More Praise for The Warren Buffett Way, First Edition

Capital Ideas,
writes that Graham’s
system is a set of rules, whereas Williams’s dividend discount model is a

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theory; but “both approaches end up recommending the same kinds of
stocks for purchase.”
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Warren Buffett has used both, with stellar success.
C H A R L E S M U N G E R
When Warren Buffett began his investment partnership in Omaha in
1956, he had just over $100,000 in capital to work with. One early task,
therefore, was to persuade additional investors to sign on. He was mak-
ing his usual careful, detailed pitch to neighbors Dr. and Mrs. Edwin
Davis, when suddenly Dr. Davis interrupted him and abruptly an-
nounced they’d give him $100,000. When Buffett asked why, Davis
replied, “Because you remind me of Charlie Munger.”
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Charlie who?
Even though both men grew up in Omaha and had many acquain-
tances in common, they did not actually meet until 1959. By that time,
Munger had moved to southern California, but he returned to Omaha
for a visit when his father died. Dr. Davis decided it was time the two
young men met and brought them together at a dinner in a local restau-
rant. It was the beginning of an extraordinary partnership.
Munger, the son of a lawyer and grandson of a federal judge, had es-
tablished a successful law practice in the Los Angeles area, but his inter-
est in the stock market was already strong. At that first dinner, the two
young men found much to talk about, including securities. From then
on, they communicated often, with Buffett frequently urging Munger
to quit law and to concentrate on investing. For a while, he did both. In
1962, he formed an investment partnership much like Buffett’s, while
maintaining his law practice. Three very successful years later, he left
the law altogether, although to this day he has an office in the f irm that
bears his name.
Munger’s investment partnership in Los Angeles, and Buffett’s in
Omaha, were similar in approach; both sought to purchase some dis-
count to underlying value. (They also enjoyed similar results, both of
them outperforming the Dow Jones Industrial Average by impressive
margins.) It is not surprising, then, that they bought some of the same
stocks. Munger, like Buffett, began buying shares of Blue Chip Stamps in
the late 1960s, and eventually he became chairman of its board. When

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Berkshire and Blue Chip Stamps merged in 1978, he became Berkshire’s
vice chairman, a position he still holds.
The working relationship between Munger and Buffett was not
formalized in an off icial partnership agreement, but it has evolved over
the years into something perhaps even closer, more symbiotic. Even be-
fore Munger joined the Berkshire board, the two made many invest-
ment decisions together, often conferring daily; gradually their business
affairs became more and more interlinked.
Today Munger continues as vice chairman of Berkshire Hathaway
and also serves as chairman of Wesco Financial, which is 80 percent
owned by Berkshire and holds many of the same investments. In every
way, he functions as Buffett’s acknowledged comanaging partner and
alter ego. To get a sense of how closely the two are aligned, we have
only to count the number of times Buffett reports “Charlie and I” did
this, or decided that, or believe this, or looked into that, or think this—
almost as if “Charlie-and-I” were the name of one person.
To their working relationship, Munger brought not only f inancial
acumen but the foundation of business law. He also brought an intel-
lectual perspective that is quite different from Buffett’s. Munger is pas-
sionately interested in many areas of knowledge—science, history,
philosophy, psychology, mathematics—and believes that each of those
f ields holds important concepts that thoughtful people can, and should,
apply to all their endeavors, including investment decisions. He calls
them “the big ideas,” and they are the core of his well-known notion
of “latticework of mental models” for investors.
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All these threads together—f inancial knowledge, background in
the law, and appreciation of lessons from other disciplines—produced
in Munger a somewhat different investment philosophy from that of
Buffett. Whereas Buffett was still searching for opportunities at bar-
gain prices, Munger believed in paying a fair price for quality com-
panies. He can be very persuasive.
It’s far better to buy a wonderful company at a fair price than
a fair company at a wonderful price.
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W
ARREN
B
UFFETT

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It was Munger who convinced Buffett that paying three times
book value for See’s Candy was actually a good deal (see Chapter 4
for the full story). That was the beginning of a plate-tectonic shift in
Buffett’s thinking, and he happily acknowledges that it was Charlie
who pushed him in a new direction. Both would quickly add that
when you f ind a quality company that also happens to be available at a
discounted price, then you’ve struck oil—or, in Berkshire’s case, the
next best thing: Coca-Cola (see Chapter 4).
One reason Buffett and Munger fit so well is that both men possess
an uncompromising attitude toward commonsense business principles.
Like Buffett, who endured poor returns in the insurance industry and
for a time refused to write policies, Charlie, in his function as CEO of
Wesco, refused to make loans when confronted with an unruly savings
and loan industry. Both exhibit managerial qualities necessary to run
high-quality businesses. Berkshire Hathaway’s shareholders are blessed in
having managing partners who look after their interest and help them
make money in all economic environments. With Buffett’s policy on
mandatory retirement—he does not believe in it—Berkshire’s sharehold-
ers will continue to benefit not from one mind but two long into the
future.
A B L E N D I N G O F I N F L U E N C E S
Shortly after Graham’s death in 1976, Buffett became the designated
steward of Graham’s value approach to investing. Indeed, Buffett’s name
became synonymous with value investing. It is easy to see why. He was
the most famous of Graham’s dedicated students, and Buffett never
missed an opportunity to acknowledge the intellectual debt he owed to
Graham. Even today, Buffett considers Graham to be the one individ-
ual, after his father, who had the most inf luence on his investment life.
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How, then, does Buffett reconcile his intellectual indebtedness to
Graham with stock purchases like the Washington Post Company (1973)
and the Coca-Cola Company (1988)? Neither passed Graham’s strict
financial test for purchase, yet Buffett made significant investments
in both.
As early as 1965, Buffett was becoming aware that Graham’s strategy
of buying cheap stocks was not ideal.
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Following his mentor’s approach

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of searching for companies that were selling for less than their net work-
ing capital, Buffett bought some genuine losers. Several companies that
he had bought at a cheap price (hence they met Graham’s test for pur-
chase) were cheap because their underlying businesses were suffering.
From his earliest investment mistakes, Buffett began moving away
from Graham’s strict teachings. “I evolved,” he admitted, “but I didn’t
go from ape to human or human to ape in a nice even manner.”
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He
was beginning to appreciate the qualitative nature of certain companies,
compared with the quantitative aspects of others. Despite that, however,
he still found himself searching for bargains, sometimes with horrible re-
sults. “My punishment,” he confessed, “was an education in the econom-
ics of short-line farm implementation manufacturers (Dempster Mill
Manufacturing), third-place department stores (Hochschild-Kohn), and
New England textile manufacturers (Berkshire Hathaway).”
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Buffett’s
evolution was delayed, he admitted, because what Graham taught him
was so valuable.
When evaluating stocks, Graham did not think about the specifics of
the businesses. Nor did he ponder the capabilities of management. He
limited his research investigation to corporate filings and annual reports.
If there was a mathematical probability of making money because the
share price was less than the assets of the company, Graham purchased
the company, regardless of its business or its management. To increase
the probability of success, he purchased as many of these statistical equa-
tions as possible.
If Graham’s teachings were limited to these precepts, Buffett would
have had little regard for him. But the margin-of-safety theory that
Graham emphasized was so important to Buffett that he could overlook
all other current weaknesses of Graham’s methodology. Even today,
Buffett continues to embrace Graham’s primary idea, the theory of