Charlie Munger’s Value Investing: A Philosophical Approach
By David Chávez Salazar
On May 4, 2024, “Woodstock for Capitalists” took place in Omaha, Nebraska. This is the nickname for the annual meeting of shareholders of Berkshire Hathaway, the company led by legendary investor Warren Buffett. Despite being a corporate event, it’s characterized by a festive, informal, and welcoming atmosphere similar to that of a comic book convention. However, in 2024, the mood was marred by a notable absence: Charles “Charlie” Munger, Buffett’s key partner for almost five decades, had died in November 2023. Although he was much more reserved than Buffett, his influence in the business world was no less significant. In fact, Bill Gates described him as the “broadest thinker I have ever encountered.”1
A Berkshire Hathaway investor once asked Munger to sum up the secret of his success in one word. He answered, “Rationality.”2 Indeed the rationality of many of Munger’s ideas makes them useful not only for investors but for anyone—and in many areas of life, from everyday things (studying, working, sleeping) to deciding on a career path.
Munger’s Life
Munger was born in Omaha in 1924. In the early 1940s, he studied mathematics at the University of Michigan but chose to leave early to join the U.S. Army during World War II. After his military service, he entered Harvard Law School (following in the footsteps of his father, who was a lawyer) and graduated in 1948. From there, he embarked on a successful career as a real estate lawyer in California.3
He met Buffett in 1959 during a dinner hosted by a mutual friend.4 In that first meeting, both men discovered how aligned their views on life and business were. Influenced by Buffett and eager to become a money manager like him, Munger decided to leave law and dedicate himself to investment management. Between 1962 and 1975, he ran his own investment firm with extraordinary results—in the first year, he earned around $300,000 (in 1962 dollars) from one real estate deal. Then, in 1978, at Buffet’s insistence, he joined Berkshire Hathaway (BH) as second-in-command, which began a collaboration that would transform the financial world.5
When Buffett acquired BH in 1960, it was a failing textile business. But he transformed it into a diversified holding company with a wide range of assets and investments. Munger added a fresh perspective to BH using an investment approach based on grasping the factors that drive the long-term market performance of a given stock, share, and other asset. This approach boosted the company’s growth enormously. In 1978, BH’s market capitalization (the total value of a company’s shares) was $819.6 million (in 2023 dollars); in 2023 it was $775.65 billion.6 In other words, in his forty-five years of comanagement, the company’s value increased almost a thousandfold.
Munger also accumulated great personal wealth. When he died, he had a net worth of approximately $2.2 billion.7 This could have been even higher, but throughout his life he donated billions to various causes he deeply believed in, such as higher education and medical research.8
What was the key to his success? The answer is value investing, an approach developed in the 1930s by Columbia University professor and fund manager Benjamin Graham.9 Munger put his own stamp on this investment approach, making it deeper and more personal.
What Is Value Investing?
Value investing is based on the premise that the market price of a security (e.g., a stock) does not always reflect its long-term profitability potential, which value investors call its “intrinsic value.”10 Unlike traditional investing, which often focuses on short-term price movements, value investing emphasizes identifying securities that are undervalued relative to their fundamental worth, providing an opportunity for long-term gains.
To determine this long-term profitability potential, investors analyze factors that strongly influence its performance and its financial statements: income statement, balance sheet, and cash flow statement. This is called “fundamental analysis.” Like a detective, the value investor analyzes these “fundamentals,” which indicate the company’s ability to generate solid cash flow.
Imagine that Walmart stock is trading at $60 a share. An investor uses fundamental analysis to determine that, based on its fundamentals, people should value the stock at about $140. The difference between this so-called intrinsic value and the current market price is the “margin of safety.” This margin would be $80 ($140 minus $60)—the amount by which the investor estimates the stock is undervalued. If he is correct, and the market adjusts accordingly, he stands to make considerable gains. A large margin of safety indicates a relatively low risk to the investor.
Understanding the margin of safety helps explain how different types of investors react to changes in stock prices. Now suppose that a value investor and a “traditional investor” both buy Walmart’s stock at $60. Then the stock falls to $50. The average investor would likely panic, seeing this as a loss. The typical value investor, however, would likely remain calm because he knows that—assuming his original valuation of $140 was correct and no drastic changes have occurred—this price drop represents a temporary loss on paper, not a permanent reduction in the stock’s “intrinsic” value. Moreover, it increases the margin of safety for any additional shares purchased at the lower price. So, the value investor might even see this as an opportunity to increase his holdings, as the stock is now even more undervalued than before.
This undervaluation creates opportunity for the investor to profit because he has acquired a share at a lower price than he believes its profitability warrants. In this sense, as Munger points out, “All intelligent investing is value investing: acquiring more than you are paying for. You must value the business in order to value the stock.”11
Value investing is about finding undervalued companies—companies whose stock price is lower than the fundamentals of its business warrants. Although some shares in the market cost less than $1 (so-called penny stocks), these are typically attractive to speculative traders looking for quick gains rather than to value investors. They do not rush to buy them because they are looking for shares in solid companies with good financial prospects or, as Munger himself said, “buying wonderful businesses at fair prices.”12
The Objectivity of Value Investing
Value investing is based on objectively understanding both the investment world and the economic role of the investor.
Shortsighted investors, particularly those unconcerned with a company’s fundamentals, often misidentify its value. Those with more foresight, especially those who grasp the underlying causal factors that drive a business’s success, can thereby capitalize on these mistakes. Whereas those in the first group are prone to succumb to the “groupthink” pressures of crowd psychology, value investors are not. Thereby, they not only profit but help to “correct” market prices. Looking at the average price over time, we can imagine that “Mr. Market” (as Graham metaphorically called it) tends to become more rational, leading to better alignment between stock prices and the real value of companies. Setting the metaphor aside, the truth is that the most rational investors cause this alignment by putting their money where the demonstrable value is—and thereby profiting.
During the 1997–2001 dot-com bubble, there was a dizzying increase in the share prices of internet companies. This phenomenon was driven by investors who—seduced by fantasies of the supposed profitability of startups based on the then-new technology of the internet—bought shares at increasingly exorbitant prices without carefully evaluating the fundamentals of these businesses. Unlike value investors, who focus on long-term stability, these investors followed a speculative approach, driven by hype and short-term profit expectations. The reality was that most of these companies weren’t able to generate stable revenue, and they soon went bankrupt. As a result, investors lost significant amounts of money and confidence, sold the stocks en masse, and thus triggered a massive market correction as the overvalued stocks crashed back down. Tellingly, Munger and Buffett stayed out of this frenzy, and time proved them right.
Munger’s Thought Method
The ability to recognize the profitability potential of a business, even in the face of market fluctuations, is not an act of random intuition. It requires a rigorous analytical approach that enables the investor to discern relevant facts from distractions. Munger developed just such a method of thinking, one that anyone can benefit from, whether or not they do any sort of investing.
Munger called this system “practical thinking,” and it is based on five elements. Although he developed it to guide his decision making in the financial realm, it offers a useful model for tackling complex problems in any area of life.13
Simplify Problems14
Munger approached problems systematically, starting with the most obvious aspects. For example, when asked for advice on achieving financial security, he would strip down the issue to its most fundamental principle: “Spend less than you make; always be saving something.”15 By focusing on this simple principle, rather than proposing complex strategies or speculative investments, Munger made the path to financial stability clear and accessible for anyone willing to follow it. As he put it, “Buffett and I don’t leap seven-foot fences. Instead, we look for one-foot fences with big rewards on the other side.”16 This strategy was key to his success, “making the world easier” for him.
It also aligns with a fundamental truth about human cognition: Our conscious minds can only handle a limited amount of information at any given time. Whether dealing with sensory perceptions or abstract concepts, individuals must focus their attention on manageable pieces of reality. The cognitive power of human beings lies in our ability to reduce a vast amount of information to a minimal set of meaningful units, which facilitates decision making.17 By tackling the simplest, most critical parts first, Munger’s method reflects this principle, facilitating decision making while avoiding unnecessary complexity.
For example, imagine someone who wants to adopt a healthier lifestyle but feels overwhelmed by the complexity of diet plans, workout routines, and wellness trends. Instead of trying to change everything at once, he could simplify the process by focusing on the most fundamental actions: Drink more water and walk thirty minutes a day. Once these habits are in place, he can gradually build on them, making long-term progress without unnecessary stress.
By breaking down problems into their essential elements, whether in finance, health, or daily decision making, Munger’s approach helps individuals take meaningful action rather than getting stuck in analysis paralysis.
Numerical Fluency
The ability to handle mathematical concepts with ease and precision and to apply them to a wide variety of situations is numerical fluency.
Numerical fluency does not require the skill of a great mathematician, but it does mean mastering the fundamentals of arithmetic, algebra, and statistics. Munger said that it was enough to understand basic mathematical operations to effectively solve most problems. In a talk addressed to BH shareholders, he explained Coca-Cola’s business model and success using simple mathematical ideas, graspable even for an elementary-school child.
Munger observed that numerical fluency helps us approach problems more clearly—leading to better decisions in all areas of life, not just in investment and business. “Without numerical fluency,” he argued, “in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.”18
For example, imagine you’re at the supermarket on a very tight budget, and you need to buy groceries for the week. If you have a clear idea of prices and can do quick calculations in your head, you can decide whether it’s better to buy one large bag of flour or two small ones, or whether the “3 for 2” deal really saves you money. You can also shop around at other supermarkets and estimate which is more convenient.
Reverse Thinking
Munger stated that it was not enough to think forward about problems (i.e., to look at the steps or actions that will get you from the current situation to your desired goal). For example, if your goal is to improve your health, then the steps to follow are exercise, eat better, get enough sleep, and so on.
Munger held that you should also reflect on the mistakes or situations you want to avoid. He called this “reverse thinking.”19 In an investment context, instead of focusing solely on which stocks to buy, Munger might ask: What common errors do investors make that could lead to significant losses, such as chasing speculative trends or neglecting thorough research? By identifying these pitfalls, he could steer clear of risky decisions and make more rational investment choices.
This principle can also be applied more broadly. In the context of improving your health, instead of focusing only on what you should do, ask yourself: What actions would harm my progress, such as skipping workouts, eating poorly, or not getting enough sleep? By identifying and avoiding these behaviors, you can create a more comprehensive plan for success.
Instead of adding to the excessive enthusiasm of the dot-com bubble, investors like Munger relied on fundamental analysis to evaluate internet companies. They examined whether these businesses had the financial stability and profitability to justify their skyrocketing stock prices. Applying reverse reasoning, Munger also asked, “What factors could lead to these companies failing to deliver long-term value?” The answer was clear: Despite being built on fascinating ideas, many early internet companies lacked solid financial fundamentals, making them unsustainable and highly speculative investments. For Munger, this combination of analysis and reverse thinking highlighted that investing in such companies would be a bad idea. He dedicated himself to studying them objectively, focusing not just on the reasons to invest in a company but also on the reasons to avoid it. Instead of starting with optimism about potential returns, Munger asked, “What are the reasons you should not invest in this company?” By identifying potential risks, weaknesses, or flaws in the business model, he avoided decisions driven by enthusiasm alone and ensured that only the soundest opportunities made it into his portfolio.
Routinely Use the Basic Concepts of Different Disciplines
Munger was famous for using what he called “multiple mental models.” By “mental models,” he meant the concepts and ways of thinking that people use in different fields of study.
The concepts of different disciplines are not isolated entities, but in Munger’s opinion can and should be integrated into a latticework that enables us to understand the world in general and a given area, such as the stock market, in particular.20 Such integration requires connecting and organizing ideas into a coherent, comprehensive view of the world, observing how they relate to each other and form an interconnected whole. This process leads to a deeper, more complete understanding of reality and thus a stronger ability to make good decisions.
Consider an investor who uses mental models not only from economics or finance but also from a discipline such as psychology to assess an investment opportunity from multiple perspectives. Grasping and applying insights from psychology enables the investor to understand, for instance, the emotional factors that influence investors’ behavior, such as loss aversion or overconfidence. Likewise, a journalist familiar with history could use examples from that field to improve his analysis of current events.
This latticework strategy takes advantage of the fact that knowledge is contextual and is more useful when it is integrated, as opposed to being a disconnected mass of compartmentalized information. For example, a chef who focuses solely on cooking techniques without considering the nutritional value of ingredients or the cultural significance of certain dishes may create delicious meals but miss the opportunity to promote healthy eating or provide diners with a richer experience. By integrating knowledge from nutrition, culture, and culinary arts, the chef can enhance dining experiences and make a more meaningful impact on his customers.
Similarly, a teacher who understands not only his subject matter but also principles of psychology and communication can be far more effective than one who doesn’t. A math teacher, for example, who applies storytelling techniques from literature can make abstract concepts more engaging and memorable for students. Instead of simply explaining the Pythagorean theorem with numbers and formulas, he might tell the story of ancient Greek mathematicians and how the theorem was discovered, making the lesson both educational and captivating.
Identify “Lollapalooza Effects”
Lollapalooza effects occur when multiple cognitive biases, incentives, and psychological tendencies combine, amplifying their impact. The term comes from the Lollapalooza festival, which symbolizes the convergence of diverse forces into a single event.
For instance, consider a Tupperware party. At such events, several psychological principles come into play. First, there’s reciprocity, which suggests that people are more likely to make a purchase because they feel they are engaging in a mutually beneficial exchange with the hostess. Second, liking bias plays a role; we tend to respond more positively to requests from people we like, such as friends or neighbors. Finally, social proof increases the likelihood of a purchase when we observe others buying as well. These factors combine to create a powerful influence, significantly raising the probability that you’ll make a purchase at the party.
Lollapalooza effects exemplify the complexity and interaction of multiple factors in decision making, where different psychological or environmental influences combine to amplify each other and significantly alter behavior.21 To identify these effects, look for situations where multiple biases or influences are at play simultaneously, such as social proof, reciprocity, and liking bias in the example of a Tupperware party. Once you recognize these factors, you can use this understanding to anticipate how people might behave in similar scenarios and even influence decisions in your own life—whether you are selling a product, persuading others, or simply trying to avoid being swayed by manipulative tactics. Essentially, by recognizing Lollapalooza effects, you can make more informed decisions and avoid being caught off guard by the power of multiple forces acting together.
Conclusions
Unlike many other thinkers, Munger did not leave an extensive written legacy. Our knowledge of his thinking comes primarily from his talks and from books that were written about him. Yet, his wisdom extended far beyond finance. Whether you’re deciding which car to buy, which career to pursue, or how to think more clearly, Munger’s principles of rationality, mental models, and disciplined decision making offer invaluable guidance. More than just an investor, Munger was a thinker who shaped businesses, influenced countless investors, and indirectly impacted the lives of millions. His legacy is not just in wealth creation but in the way he taught people to approach problems, decisions, and life in general.
This article appears in the Spring 2025 issue of The Objective Standard.
Farnam Street, “Charlie Munger on Getting Rich, Wisdom, Focus, Fake Knowledge and More,” https://fs.blog/charlie-munger-wisdom (accessed May 5, 2024).
Peter Kaufman, Poor Charlie’s Almanack, 3rd ed. (Marceline: Donning, 2008), 20.
Wesley Anderson, Warren Buffett & Charlie Munger: Biography of the Greatest Investing Duo Ever (published independently, 2019), 17, 103, 49: Anneke Cole, “Renowned Investor Charlie Munger, 99, Changed Stanford Graduate Housing,” Stanford University News and Media, December 1, 2023, https://law.stanford.edu/press/renowned-investor-charlie-munger-99-changed-stanford-graduate-housing.
Anderson, Warren Buffett & Charlie Munger, 99.
Anderson, Warren Buffett & Charlie Munger, 103.
This figure results from my own calculation. Market capitalization is defined mathematically as: Total Number of Outstanding Shares (TNOS) * Current Market Price per Share (CMPS). Both data were obtained from the Berkshire Hathaway Inc. 1978 Annual Report to the Stockholders. TNOS is equivalent to 1,028,684 shares (p. 28), while for CMPS an average was taken between the highest and lowest share price recorded during the fourth quarter of 1978, resulting in $170. When multiplying, we obtain $175,390,622 (current 1978 dollars) adjusting them for inflation and converting them to 2023 dollars results in $819,660,633.51. This conversion was done using the U.S. Inflation Calculator (https://www.usinflationcalculator.com). The 2023 figure is also my own calculation based on data that Berkshire Hathaway Inc. provided in its 2023 Annual Report to the Stockholders. The TNOS is equivalent to 2,174,768,589 shares, while the CMPS corresponds to $356.66, the closing price of the company’s share on December 28, 2023. By multiplying them, we obtain $775,652,964,952.
“Charles Munger: Profile,” Forbes, https://www.forbes.com/profile/charles-munger/?sh=779500a1697a (accessed May 5, 2024).
Maria Di Mento, “Charlie Munger, Big Donor and Warren Buffett’s Business Partner, Has Died,” Chronicle of Philanthropy, November 28, 2023, https://bit.ly/3Ykz6I6 (accessed July 25, 2024).
Benjamin Graham, The Intelligent Investor (New York: Harper & Brothers, 1949).
Strictly speaking, this is an inaccurate name because no value is “intrinsic”—value cannot exist independent of a valuer—but the term serves to distinguish an asset’s profitability potential from its current market price; Esmé Faerber, All about Value Investing (The Easy Way to Get Started) (New York: McGraw-Hill, 2013), 1–13.
Kaufman, Poor Charlie’s Almanack, 79.
Duncan Williams, “It’s Far Better to Buy a Wonderful Company at a Fair Price Than a Fair Company at a Wonderful Price,” Duncan Williams Asset Management, October 13, 2023, https://www.dwassetmgmt.com/blog/its-far-better-to-buy-a-wonderful-company-at-a-fair-price-than-a-fair-company-at-a-wonderful-price.
Kaufman, Poor Charlie’s Almanack, 299.
Kaufman, Poor Charlie’s Almanack, 300.
Kaufman, Poor Charlie’s Almanack, 219.
Kaufman, Poor Charlie’s Almanack, 254.
Ayn Rand, Introduction to Objectivist Epistemology (New York: Meridian, 1990), 60.
Kaufman, Poor Charlie’s Almanack, 300.
Kaufman, Poor Charlie’s Almanack, 300.
Kaufman, Poor Charlie’s Almanack, 62.
Peikoff, Objectivism: The Philosophy of Ayn Rand (New York: Meridian, 1993), 123.