The late Charlie Munger, the renowned investment icon and vice chairman of Berkshire Hathaway, left behind a legacy of financial acumen and a unique approach to wealth creation. In a previously unaired interview, Munger shared insights into why Berkshire Hathaway, the conglomerate he and Warren Buffett meticulously built over five decades, refrained from utilizing leverage, a common practice on Wall Street.
“Doubling the Value with Leverage”
Munger asserted that if Berkshire Hathaway had embraced leverage, the conglomerate’s value could have easily doubled. Leverage, or borrowing money when acquiring businesses and stocks, is a common strategy to amplify purchasing power and potential returns. However, Munger emphasized that he and Buffett consciously avoided this strategy to prioritize the interests of shareholders.
“The Extra Risk and Shareholder Trust”
In a candid conversation on CNBC, Munger explained, “Berkshire could easily be worth twice what it is now. And the extra risk you would have taken would be practically nothing. We just have to make a little more leverage that is readily available.” Despite this potential financial gain, Munger revealed that they chose not to pursue leverage to avoid disappointing the shareholders who trusted them. Munger acknowledged, “Even if we lost three-quarters of our money, we were still very rich. It’s a big deal for every shareholder. To lose three-quarters of the money would have been a huge disappointment.”
“Buffett’s Caution on Leverage”
Warren Buffett, often referred to as the “Oracle of Omaha,” has long cautioned against the use of debt and leverage in stock investments. In his 2017 annual letter to shareholders, Buffett highlighted the dangers of short-sighted decision-making and panic induced by market volatility when leverage is involved. He wrote, “And a shaky mind will not make good decisions.”
“Berkshire’s Cautious Approach”
Munger and Buffett, known for their long-term investment philosophy, have been exceptionally cautious with Berkshire Hathaway’s financial strategies. Munger admitted that if Berkshire had operated without shareholders, they might have employed more leverage. However, their commitment to shareholder trust influenced their decisions.
“Leverage in the Form of Insurance Float”
While Berkshire Hathaway generally avoided direct leverage, Munger acknowledged the strategic use of leverage in the form of the company’s insurance float. This unique approach allowed Berkshire to invest collected premiums before paying claims, essentially providing leverage for investment purposes.
In retrospect, Munger’s insights shed light on Berkshire Hathaway’s commitment to shareholder interests, a principle that guided the conglomerate’s financial decisions and contributed to its long-term success. Despite the potential for increased value through leverage, Munger and Buffett prioritized stability, caution, and maintaining the trust of their shareholders.
