The simple strategy Charlie Munger and Warren Buffett used to crush the S&P 500
Television personality Jim Cramer is a frequent laughing stock on Wall Street, where some even briefly launched exchange-traded funds to bet on his picks. Cramer, host of CNBC’s “Mad Money,” is no stranger to criticism, even from famous investors like the late Charlie Munger.
“I never thought I’d have the kind of really useful information on any subject that Jim Cramer claims to have,” Munger once joked to investors at the Daily Journal’s annual shareholder meeting in 2019.
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He added that some stock investors believe that “if you study a million things, you can learn a million things, but of course the bottom line is that no one can outperform the index, and I’m better than anybody.”
Munger, who died on Nov. 23, was worth $2.2 billion, according to Forbes magazine. In addition to serving as chairman of the Daily Journal, he also enjoyed great success as vice chairman of the conglomerate Berkshire Hathaway alongside his friend and business partner, fellow billionaire Warren Buffett.
Here’s the simple investment strategy that Munger says has brought prosperity to Berkshire Hathaway and the Daily Journal:
Try to do “less”
To the credit of Buffett and Munger’s investment acumen, from 1965 to 2023, Berkshire Hathaway has reported a compound annual return of 19.8%, compared with a return of 10.2% for the S&P 500 over the same period.
Munger told Daily Journal shareholders that the secret to his success was a different approach than other professional money managers.
“We tried to do as little as possible,” he says, “and we had no illusions that if we hired a bunch of smart kids, they would know more about canned soup or aerospace or public works than anyone else.”
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Rather than pick stocks every day, Berkshire’s team set itself up to make some big gains in a few sectors that it thought would give it a solid edge over the average investor.
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“I always knew that if I tried hard enough, I would find a few things that were right, and those few things would be enough,” Munger said. “That was a reasonable expectation. This is a very different approach to the process.”
Public investors can also benefit from this approach.
Lessons for investors
Buffett and Munger’s approaches are simpler and easier to understand, making them more accessible. Average investors can easily “do less,” and perhaps the best way to do that is by adopting a passive investment approach, such as investing in low-cost index funds.
According to Morningstar, assets managed by passive funds will surpass active funds for the first time in 2024, meaning this approach is definitely becoming more popular now.
But Morningstar’s analysis also found that some segments of the market are more likely to outperform: Actively managed bond funds, for example, had a 53% success rate in 2023, while 51% of real estate funds and 41% of small-cap funds outperformed passively managed funds over the 10 years ending in 2023. But these markets can be less efficient or transparent, allowing some managers to have an advantage over others.
For self-directed investors like Buffett and Munger, it was important to pick industries and companies in which they had real insight.
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This article is for informational purposes only, should not be construed as advice, and is provided without warranty of any kind.