In the 1982 Blue Chip Stamps Annual Letter, Charles Munger discussed his one enduring investing strategy. Here’s an excerpt from the letter:
We began the 1980s with five constituent businesses instead of one. In order of acquisition they are: (1) trading stamps and other promotional services, (2) See’s Candy Shops, Incorporated, (3) Mutual Savings, (4) Buffalo Evening News, and (5) Precision Steel.
Our five constituent businesses have more in common than might be noted by a casual observer:
1. They are all high-grade operations suffused to a considerable extent with the business ideas of Benjamin Franklin, manned by high-grade people operating within a long tradition emphasizing reliable and effective service, and
2. When functioning properly each business will usually generate substantial amounts of cash not claimed by
compulsory reinvestment in the same business and therefore available for purchases of new businesses or debt
The second of these two common characteristics gets more important every year as inflation continues. Many
businesses, once good investments when inflation was low, are now, under inflationary conditions, unable to produce much, if any, cash even when physical volume is constant. Any such business, always cash-starved even while reporting apparently satisfactory profits, is not a candidate, absent some special factor, to become a new subsidiary of ours.
Our balance sheet net worth at March 4, 1972 was about $46 million. By the end of 1981 our balance sheet net worth had increased to approximately $169 million, up 267% in ten years, after payment of regular dividends. At March 4, 1972 our equity in aggregate securities was worth about $3 million less than balance sheet cost. At the end of 1981 this equity was worth about $26.7 million more than balance sheet cost.
Our average annual total percentage return earned on shareholders’ investment over the ten years ending December 26, 1981 was approximately 15% per annum, without counting the favorable swing from unrealized loss to unrealized profit in our equity in marketable securities. The percentage return earned was acceptable in a moderate-inflation environment, considering the headwinds in our initial trading stamp business.
In 1981, the year just ended, our total percentage return on the beginning investment of our shareholders was approximately 19%. This percentage return fluctuates from year to year, depending upon various factors including changes in amounts of capital gains realized. The percentage return figure for any one year is not very significant, although the average figure over a period of years, and the trend in such average figure, are of vital importance.
You can read the entire letter here:
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