On Tuesday, 28 November, at the age of 99, Charlie T. Munger (1926-2023) left us. For years, the celebrated investor was Warren Buffett’s right-hand man. Of the many notable aspects worth mentioning about this multifaceted figure, what stands out is his influence on the journey toward quality in Buffet’s investment style and his subsequent impact on the magnificent results of Berkshire Hathaway, his investment vehicle.
Though their paths crossed in the late 1950s through their respective families, both being natives of Omaha in the American Midwest, they would not forge a professional relationship until the 1970s when Berkshire Hathaway, then basically an insurance group under construction, merged with Munger’s own investment holding company. Charlie Munger is key to understanding the evolution of Buffett’s investment style, which progressed from focusing on the quantitative aspects of investment—influenced primarily by the teachings of Graham, who favoured investing at depressed multiples—toward a more qualitative model where asset quality became a decisive factor. The acquisition of See’s Candies in 1971 is the perfect example of this.
See’s Candies was a third-generation family-owned business, which had established a franchise for the production, distribution, and sale of quality chocolates, highly valued by the market. By the late 60s, as often happens, many family members wanted to sell their shares (nearly 70% at the time), partly due to the lack of a clear succession plan and partly due to the consolidation of the sector. The family was asking €30M (technically €40M, since the company held €10M in cash) against a pre-tax operating profit of €4.2M. These figures meant paying a multiple of 7.1x, a substantial premium over the 4-6x Buffet was accustomed to in similar transactions (even less when he began investing in the 1950s). It was Charlie Munger who convinced Buffett it was worth paying the premium given the quality of the asset; in this case, a business that required little capital, with strong pricing power and tremendous growth potential (at the time the franchise was only present in a handful of western states). Between 1971 and 1973, Berkshire became the owner of 100% of the company that would be its most profitable investment over the next decade, with annualised profit growth of 20.9%.
Thus, Munger laid the groundwork for one of Berkshire’s enduring mottos: ‘Better an excellent business at a fair price than a fair business at an excellent price’. The quality premium would play a pivotal role in subsequent operations, such as Coca-Cola, Amex, and more recently, Apple, without which it is impossible to understand the astonishing long-term results of Berkshire Hathaway. An investment style consistent with how we choose our businesses at EDM. Rest in peace great teacher of investors.
Luis Torras,
Wealth Management director
