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Collection: Mohnish Pabrai - #133 'Lessons From Charlie Munger's Partnership'


Video Link: https://youtu.be/nYILzc94eRs


In this episode, Mohnish Pabrai talks about Charlie Munger's early investment partnership (Wheeler, Munger Partnership) and the lessons behind it.


In this episode, you’ll learn:

  • Wheeler, Munger Partnership investments during 1972-1975.

  • Why pain is part of long term investing?

To check out all Collection: Mohnish Pabrai <click here>

 

[Transcript]

(Source: https://youtu.be/bLjoL5zhBxA)

MOHNISH PABRAI 00:00

Charlie ran the Wheeler, Munger Partnership which was like a hedge fund at the time. And in 1972, 94% of the fund was in 2 stocks, 61% of the fund was in Blue Chip and 23% was in something known as a New America Fund.


So, let me just describe the New America Fund for a second because you understand what’s in Blue Chip because in 1972, Blue Chip was basically had a market cap of well under a $100 million, but had all these assets, you know, with the float and such.


The New America Fund was a closed-end fund was actually originally called The Fund of Letter, so a bunch of kind of flamboyant businessman with the help of some broker raised about $60 million dollars, the brokers took about 10% of that raise money so off the bat the investors lost 10%, so there was $54 million left in the fund and then they started to invest it and they didn’t do very good job of investing it. So what began at $10 a unit and then because the quality of investments is so bad, that fund started trading at a significant discount to underlying intrinsic value.


So you could, you know like if you look at – I don’t know if you discussed closed-end funds, so if you open Barrons or even just go Google closed-end fund, you’ll see there’s thousands of these funds where unlike typical mutual funds or ETFs.


They raise a fixed amount of money and after that they trade like stocks and sometimes you get a variance between the assets in the fund and the trading price, it can either sometimes traded a premium and sometimes get traded at discount and sometimes the discounts can get pretty wide. So one can actually build a nice little career out of in effect, buying closed-end funds and waiting for them to kind of get back on track.


But – so the new – the Fund of Letters had dropped quite a bit in value and well below the underlying assets, so Charlie Munger and Rick Guerin bought enough of the units to get on the board and then take control of the fund. So again, they got control of $60 million or $50 million in assets with just a few million dollars invested and once they got control of the fund they again, liquidated the investments and started redeploying the money more intelligently.


And so in 1972 and they renamed it, they renamed it as New American Fund, 1972 the New America Fund had a net asset value of $9.18 and by the end of 1974, it had a value of $9.28 actually went up but the price it was trading at was $3.75, it dropped a lot because 1970 to 1974 was when we had the Nixon impeachment and you know all these price controls, we had a lot of the oil embargoes inside, there’s a lot of ugliness going on at that time in the U.S. economy and the stock market had crashed.


And so Blue Chip Stamps which had a market cap of north of $80 million in 1972, by the end of 1974 was trading at a market cap of $27 million. So we just think of Blue Chip Stamps at the end of 1974, it only owns See’s Candies which they bought for $25 million and it also owns Wesco Financial that they had bought for also $25 million, both seriously undervalued even then the market was not willing to recognize that these were great assets.


So the Munger – Wheeler, Munger Partnership reported over a 2 year period about a 53% dropped in returns, it was a huge drop and a lot of pain in fact Charlie Munger recalls that time as a very painful time.


So what he did is in 1975, I think 1975 the fund was up about 75% but if you’re down 50% and then up 75%, you’re still not back up to zero, you know, if you down 50%, you need to be up a 100% and such.


So what he did was he liquidated the partnership but what he also did when he liquidated was he distributed Blue Chip Stamps and New America Fund to all the investors instead of giving them cash, he gave them these stocks and just gave them instruction that "listen, just hold on to these stocks."


And eventually, the New America Fund was eventually liquidated in 1986 for $100 per unit, so what was trading at less than $4 a unit went up 25 times. One of the companies they bought inside New America was The Daily Journal, so they bought The Daily Journal for $2 million inside the New America Fund and then when 1986 when they liquidated New America Fund, Daily Journal started trading on the over-the-counter, now trades on the New York Stock Exchange and that $2 million in the Daily Journal is today worth almost $300 million.


So that’s also done quite well, but you know, the thing is while these assets did well, we had a period of serious pain where you had huge declines. And if you think about his investment were the most sensible investment he could make because he was buying – he had 94% of his investment in 2 companies in which he had controls, knew the businesses really well and they were trading at a huge discount even then you had a lot of pain.


And so that’s the other facet that one had to keep in mind is that none of these things come that easily.

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