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For 11 years, a small investment partnership in Los Angeles never had a losing year. Then in 1973 and 74, it lost almost a third of its value and then almost a third again. Every dollar its partners had at the start of 73 was worth about 47 2 years later. The man running it was Charlie Mer. What did he do while the numbers fell?
And what does it say about the people who later became famous for patience? By the end, you'll have a seventh question for your own decisions. First, two words. Price is what a stock sells for today on a screen. Value is what the business is really worth to someone who owns it for years. Most days they stay fairly close.
Some years they drift very far apart. Mer was a lawyer. Around 1960, Warren Buffett told him that law was fine as a hobby, but he could do better. In 1962, Munger started a partnership with a friend, Jack Wheeler. Buffett later described his style. Munger owned very few stocks, so his results swung much more than most.
For 11 years, the swings went his way. The partnership grew about 28% a year before fees while the DAO grew less than seven. Not a single downyear. Then came the bare market of 1973 and 74. Its biggest holdings, blue chip stamps and new America fund fell sharply. The partnership lost about 32% then about 32% again.
The whole market fell too but by much less. Munger didn't think the businesses had lost half their worth. He wrote that his major investments were virtually sure of eventually being salailable at prices higher than the quoted market prices. The price had fallen. In his view, the value had not. Years later, he described how it felt.
It didn't bother him with his own money, but according to an attendees notes, he said it made him suffer the tortures of hell. Thinking of the partners who had trusted him, he called it pure agony. In 1975, the partnership jumped 73%. Then Munger closed it. He decided he no longer wanted to manage money directly for outside investors.
His partners received shares that years later became Berkshire Hathaway stock. So here is the question. When the price says you've lost half, how do you know whether to hold on and is holding on wisdom or just stubbornness with a nicer name? Decades later, during the next great crash, Munger gave a blunt answer in a BBC interview.
If you're not willing to react with equinimity to a market price decline of 50% two or three times a century, he said, you're not fit to be a common shareholder, and you deserve the mediocre result you're going to get. Equinimity means staying calm and steady. Notice what he's saying. Big drops aren't a sign that something went wrong.
For anyone who owns stocks long enough, they are normal. And for someone who owns only a few, like Munger, they come bigger. Buffett said Munger was willing to accept greater peaks and valleys, but calm isn't the same as not caring. Munger's calm rested on a check. What would these businesses sell for to a buyer who wanted to own them?
If that number stays far above the price, a falling price is a discount. If it doesn't, a falling price may be the truth. And it still hurt. In those same notes, he called that kind of period a test of character and endurance. Equinimity wasn't the absence of pain. It was not letting the pain make the decision.
Now go back to 1974. This is our reading. Mer held because his estimate of value hadn't moved even as the price collapsed. The quote on the screen told him what a nervous seller would accept that day. It didn't tell him what the businesses were worth. But the idea has limits. First, it was other people's money.
Staying steady was easier with his own savings than with his partner's morale. And after it was over, he stopped managing money for outside investors. Second, recovery can take a long time. Even after that 73% jump, the partnership was still about a fifth below where it stood at the end of 1972. Patience meant years, not weeks.
Third, calm only makes sense if the value was really there. If your estimate is wrong, holding on is just losing slowly. And Mer himself said he wouldn't quarrel with anyone who was more cautious than he was. So before you buy, write down two things. What the business is worth and why, and how big a drop you could live through without being forced to sell.
Then size the bet so that a 50% fall would hurt but not break you. Add this question to the ones we've collected. If this business gets better, who keeps the gain? If I say yes, who gets paid and how? What would make this fail? Would I still do this if nobody else were doing it? Is this inside my circle?
Are the odds clearly on my side? And now if the price fell by half tomorrow, would I still trust my estimate of value? and could I hold? In 1974, the price said half was gone. Munger looked past the price at what he owned.
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