Charlie Munger – The Man Who Built Berkshire Hathaway | A Documentary

[Music] America looked at capitalism as a failed experiment. This is the example of the time when capitalism broke. There was a terrible deflation, a shortage of money so little money that people made their own monopoly money, their own script. It was so extreme that people like you have just no idea what the hell it was like having lived through the hardest time in American history.

Charles Thomas Munger determined to never be poor again. I wanted my own money, not because I loved ease or social prison, I wanted the independence, but he never imagined that a half a century later he would have built the greatest business empire in history: Berkshire Hathaway. After joining a small value investment fund by Warren Buffett, Charlie Munger made it scalable, eventually becoming one of the biggest and most admired companies in history.

Charlie’s the shy, reticent one—one of the pair—but, uh, Charlie is the best partner anybody could possibly have. "We've been partners now for 60 years. He is the only one among our candidates for directors that we see no negative votes this year." [Applause] Charlie Munger is a very elusive man. Warren Buff is a nice guy, but that's not enough in business; Charlie Munger is a guy who takes no BS and has that ruthlessness to get things done, like Warren Buffett.

Charlie Munger was born in a middle-class family in Omaha, Nebraska. If you think about the pioneers who settled the West, they had kind of this wanderlust, adventuresome spirit. These were the kinds of traits that were passed down through the generations—the South and the Midwest, the researchers found, are very high in extroversion, agreeableness, and conscientiousness. Charlie Munger was born in a roaring twenties; his grandfather was a federal judge and his father was a lawyer, and his fraternal grandfather was the only federal judge in Lincoln, Nebraska—the capital city of Nebraska—and he was a brilliant man. He'd risen from nothing. From a young age, Munger understood that in order to make money there must be a value exchange.

He started raising and trading hamsters—not enough kids are willing to work for free or very little to learn, getting your hands dirty under your fingernails; it's the game. But his happy childhood was interrupted by the Great Depression. To make ends meet, everyone in the hunger household had to work, including the young Charlie. Charlie Munger got a job at Buffa’s Family Grocery Store, where he labored 12 hours a day to make two dollars.

It is during this period of his life that Munger developed a strong work ethic and an appreciation for money. "Most of my schooling was in the Great Depression, but that means I'm one of the very few people that's still alive who deeply remembers the Great Depression. That's been very helpful to me." In those days, there were all kinds of people. Most of my family, they believed in hard money based on gold and not much welfare, and so on and so on, so that I was raised among fairly backward people by modern standards, but they were backward in kind of a self-reliant way that I think was helpful.

Munger enrolled in University of Michigan to study math. "When I was young, I could get an A in any mathematics course without doing any work at all. I was choosing what for me was the easiest way to think about what I wanted to, instead of what somebody else wanted me to do." Sunday, December—shortly after Munger started college, World War II broke out. A state of war had existed between the United States and the Japanese Empire. The surprise attack at Pearl Harbor forced many young men out of college and into the military service, and Charlie Munger was no exception.

The military found out that Munger possessed an extraordinary IQ; he was then assigned to serve as a meteorologist, working on analyzing weather patterns for the war. It was a very empirical science. In those days, we just made weather maps, which laid out the weather on the map, and then we stacked up those maps—and by looking as one followed another you could see whether weather systems were moving, and that's the way we were predicting the weather. While taking a physics course to prepare for his deployment, he learned to think like a physicist. Physicists like to think in terms of fundamentals—they're very cautious about their assumptions. Surprisingly, this is very similar to Buffett and Munger's way of thinking; they seem to stick to business fundamentals and logic.

During the military service, Charlie Munger got married, and right after the service he enrolled in Harvard Law School. "Father had gone to the Harvard Law School, so that was a natural course of activity for me." After graduating, he was admitted to the California Bar in 1949. "I had an army of children almost immediately. I painted myself in quite a corner." Charlie started at a salary of 275 a month, which was above average at the time. Charlie Munger felt well off; things seemed to have worked out for him, but little did he know he was entering into the darkest period of his life.

Many young men in those days—Charlie Munger married early; divorce in the 1950s was still frowned upon—as a marriage ended with his first wife Margaret, he wanted to minimize the damage it had caused to their children. Just as Munger was healing from his divorce, tragedy struck again. His son Teddy Munger was diagnosed with leukemia; in those days, it was a death sentence. [Music]

After Teddy's passing, Munger came to realize that he had spent all his savings on Teddy's medical bills. In those days, medical insurance was not as widely covered as it is today. Once again, Munger was at the crossroads of life; he wondered what could have happened if he was wealthy enough to have the best treatment for his son. "Never feel sorry for yourself if your child is dying of cancer; don't feel sorry for yourself, never ever feel sorry for yourself." Charlie Munger was more determined than ever to have true wealth for the sake of his family. He was about to become the sharpest sword that was ever built. [Music]

Unlike lawyers today, practicing law in the 1950s was not the best way to become wealthy. He realized that to truly become wealthy, one has to be a business owner. This is the oldest trick in the book: by and large, most of the wealthy people own businesses—sometimes more than just one business. While doing legal work for a smart transformer manufacturing company in Pasadena, Munger realized that he could take ownership of that company as well. And so one day I said, "Well, I'm being too damn shy; I just about went down to the freeway in Pasadena. I made a U-turn, I went back and I walked in and I said, 'Well, I really like working for you guys—just the kind of people I like to be associated with, people I like to work for.'" Sure enough, they had another big problem that I could solve.

Munger put all his savings—and even borrowed money—to invest in the company, but the business struggled early on. In order for it to survive, Munger had to step in and downsize the company. That is very much like how private equities operate today: they will buy a business, turn it around, and sell it for profit. Munger considered this company a bad business, but he still managed to make a respectable return in the end. This experience taught him a lesson that became the foundation for how he invests: he realized that it's so much easier to buy good businesses than trying to fix broken ones.

"I have a habit in life which is that I look at it and I observe what works and what doesn't, and I've seen so many idiots get rich in easy business. Naturally, I wanted to be in an easier business." Armed with this valuable lesson, he was ready to invest in wonderful businesses. But what Munger didn't know was that he would soon make his first million in real estate. [Music]

Los Angeles was on his way to become the second largest city in America. [Music] People were moving to L.A. at a rate of 3,000 a month; it became clear to Munger that he must not miss this million-dollar opportunity. Real estate is just a highly leveraged investment, but unlike stocks, with real estate you have active control that allows you to reduce the risk. While advising his client on a real estate project at Caltech, Charlie Munger put his own money on the line by owning half of the operation. The Caltech property sold out quickly, generating a 400% return for their hundred thousand dollars investment.

Munger didn't stop there; he immediately reinvested his money for more projects. "Five real estate projects—I did both side by side. For a few years, and in a very few years I had three or four million dollars." Even to this day, Charlie Munger was very involved in real estate. He built the Munger Science Center at Harvard. Surprisingly, all this time Munger was still holding a steady job as a lawyer. It goes to show how risk-averse Munger really was at that time. Although real estate had made Munger millions, he stopped after just five projects because Munger now wanted to make money without having to involve too much debt.

"Debt is not always bad; if you have the education, the self-control, and the persistence to make smart, educated risks, then borrowing money could be like playing a very good game of offense." Munger seized a great opportunity and made millions. We see that a lot with millionaires and billionaires: they start out by speculating and taking a lot of risks, but once they make their first million, they start to play it safe by investing instead of speculating. Using his connections, he started an investment company with his friend and a legal client after they bought a seat at a Pacific Exchange.

Wheeler Munger and Company's main business was brokerage and market making. Market making, by its name, is just about creating a market for buyers and sellers to trade. When there are a small number of buyers and sellers, it may not be possible to buy and sell the product; hence, the market is illiquid. The market maker simply tried to make money on the bid-ask spread by providing transactions, which created more liquidity. Munger realized he could use the profit from the business to invest in other companies. He was acting like a true hedge fund manager at that time.

They bought small companies such as a cart wash machine manufacturer and even invested in some cart loans. Unlike other investors at that time, Munger's strategy was so concentrated in small growth companies; his portfolio was very concentrated in small-cap companies. As a result, his performance was very volatile, but over the long term it had much better performance than most people. By 1974, when the partnership dissolved, it had turned an average annual return of twenty-four point three percent, making Munger's five million dollars. Remember, this is the seventies—being a millionaire in the '70s is very different from today. [Music]

Well, Munger started his investment company in 1962. He also invested in a struggling company run by his friend Warren Buffett. Warren Buffett followed the investment approach of Ben Graham, which allowed him to build a successful investment partnership. But there was a problem—and he'd been taught it by Ben Graham—it was hard for him to quit when he was just coining money. But he saw the point: you couldn't scale that business, and it was kind of scrunchy and unpleasant, and you're firing people, and who the hell wants to do that?

"Could I ever tell you about the horrible experience I had at the Blue Chip Redemption Center here in California?" Blue Chip Stamps was a coupon company at the time. I happened to be there because I'd saved up ten and two six books to get a blender. So when I walked in, I had a lot of confidence. You can imagine the peace of mind that comes with having ten and two six books in your purse, because it takes time to accumulate stamps and many customers just forget about the stamps. This company has struck gold, generating 100 million dollars of sales a year by the 1970s.

This is exactly the type of business Warren Buffett likes: the cash flow business. Like an insurance company, they collect a lot of cash upfront. Warren Buffett realized that he could use that cash to invest in other companies. December 1963—the Department of Justice filed an anti-trust action against Blue Chip Stamps and forced the company to offer more shares to the public. This was the opportunity Munger and Buffett had been waiting for. They accumulated a controlling position in the company, with Buffett being the largest shareholder and Munger the second.

The 1970s was the start of many hostile takeovers, but Buffett and Munger were the friendlier ones. After making themselves board members, Buffett and Munger quickly gained control in order to invest the excess cash of Blue Chip Stamps. We see a chain of takeovers here: Warren Buffett owns about 36% of Berkshire Hathaway and he used Berkshire Hathaway as a vehicle to take over other companies, and when he does, he used the cash from those companies to take over other companies. So it's not as simple as stock picking using Blue Chip Stamps' cash.

Munger and Buff invested in a small candy store in California called See's Candies. The business is extraordinarily good in a very small niche, but we put 25 million dollars into it, and it's given us over 2 billion dollars pre-tax income—well over 2 billion—and we've used it to buy other businesses. But initially, C's Candies' plan of expansion faced a great challenge that Buffett didn't quite anticipate. The copycats: in 1973, Russell Stovers Candies decided to put on a campaign and tried to beat C's Candies at its own marketplace. They put in stores that looked exactly like See's—called Mrs. Stovers.

Facing such a threat, the CEO of C's Candies, Chuck Huggins, turned to the only person who's capable of handling such a matter: Charlie Munger. "Charlie Munga, deal with Stovers Candies with an iron fist. My partner, Charlie—Margaret doubt that he's—you know, he says, whenever we have a problem, you attack it immediately. He says, 'An ounce of prevention is worth a pound of cure,' and we've seen that time after time." He assembled a team of the best lawyers and went after Stover Kennedys like mercenaries—they were ready to go to war. It worked: Stovers Candies got scared and immediately backed off; even more, no other candy stores dared to do the same.

After that, Berkshire Hathaway thrived, acquiring one company after another—including the famous Coca-Cola deal—but neither Buffett nor Munger could anticipate the biggest threat to Berkshire Hathaway that was about to come. [Music] The business of Berkshire Hathaway is extremely unique. Today, it owns a large number of separate businesses; they also have their own subsidiaries. If it weren't for Munger's model, Berkshire Hathaway would have had trouble scaling up, but it may have reached its limit.

I mentioned earlier that 1954 was my best year, but, but I was working with absolutely— with peanuts, unfortunately—and, and I think if you work with small sums of money, I think there is some chance of people that really do bring something to the game. But I think it's very, very hard for anybody to identify them, and I think that when they work with large funds, it gets tougher. It's certainly gotten tougher for us with larger funds, and I would make no promise to anybody that we will do better than the S&P 500.

Warren Buffett has talked about in the past that this is an advantage that individual investors have over Berkshire Hathaway: that they can invest in things and it'll make a huge difference, as opposed to Berkshire Hathaway. So really, they have to kind of look for these really big, um, these really big stocks or big companies to go after, and, um, Buffett's also been upfront about the fact that he—you know, killed the S&P back in the 60s and 70s, and it's been a lot tougher since then. As a result, in the past five years, Berkshire Hathaway has slightly underperformed the market.

It's very judgmental, and I think that helped me—and also helped me that I kept changing my judgments as I learned more and more facts came in. Both Munger and Buffett believe in the circle of competence; they stick to things that they can understand. But what it really means is predictability—they want to invest in companies where they can confidently predict what will happen in the future. Recently, Munger and Buffett decided to expand their circle of competence by investing with Apple and Amazon.

"I'm overjoyed. I'm thrilled, uh, because, uh, Warren is focused on the long term and, and so there is—we're in sync; it's the way we run the company, it's the way he invests, and, uh, yeah, so I could not be happier." Well, I think they start to realize that these tech companies start to behave like the kind of companies that they like with predictable cash flows and steady earnings. Munger's concentrated small-cap investment style is hard for the human psyche, but it's the best investment style for retail investors. If you invest in any large caps, you're facing competition from institutions who probably have done much better research than you did.

Over the course of his long life, Munger perhaps has gathered more lessons and experiences than anyone. Like a theoretical physicist, he thinks about business in terms of first principles; he just analyzed what would work and what wouldn't, and why it's so simple. Munger's life has been legendary. He went through multiple economic recessions, he went to war, he suffered from the worst tragedy, but he never yielded—he dealt with whatever life had to offer—and by doing so, became one of the most iconic figures in business.

"Well, luckily, I got at a very early age the idea that the safest way to try and get what you want is to try and deserve what you want. It's such a simple idea—it's the golden rule, so to speak. You want to deliver to the world what you would buy if you were on the other end. There is no ethos, in my opinion, that is better for any lawyer or any other person." "I can have your soul. I can promise forever." [Music] [Music] Again. [Music] Me.