Charlie Munger's common sense approach to investing

But far more consequential was how Munger shaped the Oracle of Omaha’s investing philosophy. Before he met Munger, Buffett, following the teachings of his mentor Benjamin Graham, was an eager buyer of just about any business as long as the price was cheap. “Cigar butts”, as Graham called them, which offered a few remaining puffs of smoke.

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It was Munger who persuaded Buffett to focus on acquiring great businesses at acceptable prices rather than hunt for seedy bargains.

His reasoning was that great businesses run by competent management teams would continue to produce a steady stream of earnings in the foreseeable future, compensating for their higher acquisition cost.

Kicking the 'butt'

The turning point came in 1971 when Munger convinced Buffett to acquire California-based See’s Candy for a price three times the firm’s net worth – something the tight-fisted Buffett could scarcely contemplate.

But it was this deal, Buffett later acknowledged, which laid the foundation for Berkshire Hathaway’s resounding success in the times to come.

“This purchase ended my pursuit of ‘cigar-butt’ investments—mediocre companies at ‘bargain’ prices—and set me in pursuit of splendid businesses selling at [reasonable] prices,” Buffett wrote in 2015. “Charlie had been urging this course for some years, but I was a slow learner.”

Berkshire, Buffett added, “has been built to Charlie’s blueprint.”

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It was not as if Munger reserved his wise counsel only for his dear friend and business partner. The lawyer-turned-investor repeatedly urged investors to broaden their horizons and practice the virtues of patience and prudence.

“It’s so simple to spend less than you earn, and invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, and do a lot of deferred gratification,” he said at an annual shareholder meeting of Berkshire Hathaway. “If you do all those things, you are almost certain to succeed. If you don’t, you’re going to need a lot of luck.”

Berkshire Hathaway’s legendary AGMs — termed the Woodstock for Capitalists —  were eagerly awaited for the pearls of wisdom the dynamic duo would be dropping with rakish abandon.

In fact, it was Munger who often stole the show with his zingers.

Munger's no-go: Derivatives, crypto 

During the shareholders meeting in 2000, at the height of the dotcom bubble, someone asked them about their views on internet stocks.

Buffett, as was his wont, launched into a lecture on the history of bubbles, the nature of markets and how stock prices eventually reflect future corporate earnings.

When he was done, Munger leaned into the mike and summed up his thinking in a couple of sentences.

“…if you mix the mathematics of the chain letter or the Ponzi scheme with some legitimate development like that of the internet, you are mixing something which is wretched and irrational and has bad consequences with something that has very good consequences...”

“…but if you mix raisins with turds, they’re still turds,” he quipped, sending the audience into peals of laughter.

Munger reserved the same disdain for a lot of exotic products investors are rushing into right now, including derivatives.

During Berkshire’s AGM in 1995, when not many retail investors would have even heard of futures and options, Munger expressed his disapproval of derivatives.

“If I were running the world, we wouldn’t have options exchanges, the derivatives transactions would be about 5 percent of what they are, and complexity of the contracts would go way down…I think the world has gone a little bonkers…”

No prizes for guessing where he stood on the topic of cryptocurrencies.

In February this year, Munger wrote an op-ed piece for The Wall Street Journal titled “Why America Should Ban Crypto”.

“A cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house, entered into in a country where gambling contracts are traditionally regulated only by states that compete in laxity,” he wrote.

Munger, Berkshire’s in-house bookworm with an encyclopaedic knowledge of markets and madness, also cited an episode from the early 1700s when England saw the unravelling of a promotional plan to get vast profits by using slow-moving sailing ships to trade with people halfway around the world.

“What the English Parliament did in its anguish when this crazy promotion blew up, was direct and simple: It banned all public trading in new common stocks and kept this ban in place for about 100 years. And, in that 100 years, England made by far the biggest national contribution to the march of civilization as it led strongly in both the Enlightenment and the Industrial Revolution…,” he added.

A historian’s breadth of knowledge coupled with a veteran investor’s scepticism towards fads. That was the quintessential Munger.