Investing: Learn from Charlie Munger: This is how value investing works

This article is an acquisition from Capital, Capital's premium digital offering.

Investing: Learn from Charlie Munger: This is how value investing works

This article is an acquisition from Capital, Capital's premium digital offering. For you as a stern PLUS subscriber, it is available exclusively here for seven days. It will then be available again exclusively for Capital subscribers at www.capital.de/plus

It looks like even the courses are in mourning. The value stocks that investing legend Charlie Munger loved throughout his life weakened at the end of this month, when Munger, business partner, lifelong friend and alter ego of Warren Buffet, died at the age of 99. At plus 3 percent in November, the MSCI World Value Index lagged well behind the market-wide MSCI World, which gained around 4.5 percentage points. Over the course of the year, the conventional index also outperformed the value stocks, here by as much as seven percentage points. And yet – even in these last days of November, what Charlie Munger believed so firmly is coming true:

That in the long term it is the value stocks that triumph on the stock market. And you don't always have to be as patient as the old stock market master always preached. Over a three-year period, the value stocks beat the broader MSCI by 27 to 17 percentage points. Well, over the five-year period, both were almost on par again. But those who remained loyal to value stocks for 18 years left the race with a price increase of 210 percent, while the MSCI World, which was also doing well, “only” managed 161 percent.

And even in the extremely long term - since the MSCI World Value was launched - the values ​​have outperformed the world index: They have delivered an annualized return of 11.03 percent since 1974. The MSCI World returned 10.57 percent annually over the same period. This is primarily due to the high discount at which value stocks are usually traded on the stock market, say calculations by Morgan Stanley Research.

Now you may ask yourself: What does this half a percentage point matter? The answer is: a lot, if you extrapolate it into euros: an investor who had actually bet an amount of 1000 euros on both indices in 1974 would have a final net worth of 137,476 euros in his account using the world index today. With the value index, however, he would have increased his money to 168,490 euros - with only a 1000 euro stake. Substance is worth it, especially on the stock markets.

And mind you, that was just the broad market index, which only represents the average, which includes both good and bad companies. If one were to manage to filter out just the most promising companies from the universe of value companies, then the results would be even clearer. That's exactly what Charlie Munger and Warren Buffett have been able to do since they jointly ran the investment businesses at Berkshire Hathaway. This is demonstrated not least by the conglomerate's shares themselves: the shares have achieved an annual return of around 20 percent since the beginning of the era in 1965.

Anyone who bought Berkshire A shares back then paid $15; in 1976 it was already $67. In 2000 - in the middle of the dot-com crisis - it was now worth "only" $44,000, having previously been quoted at around $65,000. And today it is trading on the stock exchange for $546,900. In other words, if you had bought two of them for $130 in 1976, you would be a millionaire today, less than 50 years later.

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