Seize it boldly

January 1st, 2020 marked the second time that Charlie Munger lived through the 20s. As it happens, it was also the man’s 96th birthday.

Just 4 years later he would have turned 100 years old, though, unfortunately, he passed away just weeks before reaching this centennial feat. In the days following his death, business papers were full of stories of the man who so nearly made it to 100. But, for all intents and purposes, he did live to 100, in the same way John D. Rockefeller famously lived to 98, even though he made it only to 97 and 10 months.

Virtually none of the articles about Munger were able to focus on his life without portraying him as the right-hand man of Warren Buffett, who for 60 years was Mungers business partner and friend. Yet, there is much to be said about Munger aside from his partnership with Buffett, with countless unique qualities, shown elegantly in Poor Charlies Almanac, a collection of Munger’s talks as well as a brief account of his life.

One particular quality that set Munger apart from the very beginning, instilled in him long before his acquaintance with Buffett, was his willingness and eagerness to bet big when the odds were well enough in his favor.

In a talk to the University of Michigan in 2011, Munger recounts a youthful story he frequently heard from his mother, who took it upon herself to relay the important messages she received from her grandfather (Charlie’s great-grandfather).

As Charlie relays it, his grandfather exuded the fact that “good opportunities in life are rare, and when you find one… seize it boldly and don’t do it small” .

This mindset, which is shunned in finance classes as it goes contrary to the diversification obsessed know-nothings, is what Munger attributes so much of his success to.

Not only did this mindset set Charlie apart from the general population, but it also set him apart from his “Super Investor” cohort, who were more inclined to diversify their investments into perhaps dozens of stocks, while Charlie happily sat by with just a few.

The effect of this is shown by the audited investment track records of a group of extremely successful value investors laid out in Warren Buffett’s famous paper The Super Investors of Graham and Doddsville. As Buffett puts it “[Munger’s] portfolio was concentrated in very few securities and therefore, his record was much more volatile... 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.”

The most famous period of “peaks and valleys” was the period between 1973 and 1975. The period of 1973 – 1974 which saw a dramatic market decline caused most of the investors the pain of a negative return, but Charlie’s fund suffered the most due to the concentration of his. In 1973 the return of the Over-all Partnership was -31.9%, and in 1974 the fund fell a further 31.5%. In 1975, however, the peak finally emerged as the market recovered from the short-term panic and Mungers’ partnership rose 73.2% in a single year.

Looking back, this does not invoke gut-wrenching emotions as the performance of ’73 and ’74 are not so disturbing when the 1975 return is right there for display. But one can only imagine the experience Munger had when having to tell his partners, for two years in a row, their investment had fallen by a third.

Yet Munger, who was well versed in hardship after losing his first child to cancer, developed a few more life principals which were to never feel sorry for yourself and no matter what happens just keep your head down and plug away. His persistence during these down years were of course rewarded as many of the equities both Munger and Buffett bought during this period were ones held on to for decades, providing returns in excess of 1,000%.

Modern finance tells us to diversify, sell if volatility gets too high, focus on stock prices, betas, volatility indexes, and countless other meaningless figures to bring about the best returns with the lowest risk. However, one can’t ignore the fact that the most successful investors over the past century, including the group from Buffett’s paper, held no regard for these widely acclaimed figures.

But from Munger’s standpoint it is not enough to ignore the advice of diversification; one has to go further and do the complete opposite to have his level of success. When asked at The Daily Journal annual meeting why he and Warren had done so much better than everyone else, Munger characteristically responded “it’s simple, we tried to do less.”