Late Charlie Munger, Vice Chairman of Berkshire Hathaway, expressed regret about not using leverage to double the value of the conglomerate, one he built with Warren Buffett. The late investment icon passed away just a month before his 100th birthday. He regretted that the firm could have been worth twice as much but didn’t use leverage while purchasing businesses and common stocks.
Munger said on “Charlie Munger: A Life of Wit and Wisdom,” aired on CNBC, “Berkshire could easily be worth twice what it is now. And the extra risk you would’ve taken would’ve been practically nothing.” However, he emphasized that the reason they didn’t use leverage was to not disappoint shareholders who trusted them when they were young.
Berkshire mostly avoided the use of leverage and borrowing money, commonly employed on Wall Street. Leverage can amplify both potential returns and risks in investments. Buffett had previously warned of the perils of using debt and leverage to buy stocks, as they could make an investor short-sighted, especially during volatile times.
Buffett highlighted the dangers of using debt and leverage in stocks in his 2017 annual letter to shareholders. He explained that using leverage can lead to an unsettled mind, causing poor decision-making during market volatility.
Munger admitted that they were very cautious in handling shareholders’ money at Berkshire, treating their stock like a savings account. If there were no shareholders, they would have used more leverage. However, they opted to be conservative to avoid disappointing shareholders.
Munger also acknowledged that Berkshire did use leverage in the form of insurance float, where insurers receive premiums upfront and pay claims later, allowing them to invest the large sums collected. He said, “Insurance float gave us some leverage. That’s why we went into it.”
In retrospect, Munger and Buffett may have erred on the side of caution by not using leverage to potentially double Berkshire’s value. However, their conservative approach was due to their commitment to putting shareholders first and avoiding unnecessary risk. With the passing of Charlie Munger, his legacy of careful and thoughtful investment management will undoubtedly endure within Berkshire Hathaway.