Munger. And if you have read any of his investment pieces or listened to any of his interviews, you would understand why. Mr Munger is a stern believer that an investor would be better served by focusing on better quality businesses, even if the price were higher, because those businesses could be held for decades, continually churning out cash and profits for the owners. This level of thinking rubbed off on his long-time business partner, none other than the legendary Warren Buffet, and led to Buffet acquiring stakes in quality companies such as Coca Cola and shunning the “cigar butt” deep value type of companies. And as seen from the results Buffet has achieved from his illustrious career, this investment strategy does work.
Charlie Munger is a firm believer that anyone could get rich through investing. In his book Poor Charlie’s Almanack, Munger sets out a formula or strategy fro anyone willing to do so:
- Spend less than you earn
- Put the difference in a tax-advantaged account such as a pension fund (or an ISA).
- Buy shares of businesses with durable competitive advantages that generate high returns on equity with little or no debt. Only pay a reasonable price. Do not overpay.
- Reinvest your money and over several decades, compounding will do the work for you.
It is really that simple.
Mr Munger insisted one of the biggest mistakes investors make is they underestimate how difficult it is to earn a good return on capital over decades. The nature of the way capitalistic model works is that when a company enjoys high returns on capital employed, competition will inevitably follow as other investors and business owners try to get in on the action. Eventually, equilibrium is reached and companies will go from achieving above average returns and profits to sub-standard return on money.
This is why Charlie Munger focusses on finding excellent businesses with durable competitive advantages so that the company in question can continue earning above average returns with little threat of competition.
This culminated in his modified value investing approach, which was insightful and wise. He concluded that value investing is a better way to manage money but if one is forced to spend his entire life staring at ticker tape instead of reading, spending time with family, or pursuing the things you love, the sacrifice isn’t worth it, no matter how rich it makes you. You don’t want to waste your life consistently following companies and buying in and out of deep value plays.
By turning your attention fairly priced excellent businesses, you can live your life as your money compounds through growth in the underlying company. This drastically cuts down on the number of buy and sell decisions you have to make. Simply put together a collection of great companies, chosen over time as attractive prices present themselves in the market, and hold on for decades. This will enable a person to claim back their time whilst still enjoying the excellent compounded returns that great businesses provide.
As evidence, Munger points out that a single share of Coca-Cola purchased for $19 in 1919 is now worth more than $5,000,000 if you had reinvested the dividends. A $10,000 investment in Wal-Mart Stores when it went public is now worth more than $10,000,000. By broadening the definition of value investing to include businesses that earn high returns on equity without a lot of leverage in the capitalisation structure, Charlie found a better way to apply Graham’s value investing theory to real-world practice. I think we can all learn from Charlie.
This is there reason I have invested in companies such as Imperial Brands, Royal Dutch Shell, Unilever and Visa. The shares I have bought in these companies are meant to be long term buy and hold position. The peace of mind this gives me cannot be underestimated as once I bought into these companies, I do not have to do anything else. I will let the management and the excellent economic engines of these businesses do all the hard work whilst I sit back and collect the returns!