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Lesson From The Munger Partnership

By Rupert Hargreaves. Originally published at ValueWalk.

Before he became Warren Buffett’s right-hand man at Berkshire Hathaway, Charlie Munger ran his own investment partnership where he established an impressive track record for himself. In fact, the Munger partnership performance earned him a place in Warren Buffett’s now famous essay, The Superinvestors of Graham and Doddsville:

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Charlie Munger

“ … is the record of a friend of mine who is a Harvard Law graduate, who set up a major law firm. I ran into him in about 1960 and told him that law was fine as a hobby but he could do better. He set up a partnership quite the opposite of Walter’s. His portfolio was concentrated in very few securities and therefore, his record was much more volatile but it was based on the same discount-from-value approach. He was willing to accept greater peaks and valleys of performance, and he happens to be a fellow whose whole psyche goes toward concentration, with the results shown. Incidentally, this record belongs to Charlie Munger, my partner for a long time in the operation of Berkshire Hathaway. When he ran his partnership, however, his portfolio holdings were almost completely different from mine and the other fellows mentioned earlier.”

Between 1962 and 1975, the Munger partnership produced an overall compound annual return of 19.8% for his investors, compared to an annual return for the Dow Jones industrial average of 5% over the same period.

As Buffett noted in his essay, Charlie Munger ran his partnership in an entirely different way to the Oracle of Omaha’s. Unfortunately, unlike Buffett and his mentor, Benjamin Graham, Munger’s letters to his investment partners are not easy to find, so there’s not a huge amount of detail on his investment strategy available. However, Janet Lowe’s book, “Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger” does shed some light on his investment process.

Munger partnership
TEDizen, Flickr (CC BY-SA 2.0)

Lesson From The Munger Partnership

One of Munger’s largest investments was the Fund of Letter, a sort of venture capital fund that invested in a popular investment at the time, “letter stock,” a security sold without SEC registration and therefore not saleable for an extended period in ordinary stock market transactions. Structured as a closed-end registered investment company, the firm soon traded well below net asset value and as the market fell in the 70s, the fund tanked along with it. Charlie Munger helped out by Rick Guerin, brought control of the business and changed almost everything about it. The name was changed to the New America Fund, the board reorganized and investments redirected to a value approach.

The reorganization was a great success for the Munger partnership and in 1979, Business Week published an article entitled “Shareholder Heaven at New America Fund”: 

“New America eschews the common industry practice of paying fat fees to outside investment advisors,” wrote Business Week, “Instead, the work is done internally under Guerin’s supervision. What’s more, the latest fiscal year, directors fees were only $25,000, and remuneration for all officers and directors came only to $59,450.”

New America Fund exhibited “a propensity for publishing and broadcasting investments,” continued the article. “In recent years its record has been outstanding: The net asset value per share increased from $9.28 in October 1974 to $29.28 on September 30, 1979. Like most closed-end funds, New America sells at a discount to net asset value. On November 16, shares closed at $18.25, a 25.9% discount from net asset value of $24.64.”

The largest holdings of the New America Fund were Capital Cities Communications and 100% of the Daily Journal Corporation. But before this success, Munger struggled with the market downturn in 1974, a few years Buffett got out the business. According to Lowe’s book, at the end of 1974 “the entire Wheeler, Munger Partnership was only $7 million. Of this, $4.3 million or 61%, was in 505,060 shares of Blue Chip Stamps, selling at $5.25 per share, plus 427,630 shares of New America Fund selling at $3.75 per share.” Munger’s concentrated positions were entirely to blame for this volatility. An investment of $1000 at the beginning of 1973 had lost more than half of its value to $476 by January 1975. Many partners could not stand the volatility and bailed out, a problem that ultimately forced Munger to exit his business as while he was convinced about the quality of these issues himself, losing money for partners was unpalatable.

The post Lesson From The Munger Partnership appeared first on ValueWalk.

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