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Lanon Wee

Charlie Munger Predicted Berkshire Stock Value Could Double with Adoption of Certain Practice

Charlie Munger, the late investment icon and vice chairman of Berkshire Hathaway, said the conglomerate he and Warren Buffett constructed over the past five decades could have doubled its net worth had they taken advantage of leveraging, or borrowing money, when buying businesses and shares. However, Munger noted that he and Buffett almost never used this common Wall Street practice, as they always put the interests of their shareholders first. He mentioned in an unreleased interview with CNBC's Becky Quick for "Charlie Munger: A Life of Wit and Wisdom" that: "Berkshire could have easily been worth twice as much as it is now, and the danger we would have taken would have been practically nothing. All we had to do was employ a bit more leverage which was readily accessible." Explaining his interpretation, Munger further said that he and Buffett would've been immensely wealthy even if they had lost three-quarters of their money, but this was not necessarily the case for their shareholders, making the risk a letdown for them. The utilization of leverage is a prevalent strategy on Wall Street, as it allows greater buying power and a chance for a higher return in any given investment, albeit with a heightened exposure to danger, as losses can add up quickly when the investment fails to meet the expected outcome. Buffett, who is often referred to as the "Oracle of Omaha," had previously noted the hazards of charging money and utilizing leverage when investing in stocks, as it may cause the investor to become overly anxious and insistent when the market is volatile. He had said in his 2017 letter to Berkshire shareholders: "There is no way to tell how far stocks can fall in a short time. Even if your borrowings are insignificant and your positions are not immediately threatened by the falling market, your mindset may be jolted by panicked headlines and overexcited commentary." Munger declared that he and Buffett had been careful when handling their shareholders' money in the past. Shareholders of Berkshire generally practice long-term investing, similar to the conglomerate's top executives, often treating the stock as their own personal savings account. He added in the CNBC special that: "If Warren and I had owned Berkshire without any shareholders that we knew, we would have done more. We would have used more leverage." Munger finally acknowledged that the company did use leverage in the form of insurance float. Insurers collect premiums upfront and settle claims later, being able to invest the generous sums collected for their own benefit without any fees. He concluded by saying: "Insurance float gave us some leverage. That's why we went into it."

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