Charlie Munger’s Investment Insights
The late investment icon Charlie Munger, who passed away just a month shy of his 100th birthday, made some interesting remarks about Berkshire Hathaway, the conglomerate he and Warren Buffett built over the last five decades. He believed that the company could have doubled its value if they had applied leverage when purchasing businesses and common stocks.
Munger, Berkshire Hathaway’s vice chairman, stressed that he and Buffett almost never used the common Wall Street practice of leverage. He explained that they always put their shareholders first, and the idea of disappointing the people who had put their trust in them when they were young was a major factor in their decision-making.
In a previously unaired interview, Munger said that “Berkshire could easily be worth twice what it is now. And the extra risk you would’ve taken would’ve been practically nothing. All we had to do is just use a little more leverage that was easily available.” He further added that the reason they didn’t use leverage was because they were cautious about disappointing their shareholders and the potential negative impact that losing a significant portion of their money would have on them.
It is important to note that leverage is prevalent on Wall Street as it provides a way to boost buying power and enhance the potential return in any given investment. However, it also significantly increases the risk as losses can multiply quickly if the investment doesn’t pan out as expected.
Beware an ‘unsettled mind’
Both Munger and Buffett have been very cautious in handling their shareholders’ money over the years. Berkshire shareholders tend to be long-term investors, treating their stock like a savings account. Buffett, often called the “Oracle of Omaha,” previously explained the perils of using debt and leverage to buy stocks, highlighting how it can make an investor short-sighted and panicky when the market turns volatile.
Munger acknowledged that Berkshire did use leverage in the form of its insurance float. He explained that insurance float gave the company some leverage, which is why they went into it. Insurers receive premiums upfront and pay claims later, so they can invest the large sums collected — cost-free — for their own benefit. This use of leverage through insurance float played a significant role in Berkshire Hathaway’s investment strategies.
In conclusion, Charlie Munger’s insights into the use of leverage and the impact it could’ve had on Berkshire Hathaway’s value offer valuable perspectives on investment decision-making and the considerations around using borrowed capital. His caution and foresight, as well as the long-term commitment to shareholders, have been defining features of Berkshire Hathaway’s investment philosophy.
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