During one of his last interviews with Becky Quick, Charles Munger discussed the evolution of value investing. Ben Graham, a pioneer in value investing, taught that you could find a few good things and stay with them for a very long time. However, as more people tried to do the same thing, it became more and more competitive. Munger argues that the low-hanging fruit that Ben Graham had a lot of because of the Great Depression has gone away. He believes that the real money is in the really great companies, which will carry you up, and up, and up, and up, and up. Here’s an excerpt from the interview:
Munger: Well, that’s a very interesting question. And it’s a very important question. And of course it’s harder. It’s so much harder you can’t believe it.
The people that have found it harder are the people that made Warren so rich, Ben Graham and his colleague, Dodd in a damned adjunct course at Columbia.
What Ben Graham did that was so interesting is that he taught that you could find a few good things and stay with them for a very long time. But a long time to him was a few years. It wasn’t a few decades.
And he did that for, like, 40 or 50 years in a little investment partnership with incentives and so on. And his investors, who were by and large not very rich, did very well with him.
After he got his share, they got a good cut that was higher than what other people got after fees. And so he delivered a valuable product.
And he taught you got things– it could be a lousy business, but if they were cheap enough, they were still all right if they had enough assets per share.
So you’re getting at least twice as many assets as you were paying for. And he just floated around from the best available stuff among companies good and bad. That was his system.
And he worked for 50 years. His clients had good returns. Well, after he became so famous, partly with the help of Warren Buffett and Warren Buffett’s success, everybody tried to do the same thing.
And, of course, as everybody crowded in, trying to be a little Ben Graham, it got more and more competitive. And that’s what’s happened now.
And the low hanging fruit that Ben Graham had a lot of because of the Great Depression has gone away. And if you just try and float from one undervalued, bad business into another, and pay all the costs and what, it just doesn’t work well enough for the people that actually foot him the money to be worth bothering with.
That’s the way it works now. But in Graham’s time, it was the best way there was.
Quick: Well, your upgrade on that was to just look for good businesses.
Munger: I saw immediately that Graham was wrong.
Quick: Right. And you look for—
Munger: Yeah, you had – the real money was in the really great companies, which carried you up, and up, and up, and up, and up.
You can read the entire transcript of the interview here:
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