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Charlie Munger Deep Dive

This week I decided to finish Charlie Munger's letters to his shareholders at Wesco Financial from 1983-2009 and take notes with this question in mind: What makes Charlie Munger such a brilliant businessman?


Let's start with a little history. Before his days as Wesco's Chairman and Berkshire's Vice Chairman, Charlie developed commercial real estate in California successfully in joint partnerships and was also a successful corporate attorney at Munger, Tolles, & Olsen. He also averaged a ~19% annualized return from 1962-1975 in his hedge fund Wheeler, Munger & Co. He parlayed his majority stake in Blue Chip Stamps which he bought for $24M (representing almost 61% of his hedge fund investment assets at the time) into successful investments in See's Candies (99%), The Buffalo Evening News (100%), and Wesco Financial (80%).


What is interesting is that his investments into these three companies were wildly successful over the next 40 years, despite a 67% decline in the market value of Blue Chip Stamps from 1972-1974, which caused a 50% drop in Munger's hedge fund holdings. He wound up his fund in 1975 to concentrate on his larger stakes in Blue Chip, See's, Buffalo Evening News, and Wesco. His investment, alongside Buffett's, in Blue Chip for $24M essentially bought him 3 other businesses - See's Candies (which had outstanding economics), Buffalo Evening News (which performed well into the 1990's until new types of media put pressure on the business model), and Wesco Financial (which became a large financial insurance subsidiary within Berkshire Hathaway). 


Once in charge at Wesco, Charlie set to work improving Mutual Saving's and Precision Steel's operations and used each company's excess cash flows to invest in equity securities and other operating businesses as opportunity allowed. Berkshire Hathaway, 80% owner of Wesco Financial, also invested in Wesco's business by starting a reinsurance operation in the mid 80's, where some of Berkshire Hathaway's subsidiaries could lay off risk to Wesco's reinsurance business and allow Wesco to participate in their premium volumes (which generated investment 'float' for Charlie to invest). This insurance operation would go on to be a major force in generating funds for investment for Munger at Wesco.


In 1987, he along with Buffett, invested in Salomon convertible preferred stock which yielded over 9% dividends and were convertible into common equity if the stock traded above a certain price. He would make more investments of the type in Gillette, USAir, and Champion International - all of which would be converted into common equity after receiving substantial dividend payments and sold for big profits (except Champion where he sold the convertible preferreds for a profit). He bought a 4% position in Freddie Mac in the late 80's and compounded his money twenty times over.

He also bought a few more businesses as the years went on. The first was New America Electric, which was an electronics manufacturer. In this case, Munger made the mistake of paying too much for a business that was at peak earnings and in a tough industry. The next business was Kansas Bankers' Surety which insured banking institutions in the Midwest. This company would be rolled into Wesco's insurance operation and contin