The legendary investors credited their ability to avoid making dumb decisions—rather than making brilliant ones—for their performance.
/s3.amazonaws.com/arc-authors/morningstar/1eefb522-121a-4f15-acb6-d510007b9aba.png "5 Key Lessons to Warren Buffett and Charlie Munger’s Success (3)")
Greggory Warren, CFAand Ivanna Hampton
5 Key Lessons to Warren Buffett and Charlie Munger’s Success
Ivanna Hampton: Buffett has credited Munger with reshaping its investment philosophy, and Morningstar credits the duo for influencing its thoughts on investment. What makes Buffett and Munger’s investing style an example for others to follow?
Greggory Warren: Now, the key to their success really boils down to a few things. They have their own investment criteria as far as what they like to look at when they buy companies. Key things like simple business models, they’re easily understandable, semblance of an economic moat to keep competitors at bay, large enough deals to be meaningful, consistent earning powers, good returns on equity, good management. These are all things that they really look at, not just when they’re doing acquisitions, but when they’re actually investing in the shares of companies in the stock market.
And the key to the success that they’ve had has been staying disciplined and sticking to those criteria whenever they put capital to work. I think Buffett and Munger have also been fond of saying, one way or another over the years, that the key to their success has really been in their ability to avoid making dumb decisions rather than making brilliant ones.
We all know that when Buffett began his investing career, he was looking at “cigar butts,” something that had one or two good more puffs left in it, but Munger’s influence really forced him to focus more on higher-quality companies and being able to pay a higher price point for those companies.
But that said, valuation still matters to both of them. They’re looking to buy wonderful companies at fair prices rather than fair companies at wonderful rock-bottom prices. I think that the key there is Munger changed Buffett’s mindset to start looking at higher-quality companies and being able to pay a reasonable valuation for what they were getting.
As I look at what they’ve done and what they’ve provided for investors over the years, I think the key lessons for me is: Buy what you know, look for signs of competitive advantage that can sustain those excess returns for longer periods, make sure management is going to be additive to the business, and keep the firm on a path of solid returns. And then, truly focus on price when acquiring or investing in a company.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
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About the Authors
About the Authors
Greggory Warren, CFA
Strategist
Greggory Warren, CFA, is a strategist, AM Financial Services, for Morningstar*. He covers the traditional US- and Canadian-based traditional asset managers, as well as the alternative asset managers and Berkshire Hathaway. Over the course of his career, Warren has covered not only financial services names but companies from the consumer staples and consumer cyclicals sectors, and been involved in portfolio stock selection and management.
Prior to joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than eight years, covering consumer staples and consumer cyclicals. Before assuming his current role at Morningstar in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered the non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies.
Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago.
During 2014-19, Warren was selected to participate each year on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.
* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc
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Ivanna Hampton
Lead Multimedia Editor
Ivanna Hampton is a lead multimedia editor for Morningstar. She coordinates and produces videos for Morningstar.com and other channels. Hampton is also the host and editor of the Investing Insights podcast. Prior to these roles, she was a senior engagement editor and served as the homepage editor for Morningstar.com.
Before joining Morningstar in 2020, Hampton spent more than 11 years working as a content producer for NBC in Chicago, the country’s third-largest media market. She wrote stories and edited video for TV and digital. She also produced newscasts, interview segments, and reporter live shots.
Hampton holds a bachelor's degree in journalism from the University of Illinois at Urbana-Champaign. She also holds a master's degree in public affairs reporting from the University of Illinois at Springfield. Follow Hampton at @ivanna.hampton on Instagram and @ivannahampton on Twitter.
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