So, the abominable no-man has gone. He is no more and Warren Buffett will never be the same. ‘Abominable no-man’ is the nickname that Buffett, the world’s most famous investor, gave to his business partner, alter ego and paid-up member of the sceptics’ club, Charlie Munger.
It is debatable whether Munger, who died this week just 33 days short of his 100th birthday, deserved that moniker. True, he had a reputation for being morose, abrupt and blunt – even on a good day. But his life was full of dry humour and good works. Most of all, however, without Munger’s contribution it is doubtful whether Berkshire Hathaway (US:BKR.A), a $786bn (£619.53bn) insurance-based conglomerate, would have become the apotheosis of apple-pie American capitalism with Buffett as its high priest.
Two reasons lie behind that assertion. The first – and obvious – one is about Buffett’s approach to investing; the second, which perhaps underpins the first, is about Munger’s assessment of human nature.
It has become a matter of legend – and perhaps caricature – that Munger shifted Buffett’s investment thinking onto a higher plain. In that context, there is Buffett Mk 1 and Buffett Mk 2. The Mk 1 version was a faithful acolyte of Benjamin Graham, who is usually dubbed the founding father of modern investment analysis. In the early 1950s, Buffett cut his teeth in Graham’s New York investment firm where he learnt all there was to know about ‘cigar-butt investing’, the practice of buying company shares for less than their book value, then waiting for that discount to unwind. Do that exercise often enough in a diversified portfolio and the results would be “satisfactory”, as Graham once said with understatement.
Satisfactory, but possibly they could be better. Cigar-butt companies tended to be better dead than alive because the value was often realised only when they were broken up. But the best companies remain very much alive – and they grow and grow. With the influence of Philip Fisher, an early proponent of growth-stock investing, this truth was dawning on Buffett, but it really came to light in the early 1970s. The catalyst was Blue Chips Stamps, a US equivalent of Green Shield stamps. Both Munger, who was running his own investment partnership, and Buffett liked Blue Chip for the same reason – it came with a ‘float’, up-front, zero-cost money provided by supermarkets that distributed its stamps to entice shoppers.
Buffett and Munger ended up controlling Blue Chip, a fact that gave Buffett a conflict of interest between Blue Chip’s and Berkshire’s shareholders and landed him in regulatory hot water. More importantly, the tightening link with Munger’s investing deals brought the pair to See’s Candies, very much a Mk 2-style company. See’s, which is still in Berkshire’s portfolio, is a sort of 1970s Californian equivalent of today’s Hotel Chocolat (HOTC), selling up-market chocs to chocoholics. Initially, Buffett wasn’t interested. Munger persuaded him to look at the numbers, but Buffett still blanched at the $30mn asking price for See’s, so he offered $25mn.
Buffett got lucky – in more ways than one. His offer for See’s was accepted. Meanwhile, his business dealings with Munger got closer (in Berkshire’s annual reports of the 1970s he often referred to Munger as his ‘West-coast investment adviser’ or words to that effect). In 1978 Munger got closer still by coming onto Berkshire’s board as vice chairman.
What’s less clearly documented is Munger’s influence on Berkshire’s corporate culture. That it is the epitome of lean-and-mean is well known. It runs a business controlling $400bn of annual revenue, on a head office stay of just 28, which seems crazy. But the additional factor, which is mentioned less often, is Munger’s obsession with trust. As he said in 2007 at the annual meeting of Wesco Financial, a Berkshire subsidiary, “it’s wonderful to be trusted. Some think if we just had more compliance checks and process, virtue would be maximised. At Berkshire, we have subnormal process. We try to operate in a web of seamless trust, deserved trust, and try to be careful whom we let in”.
It also helped that Munger was into behavioural finance long before that field became fashionable. Here he is best known for propounding the ‘lollapalooza effect’, which describes the re-enforcing effect of a series of negative feedbacks. Lollapalooza, said Munger, is best observed at Tupperware parties where “three, four or five things work together to turn the human brain into mush”. The trouble is, as Munger also noted, it operates in business and investment; indeed anywhere that humans congregate. It addresses generic questions such, as ‘why do some growth stocks become super fashionable?’ or topical ones, such as ‘why do people who know nothing about AI obsess about it?’
Not for nothing did Howard Buffett, Warren’s older son, say that his Dad was the second most intelligent man he had met. No prizes for guessing whom he thought was the most intelligent; or probably the most rational. Indeed, sufficiently rational that Munger did not blame the eye surgeon who botched a cataract operation leaving him blind in his left eye. Instead, he noted that he just happened to be on the wrong end of a tiny statistical chance. And sufficiently rational to see that funding abortion clinics in 1970s Los Angeles before Roe v Wade made good sense, despite his strongly Republican leanings.
If Warren Buffett is the affable, avuncular face of Berkshire Hathaway – and perhaps of American capitalism – Charlie Munger was its intellectual and contrary thinker; maybe even its conscience. And neither Berkshire nor American capitalism is better off today.
