Charlie Munger’s Revelation About Berkshire Hathaway
Charlie Munger, the late investment icon and the vice chairman of Berkshire Hathaway, revealed a surprising claim about the company’s missed potential. He suggested that the conglomerate, which he and Warren Buffett built over the course of five decades, could have doubled its value if they applied leverage when buying businesses and common stocks.
Missed Opportunities
Munger, who passed away just a month shy of his 100th birthday, made this revelation in an unaired interview before his death. He emphasized that he and Buffett almost never used leverage, a common Wall Street practice, because they always put their shareholders first. He stated that Berkshire could be easily worth twice what it is now, with practically no extra risk, if they had just used a little more leverage that was easily available. However, they were driven by the idea of not disappointing shareholders who had trusted them when they were young.
The Prevalent Use of Leverage
The use of leverage is prevalent on Wall Street as it provides a way to boost buying power and enhance the potential return in any given investment. However, it also significantly increases the risk as losses can multiply quickly if the investment doesn’t pan out as expected.
Beware of an “Unsettled Mind”
Warren Buffett, often called the “Oracle of Omaha,” previously explained the perils of using debt and leverage to buy stocks. He warned that it can make an investor short-sighted and panicky when times turn volatile. Buffett cautioned that an unsettled mind will not make good decisions during market volatility.
Cautious Handling of Shareholders’ Money
Munger revealed that he and Buffett had always been very cautious in handling their shareholders’ money over the years. They recognized that Berkshire shareholders tend to be long-term investors and often treat their stock like a savings account. Munger acknowledged that they would have used more leverage if Berkshire had no shareholders. However, he also pointed out that Berkshire did use leverage in the form of its insurance float, which gave them some leverage and was the primary reason they went into it.
Munger’s surprising revelation sheds light on the company’s conservative approach to investing and managing shareholders’ money. Although Berkshire Hathaway could have potentially doubled its value with leverage, Munger and Buffett’s priority was always to protect the interests and trust of their loyal shareholders.
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