Charlie Munger: the 53% hole inside a 19.8% record
Charlie Munger is remembered as Warren Buffett’s partner and as the man who said the wise thing at the end of the meeting. Before Berkshire, he ran his own investment partnership for fourteen years and beat the market by a wide margin. Inside that record are two years in which the partnership lost more than half its value. That pair of years teaches more about position size than the average does.
KEY TAKEAWAYS
- The partnership lost 31.9% in 1973 and 31.5% in 1974. Back to back, that is −53.4%, which needs about +114.6% to undo. The yearly figures come from Buffett’s 1984 essay; the two-year totals are our arithmetic.
- Even after a +73.2% year in 1975, the partnership finished its record about 19% below its 1972 peak. Our arithmetic from the same table.
- His limited partners, after fees, compounded at 13.7%, not 19.8%. At that pace, our calculator puts the climb back from −53.4% at about 70 months.
- Munger said he could sit through a halving with “zero” worry. That is a temperament and a balance sheet with no margin loan. It is not something a leveraged account can borrow.
Who was Charlie Munger?
Charles Thomas Munger was born in Omaha, Nebraska, on 1 January 1924 and died in Santa Barbara, California, on 28 November 2023, a few weeks before his hundredth birthday. He studied mathematics at the University of Michigan, served in the US Army Air Forces during the Second World War, and graduated from Harvard Law School in 1948. In 1962 he co-founded the Los Angeles law firm now called Munger, Tolles & Olson, and in the same year started an investment partnership with Jack Wheeler, Wheeler, Munger & Co., which he wound up in the mid-1970s.
He became vice chairman of Berkshire Hathaway in 1978 and held the title for the rest of his life. He also chaired Wesco Financial from 1984 to 2011 and the Daily Journal Corporation for decades. Most people know him through the Berkshire annual meetings and the talks collected in Poor Charlie’s Almanack. This profile is about the period before that, when the money at risk was his partners’ and the record was his alone.
What did Munger’s partnership actually return?
The only public year-by-year record comes from Buffett. In his 1984 talk at Columbia, published as The Superinvestors of Graham-and-Doddsville, he printed Munger’s results next to the Dow and described him as a fellow “whose whole psyche goes toward concentration”, using the same value approach as Buffett but with “much more volatile” results. The headline line: the overall partnership compounded at 19.8% a year from 1962 to 1975, limited partners after fees at 13.7%, and the Dow at 5.0%.
A compound rate hides the path, so we rebuilt it. Starting with $1 at the beginning of 1962 and applying each of Buffett’s fourteen yearly figures for the overall partnership gives this:
Eleven years of gains took $1 to $15.55 by the end of 1972. The next two took it to $7.26. Nothing about the method changed between those years. The same concentration that produced +71.7% in 1963 and +56.2% in 1967 produced the two losses. That is the trade-off Buffett was pointing at with the word “volatile”.
How bad were 1973 and 1974, in numbers?
Worse than the market, and worse than the percentages look on their own. Losses compound like gains: two years of −31.9% and −31.5% leave 0.681 × 0.685 = 0.466 of the starting value, a 53.4% drawdown. On the same table, the Dow’s two-year loss works out to about 33%. The concentrated portfolio fell roughly half as far again as the index it had been beating for a decade.
To see what that hole means, we put it into our drawdown calculator. For the monthly return we used 1.5%, which is what 19.8% a year works out to per month. In other words, we assumed Munger went straight back to his own best long-run pace.
Three numbers from that screen carry the lesson. A $10,000 stake became $4,660. Getting back needed +114.6% (from the rounded 53.4%; the unrounded figure is +114.4%). And at one of the best long-run paces on record, the climb back takes about 51 months, more than four years.
What actually happened was faster. 1975 brought +73.2%, a year in which the Dow also rose sharply. It still was not enough: $7.26 became $12.57, about 19% below the 1972 peak of $15.55. The table ends there, and Munger wound up the partnership soon after. His fourteen-year record is outstanding, and it closed below its own high-water mark.
What did his partners actually get?
Less than the headline. The 19.8% is the overall partnership before the general partner’s share. Limited partners, the people who put money in, compounded at 13.7% after fees: $10,000 at the start of 1962 became about $60,000 by the end of 1975, against $125,700 for the overall figure (our arithmetic). That is still an excellent result. It is just a different one, and it changes how long a drawdown feels.
13.7% a year is about 1.1% a month. Put the same 53.4% hole in at that pace:
Seventy months is almost six years. Now picture someone who joined at the end of 1972, after eleven winning years had made the partnership famous. Their $10,000 became about $4,660 by the end of 1974 and about $8,080 by the end of 1975, when the record stops. They bought the reputation at its peak and never saw the average.
This is the part a long-run compound rate cannot show you: when you arrive matters, and the people who arrive are usually attracted by the years just before the fall. Position sizing (Stage 9) is the trader’s answer to it: size every position as if you are arriving at the worst moment, because you cannot know that you are not.
PRACTICE CORNER
Munger’s worst two years are a stress test you can run before your next trade. Write down the largest position in your account as a percentage of the total. Then ask what a 53% fall in that one holding does to the whole account, and whether you could keep following your plan afterwards. If the answer is no, the position is sized for the average year, not the bad one. On most exchanges you can set a stop and the order size in the same ticket, before the trade is open. The one to two percent rule shows how to work the size backwards from the stop.
These are affiliate links: we earn a commission if you sign up, it costs you nothing, and it does not change what we write. See our disclosure and the full exchange comparison.
What did Munger say about falls like this?
He talked about them as normal, which is the point. In a 2009 BBC interview, during the financial crisis, he was asked how worried he was about Berkshire’s falling share price:
Zero. This is the third time that Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%.Charlie Munger, interview with the BBC, 2009.
In the same interview he said that a long-term shareholder who cannot accept a fall of about half should expect a mediocre result compared with those who can.
Twenty-three years earlier, in a commencement speech at the Harvard School in Los Angeles on 13 June 1986, he gave the habit of mind behind that calm. He told the graduates how to guarantee a miserable life, and one of his prescriptions reads as a description of what a bad drawdown does to most people:
Go down and stay down when you get your first, second, third severe reverse in the battle of life.Charlie Munger, commencement speech at the Harvard School, Los Angeles, 13 June 1986.
The method of the speech is inversion. He credits the mathematician Carl Jacobi with the phrase “Invert, always invert”: to find out how to succeed, first work out how to fail, and avoid it.
Inversion is the most useful tool in this profile for a trader. Instead of asking “how much can this trade make?”, ask “what would have to happen for this trade to end my ability to trade?” For Munger’s partners in 1973, the answer was two ordinary bad years in a row.
Where the legend and the record disagree
There is a second, quieter gap. Quotes attributed to Munger circulate by the hundred, and many cannot be traced to anything he said or wrote. We have used only three: the BBC interview, the 1986 speech, and his 2023 newspaper article on crypto below. If a Munger line on social media has no date and no venue, treat it as unverified.
What does Munger’s record mean for a crypto trader?
He would not have liked the question. In a February 2023 opinion piece in The Wall Street Journal titled “Why America Should Ban Crypto”, he wrote that a cryptocurrency is not a currency, a commodity or a security but “a gambling contract with a nearly 100% edge for the house”. You do not have to share that view to use his partnership’s arithmetic, because the arithmetic of concentration does not care what the asset is.
Here it is in its simplest form: an account split equally between a number of holdings, and one of them falls. These are our numbers.
| Equal holdings in the account | One holding falls 50% | One holding falls 80% |
|---|---|---|
| 3 | −16.7% | −26.7% |
| 5 | −10.0% | −16.0% |
| 10 | −5.0% | −8.0% |
| 20 | −2.5% | −4.0% |
The table flatters crypto in one important way: it assumes the holdings move independently. In a broad sell-off most coins fall together, so ten coins can behave like one large position. That is how a concentrated stock portfolio lost 53.4% in two years while the index lost about a third, and it is how a “diversified” altcoin bag can do worse.
Where this lesson stops working
Munger was an investor, not a trader. He held businesses for years and did not use stop-losses. If you trade a defined setup, your protection is the stop and the size, not patience. Read his drawdown as a limit on how concentrated you can be, not as permission to hold a losing trade your plan says to close. Avoiding the big loss (Stage 11) is the trader’s version.
Concentration is not the same as adding to a loser. Munger concentrated before the fall, in businesses he had studied. Doubling a position after it moves against you, to get back to even faster, is a different act with a different name, and it is the one that empties trading accounts.
He had no margin call. As far as the public record shows, the partnership was not run on borrowed money that a lender could call in at the bottom. A 53% drawdown in an unlevered account is survivable. The same drawdown at 2× leverage is a wiped-out account, as our Warren Buffett profile works through in detail.
Common mistakes when learning from Munger
Quoting the 19.8% without the 53.4%. The average is made of those years, and you only earn it if you are still there at the bottom. Confusing the overall figure with what partners got. After fees it was 13.7%, and recovery time scales with the rate you actually earn. Copying the concentration without the temperament. Munger said his worry about a 50% fall was “zero”. Ask honestly what yours would be, and size so that the answer does not matter. Treating his crypto opinion as the lesson. His view of an asset is the least transferable part of his work; the arithmetic of his partnership is the most. Trusting untraceable quotes. If a line has no source, it is not his until proven otherwise.
FAQ
What were Charlie Munger’s partnership returns?
According to the table Warren Buffett published in 1984, Munger’s partnership compounded at 19.8% a year from 1962 to 1975 before fees, and its limited partners compounded at 13.7% after fees, against 5.0% a year for the Dow over the same period.
How much did Munger’s partnership lose in 1973 and 1974?
It lost 31.9% in 1973 and 31.5% in 1974. By our arithmetic, the two years together are a fall of 53.4%, which needs a gain of about 114.6% to undo. The partnership rose 73.2% in 1975 but ended that year about 19% below its 1972 peak.
What did Charlie Munger say about crypto?
In a February 2023 opinion piece in The Wall Street Journal, titled Why America Should Ban Crypto, he wrote that a cryptocurrency is not a currency, a commodity or a security but a gambling contract with a nearly 100% edge for the house.
What did Munger mean by invert, always invert?
In his 1986 commencement speech at the Harvard School in Los Angeles he credited the phrase to the mathematician Carl Jacobi. The idea is to solve a problem backwards: work out what would guarantee failure, then avoid it. For a trader, that means asking what would end your ability to trade before asking what a trade could make.