How Charlie Munger Helped Create Berkshire Hathaway, and Warren Buffett

Business partners for nearly 50 years and friends for longer, Charlie Munger was probably one of the few people on the planet who felt comfortable telling Warren Buffett, the greatest investor of all time with $120 billion in personal wealth to prove it, that he was wrong. 

Munger, vice chairman of Berkshire Hathaway (BRK.B), died on Nov. 28, just a month shy of his 100th birthday. Already rich by the time he joined Buffett at Berkshire in the mid-70s, Munger possessed the wealth – and had the temperament – to be the opposite of a yes man. And BRK.B shareholders are all very much richer for it.

Just ask Warren Buffett himself. He's the first to admit that he couldn't have done it without Munger, who saved him from many an ill-conceived move. Indeed, Munger shot down his ideas so frequently that Buffett called him the "Abominable No-Man."

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Buffett has said that Munger changed his thinking in profound ways, instilling in him a relentless focus for buying "wonderful companies at fair prices, rather than fair companies at wonderful prices."

Munger's upbringing during the Great Depression naturally informed his view of what constituted a good price. As a teenager in the 1930s, he worked in a grocery store for 20 cents an hour. Adjusted for inflation, that's around four-and-a-half bucks an hour today, which is still a terrible wage. Munger said he never intended to get rich. "I wanted to get independent," he explained. "I just overshot!"

Munger: The big money is in the waiting

Already being rich and independent no doubt helped even the playing field for Munger when he agreed to become Buffett's second banana. And for whatever reasons, they always had tremendous chemistry. Buffett's folksy, optimistic style perfectly complemented Munger's acerbic, more skeptical view of things. We'll never know what blunders Munger helped Buffett avoid – or which opportunities only the two, working together, could see and then seize – but suffice to say Berkshire wouldn't be Berkshire without Munger. It follows that Buffett wouldn't be Buffett without Munger, either.

Berkshire Hathaway stock has famously clobbered the broader market for decades. That's why people call Warren Buffett the greatest long-term investor of all time. At Kiplinger, we naturally like to focus on stocks Warren Buffett is buying and selling, as well as the broader Berkshire Hathaway equity portfolio. 

Munger's passing reminds us that Berkshire Hathaway is much more than the value of its stock holdings. 

Buffett is thought to manage about 90% of Berkshire's equity portfolio, with co-managers Ted Weschler and Todd Combs handling the remaining 10%. Presumably Buffett consulted Munger when handling his end of the portfolio, but it's important to remember roughly half of the company's value stems from its scores and scores of wholly owned subsidiaries and other ventures.

These were the deals – the supreme decisions of how to allocate Berkshire's capital – in which having Munger around really paid off. Buying a railway operator for $26 billion, as Berkshire did with BNSF in 2010, is not something anyone should do lightly.

It's also important not to let a massive and growing cash pile tempt you to do something stupid, like overpay for acquisitions. Buffett has bemoaned for years the lack of "whale-sized" acquisition targets, even as Berkshire's cash pile swells. Sitting on the sidelines, while waiting for lower prices, that's Munger's DNA, and it will serve any investor well:

Buy wonderful, well-managed businesses (or stocks in such companies) at great prices – and then have the patience to let these productive businesses (and their share prices) grow. 

As Munger always stressed, "the big money is not in the buying or selling, but in the waiting." 

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