A great deal has been written about Charlie Munger, former investing partner of the legendary Warren Buffett, since his much-mourned death in November last year, at the ripe old age of 99.
As an army lieutenant, meteorologist, lawyer, and finally, investor, Munger lived the fullest of lives. And while he wasn't quite as famous as his long-term partner, Buffett credits Munger with much of his success at the company they jointly ran – Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B).
So this is clearly a man that was worth listening to whenever he opened his mouth.
But today, we're going to discuss one of Munger's most lucrative, and yet least publicised, passive income investments.
As reported by our Fool colleagues over in the United Kingdom, Munger only revealed what he called his most lucrative investment at Berkshire's 2023 annual meeting (and tragically, Munger's last).
This investment set Munger back US$1,000 (about $1,500). Yet in his last years, Munger was bagging an annual passive income of US$70,000 (roughly $107,000) from said investment.
It was none other than a set of royalty entitlements from an oil well. Here's how our Fool colleagues described it:
Back in 1962, just three years after Munger first met Buffett, the two men hatched a plan.
Using savings of $1,000 each, they outbid oil brokers at auction on a set of royalty interests on oil-producing fields. These royalty agreements gave Munger an interest in any oil produced at those sites.
That $1,000 would have around the same purchasing power as $10,000 today. Markets Insider estimates that Munger made over $1m from this bet over the course of the next 61 years. So even accounting for inflation, it was still a 1,000-bagger investment.
What can we learn about passive income from Charlie Munger?
I think there are a couple of lessons we can glean from this envy-inspiring passive income tale.
Firstly, it pays to have an in-depth knowledge of something and bet big when the odds are in your favour. Munger was also a prodigious poker player and, according to The New York Times, likened poker to investing:
Playing poker in the Army and as a young lawyer honed my business skills… What you have to learn is to fold early when the odds are against you… or if you have a big edge, back it heavily, because you don't get a big edge often, so seize it when it does come.
Munger certainly seized it and later commented that "the only problem with this investment is that it only happened once".
Secondly, it displayed the value of thinking long-term. Back in the 1960s, it's clear that Munger and Buffett considered the value of owning a resource that the world needed for industrial development and, indeed, everyday life.
Correctly discerning that the world's appetite for crude oil would only grow over the rest of their lifetime proved salient. Not to mention lucrative in terms of passive income.
Perhaps if Munger were a young man today, he might not jump to the same conclusion. But that's a whole different kettle of fish.
