1 key investment lesson from Charlie Munger

Everyone knows about Warren Buffett’s extraordinary investment return record. He has an amazing temperament for investing and has dealt with every economic crisis that came Berkshire Hathaway’s way.

A lot of Buffett’s skill is attributed to his learnings from Benjamin Graham, a value investor. However, it is Munger who may have had the biggest influence on Buffett.

Warren Buffett once said to Carol Loomis for a Forbes article ”I have been shaped tremendously by Charlie. Boy, if I had listened only to Ben, would I ever be a lot poorer.”

Indeed Howard Buffett, Warren’s eldest son, said to Janet Lowe that his father is the second smartest man he knows. He says Charles Munger is the first.

Ben Rundle from NAOS Asset Management, which operates Naos Emerging Opportunities Company Ltd (ASX: NCC) and other listed investment companies (LICs), recently quoted in a Livewire article one of the sagest pieces of advice Mr Munger has given the world.

Charlie supposedly said in an article “Over the long-term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”

Foolish takeaway

I think it’s a fantastic point. If a business is re-investing into itself and earning 10% on that money then it’s unlikely to grow faster than 10% over the long run. That’s why it’s better to own businesses with high returns on equity or assets.

That’s why many of the top performing shares over time such as REA Group Limited (ASX: REA) are the ones with high returns on equity– they are able to re-invest money back into the business at attractive rates of return.

These top growth shares are also earning impressive returns on equity year after year.

3 Top Shares To Buy This Month

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.