Well Timba, its my impression you find satisfaction being entrenched in your investment approach and chiding mine without knowing much about it, which I have no problem with. The market is composed of many different kinds of investors, speculators, transients and pontificators of every stripe (myself included). I also respect the focus of this thread as most threads don't have a great deal of consistency, something can be gained from any discipline.
In my opinion, both Graham's approach and short term speculators are attempting to limit risk and maximize the probability of price appreciation. They are doing so within vastly different time horizons. Warren Buffet was the candle on Graham's cake but outside of Berkshire's and AXP stunning conglomerating success (a business strategy not an investment strategy)., where's the investing savy for the average bloak? Is there a filter that can be applied easily to today's universe of stocks? Perhaps using Graham's 10 points? After a market bursts, as the US has, a value approach will certainly limit downside risk and may uncover some rip roaring gems.. good luck.
Anyway, here's a good article for this thread......... on Buffet, Graham, Munger, high times and low.
Charlie Munger - Climbing Mount Wall Street
By Janet Lowe
Benjamin Graham, the Confucius of value investing, often reminded his followers that it only takes a 50 percent drop in the price of your stock portfolio to wipe out a previous 100 percent gain. This was Graham's way of warning that the ride down can be faster than the ride up. On the other hand, if an investor is truly walking the value path, one peak does not a mountain range make.
Value investors who feel the current market is cruel to them can take heart from the experiences of Charlie Munger, who was introduced to Graham by superinvestor Warren Buffett in the 1960s. Graham and Buffett (who later became the world's most successful investor) were close friends but Graham was growing older and losing interest in investing. Graham, who died in 1968, was the main proponent of the philosophy that every stock has an intrinsic or fundamental value, and the actual stock price fluctuates above and below that. A value investor figures out a stock's real worth and buys while it is cheap.
Munger soon replaced Graham as Buffett's confidant and quickly the Omaha-born, Los Angeles attorney became Buffett's partner in many investment deals. Eventually Munger became vice chairman of Berkshire and one of its largest shareholders. But Munger's road to wealth was rocky.
In 1962 Munger followed Buffett's suggestion and began investing money on behalf of others, establishing the Wheeler, Munger Company, an investment partnership. For eight years, Wheeler, Munger achieved stunning performance results, although with about $17 million under management, the fund was not large. When the years of 1962 to 1969 are measured together, Munger's average return was 37.15 percent.
Then in the late 1960s the market rose dramatically, making it difficult for value investors to find bargains. Even the Buffett Partnership, which Buffett ran before he took over Berkshire Hathaway and transformed it into a holding company, was down by 11.6 percent, a disappointing return for a fund that had an average return of 30.4 percent for the 13 years it operated. In 1969 Buffett began dissolving the partnership, and Munger surely wished he had done the same.
In 1970 Munger's performance declined for the first time, with a return for the year of minus 0.1 percent. In the next two years the fund rallied, but 1973 and 1974 were a nightmare. It was off 31.9 percent in 1973 (versus a negative 13.1 percent for the Dow Jones Industrial Average) and down 31.5 percent in 1974 (compared to a minus 23.1 percent for the Dow).
"We got drubbed by the 1973-74 crash, not in terms of true value, but by quoted market value, to way half of what the securities were likely to be worth later," said Munger. "It was tough - 1973-74 was a very unpleasant stretch."
During that time period, the Standard & Poor's 500 index gained only 5.2 percent annually, and that is with no management expenses to answer for. Berkshire Hathaway was still a textile manufacturer at the time, and its share price fell from $80 in December 1972 to $40 in December of 1974. Gloom permeated Wall Street. Headlines proclaimed "The Death of Equities."
It felt that way, said Munger. "February 1, 1962 to 1973-74, basically the world had stood still. An ordinary investment portfolio would have done nothing in 12 years. It was a period of no rising tide to lift the boat. We had bought amazingly good businesses and we knew that in time it was going to work out very well. You can get a good opportunity, but will you get through the tough stretches?"
Fortunately, Munger was able to ride out the storm and most of his investors stayed with him. One investment partner put $350,000 in the fund at the peak of the market, then insisted on pulling out at the bottom. The story was not pretty. "She went into the partnership and it promptly went down," recalled Munger. Though Munger tried to persuade her to wait it out, she did not. "She lost half of her money." She must have shed a few tears when she saw what happened next. The market turned around fast, and 1975 brought a whopping 73.2 percent return.
Despite the eventual triumph, the fact that some investors were damaged haunted Munger enormously. He closed the Wheeler, Munger Partnership at the end of the year. Munger's fund started in February 1962 with $1 million. It was liquidated in 1976 at around $10 million. Even counting the dreary years, for the 14 years the fund operated, it had an average annual return of 24.3 percent, before costs.
Munger distributed the cash and actual stock holdings to the partners in the Wheeler, Munger fund, but did not take his management fees. For investors who held onto the stock they received in the liquidation, there was another pleasant surprise. Along with other securities, the investors received shares of Blue Chip Stamps, Diversified Retailing, and other companies that eventually were folded into Berkshire Hathaway in a stock swap.
One of Munger's investors, Otis Booth, ended up with a 1.4 percent stake of Berkshire Hathaway, a little less than Munger's 1.5 percent holding - making both among the largest investors in the company. Both are on the Forbes Richest Americans list. The Berkshire alignment wasn't the only good investment decision Munger made over the years, but it was the best.
"The money in Berkshire Hathaway outperformed the rest," said Munger, who is now 76 years old. "Nothing could compound that way. Back then Berkshire was trading for $40 per share on shares that now (in the summer of 1999) are trading for $65,000." Many of the original Wheeler, Munger shareholders got Berkshire Hathaway on a cost basis ranging from $16 to $25.
Though Buffett and Munger agree that over time, a company's share price reflects its underlying performance, they prefer to measure Berkshire's success in terms of book value rather than share price. For the past 35 years Berkshire has had a book value growth of 24 percent compounded annually.
Many of the acquisitions that contributed to Berkshire's success were made by Buffett and Munger together. Buffett credits Charlie with drawing him beyond the fundamental Graham approach of buying cheap "cigar butt investments," or used up companies that have one last puff in them. It's no fun, says Munger, to worry constantly that a company may croak before you get your money back. On the other hand, Charlie says that Graham's basic principles will never be outdated. "The investment game always involves considering both quality and price, and the trick is to get more quality than you pay for in price. It's just that simple."
Buffett and Munger have always warned shareholders that most businesses go through negative cycles and Berkshire Hathaway would be no different. They issued the pronouncement for so many consecutive years in which earnings, shareholder equity and share price grew so robustly that investors and analysts alike stopped listening. Then about two years ago, it became apparent that Buffett and Munger were right.
It started with a slip in earnings in 1998. Due to the decline in the share price of some of Berkshire's holdings and problems with a large acquisition, the 1999 gain in net worth was only $358 million, which translated to a per share book value increase of only 0.5 percent. Berkshire's share price declined, the first time in more than a decade. At its peak, Berkshire A shares traded at around $90,000. The stocks fell to a low of $40,800 before it began an up-and-down recovery. Shares are now trading at $55,400.
Munger had cautioned investors to conduct their financial affairs so that no matter what crazy things happen in the markets, they can stay in the game. He said that if you can't afford for your Berkshire Hathaway stock (or any investment holding, for that matter) to drop 50 percent, you probably shouldn't own it.
After steadily climbing attendance at Berkshire's wildly popular spring annual meeting, in 1999 attendance dropped, with fewer than 10,000 in the audience. As for any wane in personal popularity that he and Buffett might suffer, Munger says that when you've lived as long as he has you are likely to fall in and out of vogue several times.
Overall and for the long-term, Munger is cheery about the future of Berkshire Hathaway, for exactly the same reasons his Wheeler, Munger Partnership rebound. "Basically, we have a wonderful bunch of businesses. We have float that keeps increasing and a pretty good record of doing well in marketable securities. None of that has gone away."
This article is adapted from Janet Lowe's most recent book Damn Right! The Inside Story of Berkshire Billionaire Charlie Munger, published by John Wiley & Sons. |
