Charlie Munger leaves behind a treasure trove of investment wisdom: Ajay Bagga

Munger's approach, says Bagga, involved looking for wonderful companies at fair prices, a shift from the traditional value investing style.

Investing genius and vice chair of Berkshire Hathaway Charlie Munger has passed away at age 99. Munger was more than a long-time friend, business partner and right-hand man of Berkshire Hathaway Chairman Warren Buffett. His passing has left an irreplaceable void in the financial world.

Through the decades, Munger served as the vice chairman of Berkshire Hathaway, playing a pivotal role in transforming it into an investment powerhouse alongside Buffett. Despite his instrumental contributions, Munger preferred to operate behind the scenes, while Buffett was the face of Berkshire. He played a pivotal role in shaping the investment philosophy of Berkshire Hathaway.

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Munger, who died Tuesday in California, was just a month shy of his 100th birthday. His demise has been mourned by prominent figures in the business world.

In an interview with Moneycontrol, market expert Ajay Bagga reflected on the profound legacy of the late investing legend. He highlighted Munger's impact on the world of investing, noting that Munger's wisdom, wit, and sensible approach to life and investments have made a lasting impression.

Munger's approach, says Bagga, involved looking for wonderful companies at fair prices, a shift from the traditional value investing style. This shift, according to Bagga, influenced the success of Berkshire Hathaway, with Apple becoming its largest holding, a move credited to Munger's influence in 1975.

Reflecting on Munger's famous quote, “Knowing what you do not know is often more important than being brilliant,” Bagga emphasised the significance of recognising one’s limitations and avoiding overconfidence, especially in a market where valuations are a concern. He advised investors to focus on the growth potential of the Indian market, suggesting that the current valuations may be justified given the country's economic growth trajectory.

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Addressing Munger's criticism of the EBITDA metric as misleading, Bagga said the Berkshire vice chair’s view highlighted the challenges in understanding a company's true financial health. Bagga warned against companies using off-balance sheet financing tricks, which can mislead investors, and questioned the wisdom of analysts predicting the distant future for new-age companies. He suggested a back-to-basics approach, urging investors to scrutinise balance sheets using reliable principles.

“If you go back to accounting principles and recast balance sheets, you realise a lot of fancy companies come out with huge capex plans. If you add on everything, maybe they are net cash flow negative, which would be a red flag. But these companies get a huge valuation premium because they are showing growth.”

He emphasises the importance of calculating cash flow cautiously, especially when companies show significant growth, to avoid potential pitfalls in financial assessments.

On Munger’s absence from future Berkshire Hathaway annual meetings, he says, “I would not be surprised if an AI avatar of him comes by and answers some questions at least.”

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