Charlie Munger’s Investment Style Could Pay Big Dividends in Today’s Frothy Market

Charlie Munger is one of the greatest long-term investors of our time, and he has a lot to teach today’s beginner value investors.

| More on:

Warren Buffett gets most of the attention from the financial media, but investors should also learn from his long-time friend and business partner Charlie Munger when going on the hunt for value investments.

Charlie Munger, Warren Buffett’s right-hand man, is all about buying shares of wonderful businesses at discounts to their estimate of intrinsic value and holding onto them for the long term. The man played a major role in shaping Warren Buffett’s investment style, pushing him from “cigar-butt investing” to only owning shares of “wonderful” businesses.

These days, it’s much harder to find “wonderful businesses” at sizeable discounts to their intrinsic value. Price-to-earnings (P/E) multiples are on the higher end, and even Charlie Munger himself hinted at a lack of bargains to be had in today’s frothy market. Like it or not, Munger and Buffett will continue investing, even though they think market returns over the decade ahead will be lower than that of the past decade.

Don’t neglect the valuation process

Value has never been more important. While it may not seem this way, given the speculative frenzy in Bitcoin and all the sort, investors must continue to weigh the risk with reward to ensure they’re not at risk of skating offside come the next correction. The next pullback is always waiting around the corner, and it’s the names that have climbed the highest in a market rally that tend to face a proportional magnitude of volatility in the opposite direction. As someone wise once put it, the higher you climb, the farther you have to fall.

That’s not to say you should shun growth and frothy momentum stocks, though. If a firm’s growth profile justifies its premium price tag, an unprofitable but growth business’s stock could very well trade at north of 20 times and still be considered a great value.

Shopify: It’s too expensive to be a value stock … right?

Look no further than shares of Shopify (TSX:SHOP)(NYSE:SHOP), a stock that’s never traded at a valuation multiple that’s anything short of stupidly expensive. Even during the depths of the February-March market crash, SHOP shares were still not cheap through the eyes of value investors who failed to grasp the full understanding of Shopify’s incredible growth story. Indeed, Shopify trading at 20 times sales turned out to be a bargain when you weigh how much shares cost today (shares of Shopify currently command a staggering 60 times sales)!

Of course, Shopify deserved to be re-valued to the upside, because of its pandemic tailwinds and because the low-rate environment calls for slightly higher-than-average multiples. Bonds are the most unrewarding and the “expensive” they’ve been in recent memory, after all.

Back to Charlie Munger. He’s a value man. But it’s not just the discovery and purchase of bargains that he should be known for. I think the man’s patience is admirable. In an era of commission-free trading (it’s not yet in Canada), the definition of long term has undoubtedly shrunk from the time when Charlie Munger began his investment career.

What is long term these days?

Depending on who you ask, long term could be anywhere from six months to a year and a half. That’s not Charlie Munger’s definition of long term, though!

He’ll gladly sit on a stock for years, if not decades at a time, as shares correct upwards towards his estimate of its intrinsic value. Moreover, Charlie Munger’s insistence on “wonderful businesses” over cigar butts also pays massive dividends over the long haul, because once a mispriced stock has corrected to reflect its true intrinsic value, it can still keep building upon its intrinsic value over time. That means the said stock can be held for decades at a time.

Charlie Munger is all about sit-on-your-bum investing, a strategy that I believe can help everyday investors do far better than the market averages over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify.

More on Stocks for Beginners

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

stocks climbing green bull market
Stocks for Beginners

3 TSX Stocks Soaring Higher With No Signs of Slowing

Don't ignore stocks just because they look like they're at a high price. Instead, see exactly why they've driven so…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Stocks for Beginners

2 Top TSX Growth Stocks to Stash in a TFSA for Life

These two growth stocks may not be the top in the last month, but in the last few years, they…

Read more »

people relax on mountain ledge
Dividend Stocks

Invest $10,000 in This Dividend Stock for a Potential $4,781.70 in Total Returns

A dividend stock doesn't have to be risky, or without growth. And in the case of this one, the growth…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Turn a $15,000 TFSA Into $171,000

$15,000 may not seem like a lot, but over time that amount can balloon into serious cash.

Read more »

A worker uses a double monitor computer screen in an office.
Stocks for Beginners

Why I’d Buy Fairfax Financial Stock Even at Today’s Prices

Fairfax stock just keeps edging higher. But is it now too expensive, or can investors just look forward to even…

Read more »