Stop Fixing Broken Businesses. Buy Good Ones Instead.
Charlie Munger learned from a painful turnaround that fixing a struggling company is hard, a view Warren Buffett came to share.
FINAiUS · Charlie Munger - The Man Who Built Berkshire Hathaway | A Documentary | FINAiUSCharlie Munger, the investor and longtime partner of Warren Buffett, the Omaha investor who built Berkshire Hathaway, remembered the moment Buffett would not let go of an old habit.
Buffett had learned investing from Ben Graham, the investor who taught him, and was making plenty of money doing it that way. Munger said of Buffett, "It was hard for him to quit when he was just coining money." But Buffett came to see the point, Munger recalled.
"You couldn't scale that business," Munger said. "And it was kind of scroungy and unpleasant."
Munger had lived through that kind of work himself. He put all his savings into a company and borrowed more besides, only to watch the business struggle early on.
To keep it alive, he had to step in and shrink it, cutting jobs and costs much the way private equity firms, companies that buy businesses to turn them around and sell them, operate today. He still earned a respectable return, but he considered it a bad business.
The lesson stuck with him, and became the foundation of how he invested. It was so much easier, he concluded, to buy a good business than to try to fix a broken one.
In plain terms, that kind of fix-up work meant firing people. An unidentified speaker asks: "Who in the hell wants to do that?"
He had also noticed something else. "I'd seen so many idiots get rich in easy business," he said. "Naturally, I wanted to be in an easier business."
Questions people ask
Who was Ben Graham?
Benjamin Graham was an investor and Columbia Business School professor, often called the father of value investing. He taught investors to buy stocks for less than the underlying assets were worth, looking for bargains. Buffett worked for Graham early in his career and has called him his most important intellectual influence.
Why couldn't Buffett scale the old approach?
Buying tiny, troubled companies at bargain prices works well with small sums because there are many such opportunities. Once Buffett was managing much larger sums, there were not enough of those small bargains to move the needle. He needed larger, durable businesses that could absorb more capital.
What did Buffett and Munger buy instead?
They began buying healthy companies with steady cash and loyal customers that could be held for decades, including the candy maker See's Candies in 1972. Those businesses did not need rescues or layoffs to succeed. Their profits could then be used to buy still more businesses.