Charlie Munger was right about ‘worthless’ funds

Charlie Munger, Warren Buffett’s right-hand man at Berkshire Hathaway who passed away last week at the age of 99, helped Buffett move away from buying bargain-basement stocks.

Munger, said Buffett, told him to stop focusing on buying “fair businesses at wonderful prices” and to look for “wonderful businesses at fair prices”.

It was valuable advice, paving the way for Berkshire to amass stakes in companies such as Apple, which now accounts for half of Berkshire’s stock portfolio (disclosure: I own shares in Berkshire).

That’s a big bet. Indeed, Berkshire’s top five holdings (Apple, Bank of America, American Express, Coca-Cola and Chevron) account for three-quarters of its equity portfolio.

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[ Berkshire Hathaway’s Charlie Munger dies aged 99 ]

Famously, Munger referred to diversification as deworsification, saying it was “insane” and a “dilution of knowledge”. Ordinary investors can learn many lessons from Munger, but this is not one of them.

Instead, consider what he said earlier this year, when describing active management as a “deep moral depravity” that charges “big fees” for “worthless advice”. Only about 5 per cent of managers consistently beat the averages, said Munger – a great stock-picker who rightly advised investors to stick to index funds.