To say Charlie Munger lived a long, full and rich life is putting it mildly — and literally.
The Berkshire Hathaway sidekick of billionaire Warren Buffett died in November just weeks short of his 100th birthday. His estimated net worth? $2.2 billion, according to Forbes.
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Indeed, Munger was an investing legend — and just as much a font of no-nonsense wisdom and wit. Regarding the extravagant purchases consumers love, he once [quipped](https://finance.yahoo.com/news/hell-needs-rolex-watch-why-111200183.html, “Who in the hell needs a Rolex watch?”
As investors, we arguably need to measure time in a different kind of way: that is, ticking off the moments until we trade big-ticket spending for even an ounce of Munger’s golden investment guidance.
In one video capturing Munger’s remarks from the 2022 Daily Journal ($DJCO) Annual Meeting, he shares the story of a big win … and the following year, a bad flop.
Munger’s best investment ever
Munger’s musings on the extremes of his financial life were sparked by Wes in Miami, who asked him, “In your storied investment career, which investment did you like the most?”
“Well, that’s rather interesting,” Munger replied, his trusty Diet Coke can sitting in front of him. He mentioned the World Book Encyclopedia, which he remembered from his youth as a product sold door to door. “It was easy for a child who wasn’t necessarily a brilliant student.”
And as an investment, the World Book provided volume after volume of wealth. ”Berkshire made $50 million pre-tax per year out of that business for years and years and years. I was always so proud of it because I grew up with it and it helped me.”
The World Book triumph follows a pattern of Buffett and Munger buying into successful businesses whose products they loved, including Dairy Queen, See’s Candies, and yes, Coca-Cola.
Berkshire Hathaway also followed a model that almost seems old fashioned today: it invested in companies whose stocks were undervalued; that is, when the intrinsic value per share dips below the current market share price.
Read more: Suze Orman says Americans are poorer than they think — but having a dream retirement is so much easier when you know these 3 simple money moves
World Book only ceased to return monstrous profits when, as Munger noted, “a man named Bill Gates came along and decided he was going to give away a free encyclopedia with every damn bit of software.”
The World Book success story boils down to the kind of simple principle Munger loved so much: buy in companies whose products and profit potential you believe in, especially after you study the numbers and marketplace dominance.
“It’s still a marvelous product,” Munger said, “and it wasn’t good that we lost what World Book was doing for this civilization. World Book helped me get ahead in life.”
Charlie’s folly
But even the most successful market gurus have their crash-and-burn moments. Munger had no trouble recalling the dud that haunted him at the Daily Journal’s 2023 meeting: Alibaba “was one of the worst mistakes I’ve ever made.”
Munger said he was “over-charmed” by online retailing and “got a little out of focus” when it came time to invest his money in Alibaba. In fact, Munger acknowledged that he used leverage to buy the stock— a tactic he has frowned on in the past — because “the opportunities were so ridiculously good I thought it was desirable to do that.”
Munger initially bought about 165,000 Alibaba shares in the first quarter of 2021 and increased that to 602,060 shares in the fourth quarter. But he then cut that back to 300,000 shares in the first quarter of 2022.
The lesson Munger learned and that we can especially benefit from today is that the market’s bright shiny objects may distract us from doing our homework. E-commerce, he said, wasn’t a slam dunk but just another form of retail where a business has to prove its viability, just like a brick-and-mortar store.
This story should be familiar to anyone who has jumped on an IPO from a much-hyped company, only to see its stock falter days afterward. Trump Media, for example, recently dropped below $30 a share, compared to an IPO price that soared above $70.
As for his particular market tumble, Munger’s response was pure Munger: “I keep rubbing my own nose in my own mistakes like I’m doing now because I think it’s good for [me].”
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Berkshire Hathaway CEO and long-esteemed billionaire investor Warren Buffett dedicated the entire first page of his annual letter to shareholders remembering the guidance and contributions of his friend and partner, Charlie Munger, who died in November. Buffett recalled that Munger had always been an advisor to him, telling him in 1965 (“correctly!” Buffett adds) “that I had made a dumb decision in buying control of Berkshire.” In the letter, Buffett says Munger advised him on how to correct that “mistake.” Later as a partner at Berkshire, Buffett said, Munger many times “jerked me back to sanity when my old habits surfaced.” Buffett wrote that Munger was truly the “architect” of the present-day Berkshire, and Buffett has been the “general contractor” carrying out its day-to-day construction.
“Charlie never sought to take credit for his role as creator but instead let me take the bows and receive the accolades,” Buffett wrote. “In a way his relationship with me was part older brother, part loving father. Even when he knew he was right, he gave me the reins, and when I blundered he never—never—reminded me of my mistake.”
As Berkshire Hathaway’s latest earnings show, the architect designed a robust and unique financial machine that has reliably delivered success. Berkshire delivered record earnings in the last quarter, with operating earnings up 28% and cash reaching $167.6 billion. Operating earnings were near $8.5 billion for the quarter—up year-over-year from $6.6 billion—and showed massive growth in insurance underwriting and insurance investments.
And while the stock market has seen a banner last few months, with most indexes hitting record highs, Berkshire Hathaway’s returns have perpetually beat the markets. Compared to the S&P 500, Berkshire has gotten better returns for the last 40 years. So far in 2024, Berkshire has tallied an 18% return, better than the 7% for the S&P as a whole. Buffett said Berkshire’s “eye-popping performance” could be a thing of the past because of its large size and market concentration, but it’s had an amazing run.
While the markets—and savvy investors like Berkshire Hathaway—are booming, companies of all sizes are hyper-focused on their costs this year, looking to find the right ways to trim costs and yet invest for growth. I talked with Myles Corson, strategy and markets leader for EY Global and Americas financial accounting advisory services, about where CFOs should be investing so their companies can grow. An excerpt from our conversation is later in this newsletter.
ARTIFICIAL INTELLIGENCE
AI behaving badly cost Google parent Alphabet $90 billion in market value this week. Late last week, outcry over the company’s Gemini AI image rendering tool returning historically inaccurate racial depictions led the company to take that function offline. But the Gemini chatbot also gave controversial responses to questions, including refusing to condemn pedophiles (because people “cannot control who they are attracted to”) and dithering on whether Adolf Hitler or Elon Musk had a more negative impact on society (though Musk did repost content on X claiming Google has “done great damage to Western civilization”). In a blog post from Google senior vice president Prabhakar Raghavan, the company acknowledged its mistakes, but it wasn’t enough to solidify investor confidence. “The issue for the stock is not the debate [over Gemini] itself, it is the perception of truth behind the brand,” Melius Research analysts Ben Reitzes and Nick Monroe wrote in a Monday note to clients obtained by Forbes. “Regardless of your view, if Google is seen as an unreliable source for AI to a portion of the population, that isn’t good for business.”
VALUATIONS + FUNDING
As Carson Group strategist Ryan Detrick said in an email to Forbes, “Few things are more certain than death, taxes, and Nvidia beats on earnings.” Last Wednesday, the AI chips titan shattered expectations and broke records for the third consecutive quarter, boosting itself and the markets as a whole into new territory. After Nvidia’s blockbuster earnings report, the company’s market cap swelled past $2 trillion for the first time, solidifying its status as the world’s third most valuable company. And its stock performance helped the S&P 500 and Dow Jones Industrial Average both hit record highs on Thursday. Cofounder and CEO Jensen Huang, who owns about 3.5% of Nvidia’s shares, also benefited. His wealth swelled by about $9.5 billion after the earnings report.
Nvidia’s quarterly revenue was $22.1 billion, a 265% year-over-year jump. Data center revenue was $18.4 billion, up 409% from a year ago. And its full-year revenue was $60.9 billion, up 126% from 2022. “Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations,” Huang said in the earnings release.
NOTABLE EARNINGS
Walmart hit an all-time stock price high after the mega-retailer reported earnings last week. The mega-retailer saw revenues increase 5.7% year-over-year, and saw 17% growth in U.S. E-commerce sales, which totaled more than $100 billion globally. Its quarterly sales of $173.4 billion and earnings per share of $1.80 topped analysts’ estimates. The retailer also announced the planned $2.3 billion acquisition of streaming TV manufacturer and platform Vizio to accelerate its Walmart Connect marketing platform.
Walmart stock continued to rally as the company split its shares on a three-for-one basis on Monday. The move was announced late last month as a plan to make Walmart stock more affordable for a range of potential investors, including store employees. But its recent success attracted more buyers, with its stock price closing up about 2% on Monday.
INTERNATIONAL NEWS
China once was a preferred economic engine for the rest of the world, but that has changed in the recent past. The Asian nation reported the smallest annual direct investment from foreign governments since the 1990s, with direct investment liabilities increasing 33% last year, according to national data reported by the Wall Street Journal. Forbes senior contributor Mike O’Sullivan wrote this calls into question the strength of China’s economy in the years to come. Forbes senior contributor Milton Ezrati said these figures and others are telltale signs that many of the world’s other economic powerhouses are decoupling from China. U.S. companies, Ezrati said, have been trying to source goods from other countries, and Mexico was the top exporter to the U.S., topping China. Ezrati reports that other countries are relying less on China now too, with Germany’s imports from China down 13%.
OFF THE LEDGER
EY’s Myles Corson On How CFOs Can Invest For The Future
A CFO’s job is never easy, but this year is a tremendous balancing act. While it’s important to keep costs down, there are areas that need investment in order for the finance department to perform well this year and in the future. I talked to Myles Corson, EY Global and Americas strategy and markets leader for financial accounting advisory services, about how CFOs can make the right investments that keep momentum moving. This conversation has been edited for length, clarity and continuity.
It’s always important for a CFO to balance spending to invest in the business and keep expenses down, but how much more of a struggle is it this year?
Corson: There’s a lot of uncertainty right now, economically, geopolitically. That pressure is definitely ramped up right now on how CFOs strike that right balance. …Priorities change in the short-term, but the underlying issues of how CFOs balance across the protecting value—which is the traditional responsibilities of CFO: compliance, reporting—and making sure all of that is totally robust with the optimizing value, which is more of the driving efficiency, the cost management, the operational performance. Then the area that probably gets the most attention: the value creation and growth agenda. That’s where everyone talks about wanting to be, but what you consistently see is they struggle to get there.
If you look at where a lot of finance organizations actually measure their success, it’s through the lens of compliance, cost management and efficiency, not how they’re helping to drive value. One of the key things that I think CFOs really need to focus on if they’re going to make that shift to being perceived as more strategic and being better business partners, is actually starting to change the narrative and focus on that very value creation. How do they measure the value they’re delivering to the organization and see it as a positive story? It comes back to this question about getting investment. If you want investment, you need to demonstrate what the return on that investment potentially is, and no one’s better positioned than finance executives to tell that story. But they haven’t done a good job of it previously.
…In the short-term, while the pressure is on cost management and efficiency, don’t lose sight of the longer-term goal or where you’re trying to get to. One of the big concerns that we have and one of the things that came through in the [Global EY] DNA [of the CFO report] last year, is while CFOs know where they want to be spending, because they drive long-term performance through that, those are also the areas that most often they’re talking about cutting back when they’re under cost pressure. Particularly areas like sustainability, technology, talent investment.
One of the most important roles for CFOs is building confidence: externally, with stakeholders, with investors in the sustainable performance of their organization, but also with their own people. One of the big challenges when you go through cost cutting [is] it can set back the organization culture, it can set back the confidence of your people, and that takes time to rebuild. So the challenge is how do you continue to display the fiscal responsibility that CFOs are expected to have whilst also keeping the eye on the long term and maintaining that growth trajectory. And to do that, you clearly need to have a very clear vision for where you’re going. You need to be making sure that all investments you make are clearly aligned with that longer-term vision and the outcomes you’re trying to drive towards. And your people are really bought in to what you’re trying to achieve, both within the finance function, but also the broader stakeholders within the C-Suite, within the other functional areas of your business, because CFOs have a really important role to play in connecting those dots.
Having the right people and the right skill sets is important. How can a CFO successfully convince others in the organization to hire those kinds of workers and not cut back on departments?
That’s one of the challenges, and it’s why the EQ-as-well-as-IQ skills are so important for successful CFOs. Now they need to be able to influence. They need to be able to engage differently with key stakeholders. Traditionally, the CEO-CFO relationship has been one of significant strength, and I think there’s good alignment there. Where there is more room to [improve], is in some of the other functional relationships with CMOs, CHROs. …It comes back to not just relying on the traditional finance skills of analysis. It’s bringing in the storytelling and using different ways of communicating.
I come back fundamentally to having the clarity of vision. How does what the finance organization is trying to do support the overall objectives of the business strategy? If you can communicate that to a CEO—how you’re helping them to drive the things that they’ve pointed out as being significant to the strategy, and you’re also doing that within the context of your own finance organization—then you’re more likely to get support for continuing to maintain andinvest your resources, particularly if you can articulate why that is going to help drive the value creation, the business partnering and get people closer to the customer and work where the business value is created.
As far as technology, what do CFOs need to look at to determine where companies to invest? Especially with all of the excitement around generative AI?
There’s areas where CFOs have a role to play in terms of the organizational approach to AI, and clearly also protecting the organization in terms of managing the risks. Do we really understand what the consequences are, and building that confidence and trust that the technology is being used in an appropriate way.
…The technology is an enabler of the outcome. What really drives success and transformation in technologies is understanding the data piece, because really, the data is the foundation. Technology is what you put on top. Getting the data piece right is what will also help you to unlock the real potential of generative AI, but then also the human aspect. If you get the data and the human aspects of transformation right, you will have clarity around what the technology you actually need to use is, and you’ll make better decisions.
While there’s a lot of financial uncertainty now, it’s unknown how things will be in the future. How critical are a CFO’s decisions this year to navigate that future, no matter what it is?
There is always uncertainty. There’s always volatility. We have economic cycles. The key thing for CFOs is: how do you build the agility into your organization so that you can adapt? …I come back to this point around having the clarity of vision and being able to stay the course, because the decisions you make in the short term still line up with that long-term vision. If your organization understands that, if the people in your finance organization understand that, they will make better decisions as a result, because they understand there’s going to be some short-term ups and downs, but we’re going to stay the course and head towards that longer-term goal that we set for ourselves.
FACTS + COMMENT
The Federal Trade Commission and nine attorneys general filed a lawsuit Monday to block Kroger’s proposed acquisition of Albertsons, which would be the largest proposed supermarket merger in U.S. history.
$24.6 billion: Price Kroger would pay for Albertsons
5,000+: Stores Kroger would operate if the merger proceeds
‘Additional grocery price hikes for everyday goods’: The outcome of the merger would “further exacerbate the financial strain [on] consumers across the country,” said Henry Liu, director of the FTC’s Bureau of Competition
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Discover’s Acquisition By Capital One: A $35 Billion Game-Changing Profit Venture
QUIZ
This week, Walgreens Boots Alliance dropped off of the Dow Jones Industrial Average. Which company took its place?
A. General Motors
B. Amazon
C. PepsiCo
D. CVS
See if you got the answer right here.
By Jonathan Stempel
(Reuters) – Warren Buffett on Saturday moved to reassure investors that his conglomerate Berkshire Hathaway would serve them well over the long term, even as he mourned the recent passing of his longtime second-in-command Charlie Munger.
In his widely-read annual letter to Berkshire shareholders, which accompanied a record $37.4 billion full-year operating profit, Buffett said his more than $900 billion conglomerate has become a fortress capable of withstanding even an unprecedented financial disaster.
“Berkshire is built to last,” Buffett wrote.
Buffett also tempered expectations for Berkshire’s stock price, saying the company’s huge size left “no possibility of eye-popping performance.”
“There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others,” Buffett wrote. “Some we can value; some we can’t.”
But the 93-year-old billionaire also assured investors that Vice Chairman Greg Abel, his designated successor, was “in all respects ready to be CEO of Berkshire tomorrow.”
Buffett also saved his most heartfelt words for Munger, who died in November at age 99.
He called Munger the “architect” of Berkshire, with Buffett being only the “general contractor,” and reminded investors how Munger pushed him to buy wonderful businesses at fair prices instead of fair businesses at wonderful prices.
Berkshire’s “extreme fiscal conservatism,” including reluctance to make major acquisitions at inflated prices, is one reason Buffett has let the Omaha, Nebraska-based company’s cash stake swell to a record $167.6 billion.
“In a way his relationship with me was part older brother, part loving father,” Buffett wrote, referring to Munger. “Even when he knew he was right, he gave me the reins, and when I blundered he never–never–reminded me of my mistake.”
Cathy Seifert, a CFRA Research analyst who rates Berkshire “buy,” said Buffett tried to show how Berkshire could withstand rocky shoals, even after Munger helped him transform a once-failing textile company into a colossus mirroring the broader economy.
“Nothing is perfect,” she said. “He tried to show there is a succession plan, and Berkshire would stick to its knitting.”
Buffett likened Berkshire’s caution in making acquisitions, with the stock market now routinely setting record highs, to an insurance policy against the kind of hurried, unwise business decisions that would have irked Munger.
“I have a sense that Berkshire wants to make Charlie proud,” said Thomas Russo, a portfolio manager and longtime shareholder at Gardner, Russo & Quinn in Lancaster, Pennsylvania.
GEICO BOOSTS RESULTS
Buffett’s letter was accompanied by Omaha, Nebraska-based Berkshire’s quarterly and annual results.
Operating profit from its dozens of insurance, railroad, industrial, energy, and retail businesses rose 28% in the quarter to $8.48 billion and 21% for the year to a record $37.4 billion.
Insurance businesses such as Geico benefited from improved underwriting quality and higher investment income as interest rates rose, offsetting wage pressures at the BNSF railroad and wildfire losses at Berkshire Hathaway Energy.
“Results reflect the value of holding a diversified collection of operating businesses,” said Jim Shanahan, an Edward Jones analyst with a “hold” rating on Berkshire.
Investment gains in Berkshire’s $354 billion equity portfolio, including stocks such as Apple, American Express, Bank of America and Coca-Cola, helped Berkshire generate a $96.2 billion annual profit.
The amount reflects accounting rules that require Berkshire to report gains in stocks it hasn’t sold, however, making it “worse-than-useless” to investors according to Buffett.
Berkshire’s caution, and one of the reasons for its record cash stake, was reflected in its having sold about $24 billion more stocks than it bought in 2023.
Results also included some of Occidental Petroleum’s earnings, which reflected Berkshire’s approximately 28% stake in the oil company.
Buffett said he expects Berkshire will keep that stake “indefinitely,” along with its stakes in five Japanese trading houses: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo.
Berkshire’s businesses also include industrial parts and chemical companies, a big real estate brokerage, and retail brands such as Dairy Queen, Fruit of the Loom and See’s candies.
(Reporting by Jonathan Stempel in New York; Editing by Ira Iosebashvili and Diane Craft)