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In Poor Charlie’s Almanack, Munger doesn’t talk directly about Berkshire Hathaway’s decisions much, but he does share the general investment philosophies and practices that have made them successful over decades. In this chapter, we’ll discuss his perspectives as an investor; in the next, we’ll discuss perspectives on creating a successful business.
Despite its giant size, Berkshire Hathaway’s model is relatively simple:
In essence, if you can take in money at 3% and invest it in things that grow at 13%, and you can do this for 50 years, you can grow to be very large, as Berkshire Hathaway has.
Warren Buffett and Charlie Munger are famously hands-off in the management of companies they acquire. They decentralize all the decision-making to the owned companies, trusting that the company managers are in the best position to make technical decisions for their companies. In this way, they recognize their circle of competence—they’re good at spotting businesses to invest in, but they know they’re not the best to run them. (Shortform note: For a detailed look at Berkshire Hathaway’s management style and its investment model, read our guide to The Outsiders.)
Compared to other public companies, Berkshire Hathaway has the advantage of being very patient, long-term planners who don’t mind lumpy results in the short-term and don’t care about pleasing Wall Street. When the market is unfriendly, Berkshire is willing to underwrite less insurance and avoid doing deals. Then, when the market flips, Buffett and Munger can swoop in and take advantage of great deals.
However, Munger notes that Berkshire’s historical returns will be hard to match as it grows. It’s much harder to find underpriced, low-competition investments when you have $10 billion than when you have $10 million.
Warren Buffett and Charlie Munger make successful investments because they’re able to wait patiently for great deals. Unlike many investors, they don’t mind staying inactive, even for years at a time, when they don’t see great opportunities. However, when they do see great opportunities, they bet big.
When Warren Buffett lectures at business schools, he’s known for saying that everyone would make better investments if they were given a punch card with twenty slots in it and were restricted to only twenty investments throughout their entire lifetime. Once they punched all twenty holes, they would be able to make zero additional investments. Under these conditions, investors would be much more discerning about which investments to pursue, and they’d bet big on the few investments they found.
We’ll break down both aspects of patience and decisiveness.