Shortly before he died last month, Charlie Munger told CNBC, “My game in life was always to avoid all standard ways of failing […] I’ve avoided a lot because I’m so cautious.”
Caution drove much of his investment strategy, which informed his personal stakes. It also drove his decision-making as part of Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B). Still, despite the cautious attitude, Charlie Munger gambled on a handful of moonshot stocks. Some of them paid off, while some didn’t. But remember, you often learn more from examining losers than you do winners. Charlie Munger remained transparent about those losers. That demonstrates the refreshing honesty and transparency that Munger exemplified.
You can learn a lot about investing by examining how legendary investors allocate capital. Munger is decidedly one of the greats. Luckily, investors can easily find a wealth of resources, interviews, and articles where he happily details the why and how behind his decisions. These are just a few snippets from his lengthy notes and talks. Still, each offers massive insight into Charlie Munger’s stock picks.
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It’s tough to find a stock Charlie Munger loved more than BYD Company (OTCMKTS:BYDDY) – literally. During his 2023 Daily Journal Corporation (NASDAQ:DJCO) meeting (Daily Journal is Munger’s “other” holding company), he told investors, “I would say that I’ve never helped do anything at Berkshire that was as good as BYD — and I only did it once.”
But what made Munger so bullish on this electric vehicle (EV) company, especially compared to a homegrown competitor like Tesla (NASDAQ:TSLA)? Most of Munger’s sentiment comes from his focus on China as an emerging investment hub. He told investors that, specifically compared to Tesla, “We’re direct competitors. BYD is so much ahead of Tesla in China, it’s almost ridiculous.”
Munger did note that, at the time of the meeting, BYD was a pricy stock trading at 50x earnings. Since then, BYD’s per-share pricing dipped substantially and currently trades at 20x earnings. Munger would probably call this stock a Buy at that valuation. If you didn’t know, note that BYDDY is an American Depository Receipt (ADR) stock. That means that it’s structured somewhat differently than standard stocks and introduces additional risk, including exchange rate and political risk.
Costco (COST)
Costco Stock May Be the Market’s Top Recession Pick
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Munger would probably call Costco (NASDAQ:COST) his second favorite stock, considering his enthusiastic endorsement in the same February shareholder meeting. He called Costco “a perfect damn company [with] a marvelous future” and “a wonderful culture […] run by wonderful people.”
Munger’s stake in Costco reflected his love for the stock, and he owned the second-largest individual position in the company when he died. Like his investment strategy, Munger’s thesis for Costco’s strength and durability focused on its value. In fact, he thought that – from a value perspective – Costco’s ongoing entry into eCommerce posed a threat to online retail juggernaut Amazon (NASDAQ:AMZN).
Munger didn’t live to see Costco unseat the eComm giant. But the thesis holds true, particularly as strained household economics make value a core consumer buying focus. Despite stakeholder activism, Costco recognizes that fact, and the company is even stalling membership fee hikes in light of inflationary pressure.
Wells Fargo (WFC)
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Wells Fargo (NYSE:WFC) represented a splinter between Warren Buffet and Charlie Munger, as Berkshire Hathaway slashed (and eventually exited) its position at the same time Munger’s Daily Journal Corporation kept holding. Of course, in a 2021 Daily Journal meeting, Munger reminded shareholders that he and Buffett were allowed to have differences of opinion and exercise those opinions through investments.
Munger pointed to two divergent points that fed his preference for WFC compared to Buffett: tax considerations and fallout from Wells Fargo’s 2016 cross-selling scandal. He didn’t dive deeply into his tax strategy but expounded upon his bank stock thesis. He summed up his outlook quickly, saying “I think I’m a little more lenient. I expect less out of bankers than [Buffett] does.”
While that isn’t too reassuring, he did explain further by discussing how banks are tough to run, and short-term earnings emphasis can cloud executives’ judgement and impact long-term strategic vision. Since Munger made those remarks, shares in WFC nearly doubled – indicating he made the right call by holding when Buffett sold.
Bank of America (BAC)
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Bank of America (NYSE:BAC) is Daily Journal’s largest holding (as of September 30th), showing that this bank stock was easily Charlie Munger’s favorite. In the 2021 meeting, he told shareholders he thinks “that a properly run bank is a great contributor to civilization.” And Bank of America is one of the paragons of well-run banks.
Across the spectrum of profitable banking services – investment banking, credit cards, and retail and commercial banking – BAC stands within the top five nationally for each. Higher rates put downward pressure on BAC, as they did for all bank stocks. But Bank of America maintains a more prudent financial approach than others, keeping cash in reserve.
That’s clear from their current payout ratio, just 25% of excess earnings. Alternately, look at Goldman Sachs (NYSE:GS), which allocated nearly 50% of excess earnings as dividends or stock buybacks. By comparison, they’re leaving far less in reserve to react to shifting economic winds. That conservative approach to operational management is a cornerstone of Munger’s business outlook.
US Bancorp (USB)
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US Bancorp (NYSE:USB) was Munger’s fourth-largest position, one he opened in 2013 and refused to sell since. That represents another divergence from Buffett, who loved Peter Lynch’s quote, “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” Since Munger opened his USB position, shares are down slightly (about 1%) compared to the S&P 500’s whopping 210% return over the same period.
But Munger was a conviction-based investor and thought USB remained a quality stock for the duration of his holding. In one interview, he (indirectly) parried Buffett’s quote by saying, “Psychologically, I don’t mind holding a company I like and admire and I trust and know that it will be stronger than now after many years.”
Today, USB seems overpriced from my perspective, even as it has fallen nearly 20% over the past five years. Shares trade at 1.36x book value, whereas the industry average is slightly below 1. Would I invest in USB today? No. But I’m not Charlie Munger, nor nearly as rich.
Alibaba Group (BABA)
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As I mentioned at the top, Munger loved China. Alibaba Group (NYSE:BABA) was another inroads into the rapidly emerging market. Munger was so bullish on the stock that he did something rare (for him). He used leverage to expand his position. Amid 2022’s rate hikes, he was forced to sell as part of the position became untenable.
Confronted with the paradox, Munger said, “Recently, I did use a little bit of leverage here and in another place because the opportunities were so ridiculously good that I thought it was desirable to do that.” Of course, a confluence of factors forced him to halve his Alibaba position. Still, he remained bullish on Chinese stock prospects. Confronted with further concern over geopolitical and political risk, he told investors, “[the] Chinese have behaved very shrewdly in managing their economy, and they’ve gotten better results than we have in managing our economy. I think that that will probably continue.”
BABA shares are down 50% over the past five years and nearly 75% from their 2021 highs. Unfortunately, it seems as though Munger might have missed the mark on this stock pick.
Daily Journal Corporation (DJCO)
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If you want to invest in Munger’s strategic vision, it’s hard to beat his holding company, Daily Journal Corporation (NASDAQ:DJCO). While not a direct parallel, it’s easy to think of DJCO as a smaller sister organization to Berkshire Hathaway. Both operate similarly by buying and operating multiple subsidary businesses alongside stock positions.
DJCO’s top four holdings are those Munger endorsed heartily – WFC, BAC, BABA, and USB. Shares of DJCO climbed nearly 50% over the past year. Compare that to Berkshire Hathaway, which returned 13% over the same period. For some, it seems as though Munger’s unique outlook might be better suited to today’s economic conditions than Warren Buffett’s.
Despite the outperformance, shares of DJCO seem somewhat undervalued by most estimates, trading at just 2x book value and around 22x earnings. Still, valuation aside, if you want to invest in Munger’s memory, DJCO is the best way to do so.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.
Jeremy Flint, an MBA graduate and skilled finance writer, excels in content strategy for wealth managers and investment funds. Passionate about simplifying complex market concepts, he focuses on fixed-income investing, alternative investments, economic analysis, and the oil, gas, and utilities sectors. Jeremy’s work can also be found at www.jeremyflint.work.
