How Charlie Munger changed Warren Buffett, and what investors can learn

He called them “cigar butts” but still good for one last puff of value.

From 1956 to 1969, Buffett Partnership Ltd. compounded at 29.5 per cent per year. But this approach required constant effort. He had to keep searching, selling, and reallocating. The businesses were often average. There was no real peace of mind.

Then something changed.

Buffett stopped looking only for cheap stocks. He started looking for quality. Businesses with pricing power. Brands people trusted. Owners who allocated capital well. Companies that could grow steadily without needing too much of his time.

That shift came from Charlie Munger.

Munger influenced Buffett, who believed it was better to buy a great business at a fair price than to buy a fair business at a great price. And Buffett listened.

The result? Berkshire Hathaway compounded wealth at nearly 20 per cent per year over the next five decades.

Berkshire Hathaway vs S&P 500 Returns. (Source: Letter to Shareholders 2025)
Berkshire Hathaway vs S&P 500 Returns. (Source: Letter to Shareholders 2025)

Figure 1: Berkshire Hathaway vs S&P 500 Returns. Source: Letter to Shareholders 2025

For context: if you had invested just one dollar with Buffett sixty years ago, and it compounded at 20 per cent per year, that single dollar would be worth over $55,000 today.

Now, coming back to the core point.

Take Coca-Cola. Buffett started buying it in 1988. It was a dominant brand with high margins and global scale. Over 35 years, that investment delivered more than 16 times the returns, not counting dividends. Apple, which Berkshire started buying in 2016, is now worth more than $150 billion on their books. That one holding alone makes up over 40 per cent of their listed portfolio.

Now, Buffett did not find these ideas by screening for the lowest P/E ratio. He found them by asking: Is this business strong enough to hold forever?

That is the Munger influence. Munger influenced Buffett on how to think in decades, not quarters.

In this article, we explore the core stock-picking ideas that Buffett now follows and how Munger’s thinking shaped each of them.

Four big ideas Munger taught Buffett

1. Great businesses create more wealth than cheap stocks ever will

What Munger Believed: A truly great business, even if not cheap, would outperform a merely good business bought at a discount because time would work for you, not against you.
Most cheap businesses either stay cheap or deteriorate. But a high-quality business with strong fundamentals can reinvest profits, defend its market, and grow over decades with very little friction. Munger saw that as the ideal compounding machine.

How it changed Buffett’s thinking: Early Buffett, under Graham’s influence, focused on ‘net-nets’, that is, stocks trading below the value of their assets. He made money in them, but the process required frequent buying, selling, and constant vigilance.
Munger influenced him to stop thinking in terms of discounts and start thinking in terms of durability.

See’s Candies was the turning point for which Buffett paid three times the book value, something he would never have done before. But the brand, pricing power, and customer loyalty made it a predictable cash flow engine. That one business generated over $1 billion in profit and taught Buffett that great businesses bought once could outperform dozens of cheap trades.

2. Few bets, big conviction

What Munger told Buffett: “Diversification is protection against ignorance,” Munger once said. “If you know what you are doing, it makes very little sense.” He pushed Buffett to stop spreading capital across dozens of average ideas and instead concentrate on a few high-quality businesses.

How it shaped Buffett: Berkshire Hathaway’s portfolio has always been focused. Buffett often holds just 10 to 15 large positions, and his biggest winners, such as Coca-Cola, American Express, and Apple, often make up a large chunk of total value. He does not dilute conviction just to feel safe.

3. Sit quietly: The power of inactivity

What Munger thought: Munger was of the opinion that the best investors are not always doing something. They are sitting, thinking, and waiting. Activity for the sake of it usually destroys returns. “The big money is not in the buying or the selling,” he said. “It is in the waiting.”

How it shaped Buffett: Buffett became famously patient. He rarely trades. His portfolio turnover is extremely low. He once held American Express for over 25 years, See’s for over 40, and now Apple for more than a decade. He lets the business do the work, not constant reshuffling.

4. Avoid complexity. Stay within your circle of competence

What Munger thought: Munger made this very clear: “Knowing what you do not know is more useful than being brilliant.” He encouraged Buffett to avoid sectors he did not understand, and to focus on businesses he could explain in one paragraph. Complexity is not a badge of honour in investing.

How it shaped Buffett: Buffett famously skipped tech stocks in the 1990s. He admitted he did not understand them then. He has always preferred consumer products, insurance, banking – sectors he could analyse and predict with some confidence.

Concluding remarks

Buffett would have been a great investor even without Munger. But Munger possibly made him pause, reflect, and rewire his thinking.

That shift made them sustainable.

A closer look at Munger’s ideas reveals that many retail investors tend to follow a similar journey, often starting with stock screens, news, and market tips.

But the real breakthrough comes when investors simplify and do not chase market signals.

Munger possibly gave Buffett that filter. And if investors learn to build their own, they may not outperform every cycle, but they will likely avoid the costly mistakes (like a drain on capital) and stick around long enough to let compounding do its job.

Note: We have relied on data from the annual reports throughout this article. For forecasting, we have used our assumptions.

Parth Parikh has over a decade of experience in finance and research, and he currently heads the growth and content vertical at Finsire. He holds an FRM Charter along with an MBA in Finance from Narsee Monjee Institute of Management Studies.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

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