Charlie Munger is one of the most successful and respected investors in the world. He is the vice chairman of Berkshire Hathaway, the conglomerate led by his longtime partner Warren Buffett. Together, they have built a fortune of over $100 billion by following a simple but powerful investing philosophy: value investing.
Value investing is the art of finding stocks that are undervalued by the market and buying them at a bargain price. Value investors look for companies that have strong fundamentals, such as earnings, cash flow, assets, and competitive advantages, but are trading below their intrinsic value. Value investors believe that the market is often irrational and emotional, and that it can overreact to good or bad news, creating opportunities to buy low and sell high.
But how do you value a business and a stock? How do you know if you are paying more or less than what it is worth? This is where Charlie Munger’s quote comes in handy:
“All intelligent investing is value investing. Acquiring more that you are paying for. You must value the business in order to value the stock.“
-Charlie Munger, Renowned Investor
Munger suggests that the key to value investing is to focus on the business behind the stock, not just the price movements or the market sentiment. He advises investors to study the company’s financial statements, its industry, its competitors, its customers, its suppliers, its management, its culture, and its future prospects. He also recommends reading annual reports, shareholder letters, conference calls, analyst reports, and news articles to get a comprehensive picture of the business.
By doing this, investors can estimate the intrinsic value of the business, which is the present value of all its future cash flows. This is not an exact science, but rather an art that requires judgment and common sense. Munger often uses a simple formula to calculate the intrinsic value of a business:
Intrinsic value = (Future earnings per share x P/E ratio) + (Future dividends per share x dividend yield)
The P/E ratio and the dividend yield are metrics that reflect how much the market is willing to pay for a dollar of earnings or dividends from the company. They can vary depending on the industry, the growth prospects, the risk profile, and the market conditions of the company. Munger prefers to use conservative estimates for these metrics to avoid overpaying for a stock.
Once investors have an estimate of the intrinsic value of the business, they can compare it with the current market price of the stock. If the market price is significantly lower than the intrinsic value, then the stock is undervalued and represents a good buying opportunity. If the market price is higher than the intrinsic value, then the stock is overvalued and should be avoided or sold.
Munger also advises investors to look for a margin of safety when buying stocks. This means buying stocks at a price that is well below their intrinsic value, to account for any errors in estimation or any unforeseen events that could affect the business negatively. Munger likes to buy stocks at 50% or less of their intrinsic value, which gives him a high probability of making a profit and a low probability of losing money.
By following this value investing strategy, Munger has been able to achieve extraordinary returns over his long career. He has also been able to avoid many of the pitfalls that plague other investors, such as chasing fads, speculating on rumors, trading too frequently, or panicking during market crashes. He has been able to stay calm and rational in all market conditions and stick to his principles.
If you want to invest like Charlie Munger, you need to adopt his mindset and his methods. You need to think like a business owner, not like a stock trader. You need to do your homework and research thoroughly before buying any stock. You need to look for quality companies that are trading at a discount to their true worth. You need to be patient and disciplined and wait for the right opportunities. And you need to have a margin of safety that protects you from mistakes and surprises.
By doing this, you will be able to achieve long-term success in investing and build your wealth steadily and safely.
-The Wise Investor
