As CEO and chairman of the board, Warren Buffett officially calls the shots at Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). But Berkshire's success has much to do with Buffett's official sidekick, Charlie Munger, who serves as the firm's vice chairman.
For those not familiar with Munger, he started out as a lawyer but eventually turned to investing. In the 1960s, he started an investment partnership that beat the market by 15% annually, and then turned his attention to Berkshire. While at Berkshire, he has been credited with working closely with Buffett in identifying significantly undervalued investment opportunities. Munger is worth an estimated $1 billion.
Until recently, Munger also presided over Wesco Financial Corp., which was 80.1% owned by Berkshire. Berkshire had held this same stake since 1977, but back in February, it announced it would be acquiring the 19.9% it didn't own. As of the end of 2010, Wesco's primary businesses included two insurance companies, the CORT furniture rental business and the Precision Steel Warehouse, a steel service center business.
Similar to Berkshire, Wesco pursued a highly concentrated investment approach. Its stock portfolio held five stocks that constituted 81.5% of its total market value. The names included Wells Fargo (NYSE: WFC), US Bancorp (NYSE: USB), Procter & Gamble (NYSE: PG), Coca Cola NYSE: KO), and Kraft (NYSE: KFT). Each position will be familiar to those that track Buffett's investment moves -- Berkshire holds very large positions of each of these stocks.
The three consumer stocks Wesco owned before it was acquired offer great examples of firms Munger admires. P&G is the ultimate consumer goods firm, while Kraft focuses on selling food across the world. Coca-Cola may not qualify because of its namesake sugar water, but does sell plenty of water and non-carbonated beverages, including Dasani, Minute Maid and Vitamin Water. All three have stable businesses and continue to grow despite their massive size.
The acquisition of Wesco also ended a tradition whereby Munger met with Wesco shareholders every year. The talk was unofficially termed "Conversations with Charlie Munger," and the last one occurred on July 1 in Pasadena, California. During the talk, Munger offered some keen insight into the economy, Berkshire Hathaway and some of his favorite holdings.
During the talk, an audience member asked Munger his thoughts on Chinese lithium battery and auto manufacturer BYD (Pink Sheets: BYDDF), which Berkshire also holds in its portfolio. Munger and his family have an estimated 3% stake in BYD, which is worth around $200 million. Though he wouldn't offer a specific recommendation, said he plans to hold his stake indefinitely. This was due mainly to the fact he likes the people running BYD. He doesn't usually invest in younger start-up companies, but feels like BYD has a solid chance at becoming a large player in selling electric cars in China.
Munger also detailed during his talk that Coca-Cola is his favorite consumer-goods firm, though it isn't nearly as appealing as two decades ago when it was growing faster. He admires Coke's brand recognition and believes it represents a competitive advantage that rivals can't easily copy.
He had kind words for discount warehouse giant Costco (Nasdaq: COST), saying it is "just about the most admirable capitalist enterprise that ever existed." Munger is also a member of Costco's board of directors, demonstrating his admiration for the firm so much to devote his time to in addition to Berkshire.
Munger believes Wells Fargo and US Bancorp, two financial holdings in Wesco's portfolio before selling out to Berkshire, are among the best-run big banks in the country. Like most banks, they made massive errors in judgment during the financial crisis, but Wells and US Bancorp managed to outperform their rivals. He called Bank of America's (NYSE: BAC) actions leading up to the downturn "disgraceful," as management made a number of poor decisions such as acquiring Countrywide Financial and adding billions in soured mortgage loans to its balance sheet. Wells Fargo and US Bancorp look like solid holdings as banking recovers in the United States. Again, Berkshire holds big positions in both -- $11 billion and $2.1 billion as of the latest year-end.
Equally important is insight on what Munger does not own. During his final talk, he said he doesn't spend time looking at mutual funds or exchange-traded funds (ETFs) because he prefers to invest in individual stocks. However, he does believe low cost mutual funds are appropriate for other people, especially when compared to hiring an active manager that may charge excessive fees and underperform the market. He also isn't a big fan of credit card companies that are too aggressive in convincing people to rack up credit card debt, or of firms that promote gambling. In his mind, firms should focus on selling goods that are healthy and benefit customers.
Munger is of course most knowledgeable about Berkshire. During his final talk, an audience member asked him if Berkshire would eventually pay a dividend. He thought it might one day, but said he doesn't want to be around to see it personally. In his mind, this would mean Berkshire no longer has enough appealing investments to make so it would rather pay it out to shareholders. In this respect, he would consider a dividend a failure.
Action to Take --> Much has been written on Munger, so while his annual talks have ended, there is plenty of material to learn more about his investment philosophies and his opinions, many of which can be irreverent but incredibly educational.
In terms of investments he likes that look like compelling opportunities right now, BYD is certainly worth a further look. The stock is trading at its lows of the past year and has incredible potential to sell electric cars in China and the rest of the world. The fact that Munger and Buffett are holding firm on the name suggests it will be a winner over the long haul.