Warren Buffett and Charlie Munger's epic success is down to 3 key things, Howard Marks says
- Warren Buffett and Charlie Munger's success is down to three simple things, Howard Marks says.
- The pair have made lots of solid bets, found some big winners, and had few big losers, Marks says.
Berkshire Hathaway stock has skyrocketed by over 4,300,o00%, or about 20% a year, since Warren Buffett took over as CEO in 1965. Buffett and his business partner, Charlie Munger, have achieved that phenomenal gain for three clear reasons, Howard Marks says.
"I believe the ingredients of Warren's and Charlie's great performance are simple: (a) a lot of investments in which they did decently, (b) a relatively small number of big winners that they invested in heavily and held for decades, and (c) relatively few big losers," Marks wrote in his latest memo, published on Tuesday.
The billionaire investor and co-chairman of Oaktree Capital Management nodded to Buffett's shareholder letter this year, in which the Berkshire chief attributed his company's success to "a dozen truly good decisions," or about one every five years.
Buffett singled out his bets on Coca-Cola and American Express as examples. He invested about $1.3 billion in each stock in the mid-1990s. Those positions are each worth about $25 billion today, and together they yield over $1 billion in dividends annually.
"The weeds wither away in significance as the flowers bloom," Buffett wrote. "Over time, it takes just a few winners to work wonders."
Marks agreed in his memo that picking winners is vital to beating the market as an investor.
"Warren Buffett – arguably the investor with the best long-term record (and certainly the longest long-term record) – is widely described as having had only twelve great winners in his career," Marks said. "His partner Charlie Munger told me the vast majority of his own wealth came not from twelve winners, but only four."
However, the Oaktree cofounder also underlined the importance of not screwing up. Taking some risk, for example by betting big on a select few stocks, is necessary to deliver outsized returns, he said. But those gains can be offset by bad wagers, meaning a balance is needed between picking winners and avoiding losers, he added.
Buffett made a similar point in a television interview nearly 40 years ago: "The first rule of investment is don't lose, and the second rule of investment is don't forget the first rule, and that's all the rules there are."