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Charlie Munger is often recognized as the sidekick to one of the world's greatest investors Warren Buffett but monger's story and tips are equally as helpful in understanding what it takes to successfully make money from stocks so in today's video we'll be going through how Charlie Munger made money from stocks and how he still does it and how you can do the same if you like the sound of today's video smash that like button let's get right into it Charlie Munger didn't have the easiest life when he started in his vesting Journey he went through a divorce his nine-year-old son had leukemia and his father sadly passed away Munger met Buffett through his father's acquaintances when he returned to Omaha to support his family he and Buffett clicked right away they talked for hours on the phone about potential Investments Munger gradually Rose to the position of business partner and investment counselor in his company which was previously held by Benjamin Graham Buffett's mentor and the father of value investing when the opportunity came up Munger entered a real estate business by partnering with one of his clients in 1961 he started building apartments that were coming into Trend in South California as the population there started to rise in 1962.
he found a new law firm with some of his sharpest colleagues from his old firm too that year Munger started his investment partnership and his first real estate development proved immensely profitable when he sold it in 1967 and he continued to invest in similar projects with very successful partners his success allowed him to indulge in his passion for architecture as well as to hone his business skills by spotting real estate friends and introducing new ideas to sell his projects many of munger's business associates eventually became very successful themselves and one of munger's firm's early clients was Warren Buffett along with the companies that later became Berkshire Hathaway Munger stopped practicing law entirely almost in 1965.
his firm had the reputation of an intellectual Powerhouse Munger had a company that was a hedge fund that invested in many of the same firms insecurities as the Buffett partnership Monger developed it mainly as a result of Buffett's encouragement despite the disastrous consequences of the 1973-1974 stock market crash Munger averaged a 24.3 annual return from 1962 all the way to 1975.
this easily outperformed the Dow Jones Industrial Average 6.4 percent annual return during the late 1960s and early 1970s Munger and Buffett gradually acquired a controlling interest in Blue Chip Stamps this small company had issued trading stamps which Merchants distributed customers collected and redeemed the stamps for merchandise the investors saw untapped potential in the company's float account the difference between stamps issued and stamps redeemed using this pool of capital Blue Chips controlling investors acquired several other companies at first Blue Chip bought part of the company but it owned 80 percent my 1974.
the acquisition led to the SCC lawsuit alleging that blue chip manipulated West Coast stock to fight off a merger another merger the suit was settled in Berkshire Hathaway's dense tangle of ownership interest was subsequently simplified with blue chip becoming a wholly owned subsidiary Munger was named Berkshire Hathaway's Vice chairman his first formal position within the company one of mongers and Buffett's biggest successes was when they invested in C's candy and this investment marked the transition in Munger and Buffett's way of investing as Munger encouraged that they focus on the quality of the underlying business they weren't going to invest in to See's Candy at first because they didn't want to pay more than what they had offered but then took some constructive criticism and decided to change their minds walking away from See's Candy would have been a terrible idea because for them in 1972 Berkshire Hathaway bought the entire company for 25 million dollars the story gets better that year the company had 31 million dollars in sales and made 2.083 million dollars in profits after taxes based on Warren Buffett's valuations of See's Candy he was initially unwilling to pay more than 25 million dollars that he offered and that would have proved to be an extremely silly decision as of 2007 See's Candy had earned Berkshire Hathaway 1.35 billion dollars in pre-tax earnings So based on this it was irrelevant whether they paid a hundred thousand dollars one million dollars or heck even 10 million dollars more since then in 2019 Buffett said that See's Candy has produced north of two billion dollars in pre-tax earnings and that the Chocolate Company remains a cash cow for Berkshire Hathaway See's Candy exemplifies what Monger looks for in a business the company has built a competitive advantage through significant brand and customer loyalty long-term competitive advantage in a sustainable industry is what you would seek in a business when it comes to investing sense right this is exactly what Munger and Buffett found and they saw in See's Candy the company had limited potential for scaling sure but they were able to provide a reliable consistent Cash Cow this mindset of buying great businesses at fair prices shaped many of monger's future Investments in 1977 monger's mother passed away and a cataract operation left him blind in one eye but this did not stop Monger in the late 1970s and through the 1980s Having learned from See's Candies that some companies were worth a premium price Berkshire Hathaway Investments included Geico Dairy Queen and Coca-Cola so that's some background on how Monger became a billionaire despite having to face some devastating blows along this journey now what can we learn from this well monger's tip number one for investing in stocks is buy stocks that are easy to Value he says you're looking for a mispriced gamble that's what investing is and you have to know enough to know whether the gamble is mispriced that's value investing funding a stock with an asymmetrical risk reward ratio in favor of the position you want to take in it is essential to what this comes down to the stock must be simple to value for this to be repeated and successful all of this boils down to Warren Buffett's famous circle of competence while some investors have in-depth knowledge of some complex Industries such as semiconductors or biotechnology it is ideal for the average retail investor who lacks specialized knowledge of technical subjects to stick with extremely simple Investments the easiest businesses to Value are defensive ones that produce very stable cash flows growth within a very predictable range year after year and then distribute the majority of their cash flow to shareholders via dividends and or BuyBacks this is because there are fewer variables and it's simpler to estimate future cash flows REITs like WP carry Midstream energy firms like Enbridge utilities like Algonquin power and utilities and bdcs like ours Capital are some of the favorite sectors to mine for these opportunities this applies to some excellent asset managers as well such as Blackstone monger's tip number two buy high quality businesses Munger says a great business at a fair price is superior to a fair business at a great price great businesses make for better Investments than fair businesses for two main reasons number one since great businesses by definition have better competitive advantages using monger's tip number one is simpler because there's less ambiguity regarding the business of potential future Revenue stream number two outstanding companies have a proven track record of developing a superb corporate culture and employee team that can innovate to meet unforeseen obstacles and Forge brand new exciting growth prospects this is what has fueled the superior long-term performance of businesses like Amazon and Apple monger's tip number three buy businesses that play the long game he says today it seems like there's a regard as a duty of CEOs to make the stock go up this leads to all sorts of foolish Behavior we want to tell it like it is the creation of actual value comes from investing in the long-term success of the business yet many management teams have become fixated on financial engineering appropriate to placate Wall Street analysts in the short term a t and International Business Machines IBM are two terrible examples of this both of these firms aggressively repurchase shares at high prices the placate analyst and entice shareholders at the expense of making risky but essential investments in their future as a result both companies had slow growth and disappointing results shareholders value was ruined as a consequence when Munger speaks about investing people sit up and pay attention from today's video you should take away that an Investor's evaluation of a possible investment opportunity should be heavily influenced by these three Pearls of investing wisdom we just went over easy to value stocks exceptional businesses and playing the long game so be sure to have these words of wisdom in the back of your mind as you're embarking into your investing today and your whole long-term Journey if you've learned something new in today's video be sure to hit the thumbs up button down below and comment any thoughts or questions that you might have where is Community helping each other grow we love hearing from you guys and if you don't want to miss out on more incredible money making tips and opportunities be sure to subscribe to the Channel with notifications turned on welcome see you next time
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