Charlie Munger’s Comments on Real Estate as a ‘Bad Investment’ Show the Difference Between Knowledge and Wisdom
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It’s well-known that real estate is a solid investment that can accelerate an investor’s path to financial freedom. So why did Warren Buffett’s right-hand man Charlie Munger say he thought real estate was a “bad investment”? Was he crazy? Benzinga takes a closer look at this famous quote and how it illustrates Munger’s profound investing wisdom.
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Who is Charlie Munger?
Charlie Munger is best known as the former vice chairman of Berkshire Hathaway, but his roots in investing and his relationship with the Buffett family run much deeper than that. Like Buffett, Munger was born in Omaha, Nebraska, where he worked at a grocery store owned by Warren’s grandfather, Ernest P. Buffett. After graduating from law school, he briefly practiced law before branching out into wealth management.
He founded an investment firm called Wheeler, Munger and Company, where he gained a reputation as a serious investor. The company eventually earned a listing on the Pacific Stock Exchange. Munger’s prowess as an investor caught the attention of Warren Buffett when he noted that Munger’s company had generated returns of nearly 20% between 1962 and 1975.
Wesco Financial and Warren Buffett
Munger eventually became chairman of Wesco Financial Corporation, a savings and loan company at the time. Munger grew the company’s portfolio by buying and holding a small but diversified portfolio of stocks in companies well-suited for long-term growth. Warren Buffett’s blue chip company eventually purchased Wesco Financial Corp.
At the time of the merger, Wesco’s portfolio was worth $1.5 billion and consisted almost entirely of blue chip stocks. It’s the same strategy Buffett successfully adopted at Berkshire Hathaway. Buffett himself called Munger the “architect” of Berkshire Hathaway in an interview with Fortune magazine. It was in his capacity as vice chairman that Munger famously said that real estate is a “very bad investment.”
Why was Munger so depressed about real estate?
Charlie Munger was speaking at a Berkshire Hathaway investor meeting in 2002, and the full context of the quote explains a little better what he meant. He was talking about the suitability of real estate for Berkshire Hathaway’s portfolio. Munger said at the time that “real estate is a terrible investment for companies like ours.”
Munger went on to explain that a key aspect of his investment strategy was finding undervalued assets to buy and hold. His experience with stocks and traditional investments gave him an advantage in this area. However, he acknowledged that when it came to real estate, other, more experienced investors were likely to have a head start on him in identifying bargains.
He also noted that the REIT tax structure would expose Berkshire Hathaway to “a whole host of corporate taxes” that it wanted to avoid. So it’s not that Munger was against real estate in general; he just thought it was out of his league.
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What Investors Can Learn from Munger’s Thoughts
Charlie Munger’s thoughts on real estate investing show why he and Warren Buffett worked so well together. Munger not only has the knowledge of investing, but also the wisdom to recognize what makes a good investment for his shareholders and why. He didn’t want to compete on a playing field that was stacked against him, especially when he had the responsibility to act in the best interest of his shareholders.
Keeping this mindset before you invest or even consider investing can only serve you well in the long run. Whether it’s a real estate investment trust, stocks, precious metals, or even cryptocurrency, your knowledge of what could make you money should be guided by the wisdom that Charlie Munger is known for.
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