Munger’s investing style has been more audacious than Buffett’s

Despite being “twins,” Charlie Munger has, historically speaking, made more bold investments than Warren Buffett.

In The Snowball, Alice Schroeder wrote about the differences between their viewpoints:

[Munger’s] impatience stood out more than any theory that was emerging inside his head. He wanted to get really rich, really fast. He and Roy Tolles (sidenote: For more on Roy Telles, read his 2008 obituary in the LA Times (a).) made bets on whose portfolio would be up more than one hundred percent in a year. And he was willing to borrow money to make money, whereas Buffett had never borrowed a significant sum in his life. “I need three million dollars,” Munger would say, on one of his frequent visits to the Union Bank of California. “Sign here,” the bank would reply.

With these huge sums, Munger did enormous trades like British Columbia Power, which was selling at around $19 and being taken over by the Canadian government at a little more than $22. Munger put not just his whole partnership, but all the money he had, and all that he could borrow into an arbitrage on this single stock — but only because there was almost no chance that this deal would fall apart. When the transaction went through, the deal paid off handsomely.

Jack Wheeler had explained to [Munger] that, as a member of the exchange, under its rules he could borrow an additional ninety-five cents for every dollar invested.

Thus, if he put up $500, he could borrow another $475 and invest a total of $975. If the investment earned a profit of twenty-five percent, the profit on Munger’s $500 of capital would be nearly double that (sidenote: Alice Schroeder notes: “The example has been simplified for ease of understanding the concept of leverage. Obviously the exact return on capital depends on how long it took to make the profit, and on the funding rate.”) . While having the potential to nearly double his returns, this borrowing likewise nearly doubled his risk. If he lost twenty-five percent, he would lose nearly half his capital.

But Munger, more than Buffett — far more than Buffett — was willing to take on some debt if he was positive the odds were right.

By the early 1960s, the Buffetts had begun to vacation in California, so that Warren could spend more time with Graham and Munger. Once Warren and Susie took the kids on a long trip up and down the coast, but usually when they came to visit, they’d settle into a motel on Santa Monica Boulevard, and he and Munger would talk stocks for hours.

The differences in their philosophies made for long conversations. While Buffett made many of the same investments, he would forgo the chance of profits any day to avoid too much risk, and viewed preserving his capital as an almost holy imperative (sidenote: Schroeder, again: “[Buffett] tended to extrapolate mathematical probabilities over time to the inevitable (and often correct) conclusion that if something can go wrong, it eventually will.”) . Munger had the attitude that unless you were already wealthy, you could afford to take some risk — if the odds were right — to get rich. His audacity put him in a different category from all the others who cultivated Buffett, for his deference to Buffett was limited by his high opinion of himself.