August 30, 2013, 5:19 p.m. ET
Charlie Munger: Lessons From an Investing Giant
Warren Buffett's right-hand man is brilliant in his own right.
BY JASON ZWEIG
One of the least appreciated virtues in investing is courage.
Filings with the Securities and Exchange Commission in March and again this month show the extraordinary gumption of Charlie Munger, Warren Buffett's business partner and vice chairman of Berkshire Hathaway.
Mr. Munger, who will turn 90 years old next Jan. 1, is a model for individual investors who wonder how they can possibly beat the professionals at their own game. The pros have more information than you, and their trading machines are faster. But you still have an edge over them—so long as you play a different game by your own, more sensible rules.
You can be patient; the pros can't. You don't have to be part of the herd; they do. Above all, you can be brave; they almost never are.
What makes Mr. Munger a model for individual investors?
In the first quarter of 2009, during the most desperate days of the financial crisis, Mr. Munger took 71% of the cash at Daily Journal, DJCO +3.35% a small publishing company he chairs, and poured it into the bank stocks that so many other investors were fleeing. By March 31, 2009, his bet already had gained 60%. With other purchases he made later, Mr. Munger invested $49.7 million into stocks and bonds that today are worth $128.4 million, according to financial statements Daily Journal filed on Aug. 20.
Mr. Munger was out of the office this past week and unreachable for comment, said his assistant.
At Daily Journal's annual meeting in February, Mr. Munger discussed the move briefly. According to an online transcript and an attendee, Alexander Rubalcava of Los Angeles-based Rubalcava Capital Management, Mr. Munger said "we behaved pretty sensibly" by moving boldly out of cash when stock prices got "ridiculously low."
The Daily Journal investment wasn't the only bold move Mr. Munger made during the crisis.
At Good Samaritan Hospital, a Los Angeles medical center whose board Mr. Munger leads, the endowment had long been invested in cash and short-term debt—until corporate bonds got hammered during the financial crisis.
At that point, Mr. Munger plunked most of the money into corporate bonds, according to two people familiar with the matter.
A Good Samaritan spokeswoman didn't return a request for comment, but the hospital's financial statements show that its endowment earned more than $12 million in income and unrealized gains in the year ending Sept. 1, 2009—roughly a 20% return over a period when cash earned 0.5% and the overall bond market returned less than 8%.
Where does Mr. Munger get his gumption?
In the late 1980s, he recalled in a magazine interview, a guest at a dinner party asked him, "Tell me, what one quality accounts for your enormous success?"
Mr. Munger's reply: "I'm rational. That's the answer. I'm rational."
Trained as a meteorologist at the California Institute of Technology, Mr. Munger thinks in terms of probabilities rather than certainties, say those who know him well. An early divorce and the death of his young son from leukemia taught Mr. Munger that adversity provides an opportunity to show what you are made of. Decades of voracious reading in history, science, biography and psychology have made him an acute diagnostician of human folly.
"Charlie has such a deep sense of stoicism," says a longtime friend, Christopher Davis, chairman of New York-based fund manager Davis Advisors. "He seems to be able to invert emotions, becoming uninterested when other people are euphoric and then deeply engaged when others are uncertain or fearful."
Mr. Munger favors what he calls "sitting on your a—," regardless of what the investing crowd is doing, until a good investment finally materializes.
In the panic that typically produces such an opportunity, Mr. Munger ruminates. If he likes what he sees, he pounces.
"Charlie knows exactly what he thinks, and the fact that other people don't agree has no impact on him," says his friend John Frank, managing principal at Oaktree Capital Management in Los Angeles. "He doesn't get confused about the difference between an emotional feeling and an intellectual understanding."
Many money managers spend their days in meetings, riffling through emails, staring at stock-quote machines with financial television flickering in the background, while they obsess about beating the market. Mr. Munger and Mr. Buffett, on the other hand, "sit in a quiet room and read and think and talk to people on the phone," says Shane Parrish, a money manager who edits Farnam Street, a compelling blog about decision making.
"By organizing their lives to tune out distractions and make fewer decisions," he adds, Mr. Munger and Mr. Buffett "have tilted their odds toward making better decisions."
Mr. Munger and Daily Journal haven't disclosed which stocks he bought during the crisis, but Jacob Wolinsky of ValueWalk, an investing website, believes the largest position was in Wells Fargo, WFC +1.66% followed by U.S. Bancorp USB +1.00% .
Mr. Buffett declined to comment other than to say, "Charlie is indeed rational."