How Charlie Munger built the blueprint for Berkshire’s $785 billion empire and steered Warren Buffett away from ‘cigar-butt’ investing

Charlie Munger, the right-hand man of Warren Buffett, died Tuesday at the age of 99. Long considered one of Buffet's closest confidants and Buffett’s reliable No. 2, Munger held the nickname of “The Abominable No-Man” because of the frequency with which he turned down investment ideas he deemed unworthy. But the older man was a renowned investor in his own right, and responsible for shaping much of Buffett’s thinking over the course of his career.

Buffet credited Munger with encouraging him to diversify his investing strategy. Prior to meeting Munger, who was trained as a lawyer, rather than investor, Buffet had focused almost exclusively on investments in distressed businesses, a strategy he described in a 1989 letter as “cigar butt” investing. “A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the ‘bargain purchase’ will make that puff all profit,” he wrote.

But once the two became fast friends, Munger encouraged Buffett to invest in growth companies, regardless of whether they were underpriced. In Berkshire Hathaway’s 2015 shareholder letter, Buffett expounded on Munger’s influence.

“The blueprint [Munger] gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices,” Buffett wrote at the time. “Altering my behavior is not an easy task (ask my family). I had enjoyed reasonable success without Charlie’s input, so why should I listen to a lawyer who had never spent a day in business school (when – ahem – I had attended three). But Charlie never tired of repeating his maxims about business and investing to me, and his logic was irrefutable. Consequently, Berkshire has been built to Charlie’s blueprint. My role has been that of general contractor, with the CEOs of Berkshire’s subsidiaries doing the real work as sub-contractors.”

‘Most lousy businesses can’t be fixed’

The problem with cigar-butt investing, as Munger later said, was that it couldn’t scale. Buying up dirt-cheap businesses and turning them around worked for a small company, but once Berkshire got big it was unwieldy, and required some heavy-handed management.

“[I]t was kind of scroungy and unpleasant when you're firing people. Who in the hell wants to do that?” Munger said at a 2017 event at the University of Michigan, which he attended in the 1940s before joining the army. “So we just run the money out and bought better businesses. And we've been doing it ever since.”

“The reason that Berkshire has been successful as a big conglomerate…. is we try to buy things that aren't going to require much managerial talent at headquarters,” Munger explained earlier in the conversation. “Everybody else thinks they've got a lot of managerial talent at headquarters and that's a lot of hubris … Most lousy businesses can't be fixed.”

Munger would earn so much of Buffett’s trust that he would eventually rise to become vice chair of Berkshire Hathaway, a role he held from 1978 until his death. The strategy Munger encouraged Buffett to adopt led to some of Berkshire Hathaway’s more significant investments. Buffett credits Munger’s approach with encouraging him to invest in American Express stock, which he first bought in the 1960s. By 1991, he owned more than $300 million dollars worth of AmEx stock. Now, he’s the company’s single largest shareholder with a stake worth an estimated $23 billion. Munger’s approach also helped Buffett invest in See’s Candies, one of Berkshire Hathaway’s most famous investments, which he bought for $25 million in 1972 and which has since earned him 8,000% returns.

To hear Munger tell it, all these investments were obvious. It was a no-brainer to invest in good companies regardless of the price. “I’d seen so many idiots get rich in easy business so naturally I wanted to be in an easier business,” he told former Fortune editor-at-large Pattie Sellers in 2014.

Much like Buffett, Munger had a characteristically matter-of-fact way of speaking about his investments, making them out to be uncomplicated, when they were often the opposite. When asked about his investment strategy by Sellers, Munger replied that he thought about “what would work, what wouldn’t, and why. It’s so simple.”

In the same interview, Buffett credited Munger with being an astute businessman with a knack for seeing things others missed. “When I first met Charlie he had a number of clients and he had thought about the business of each one of those clients probably in a much more perceptive way than most of them had thought about them themselves,” Buffett said. “I mean he was incapable of not thinking through what the realities of the situation were, and what could be done about it. He just analyzed things.”

Munger also coaxed Buffett out of some frugal habits that could have otherwise cost him big, stepping in when Buffett took his zeal for haggling too far, the duo told Sellers. When Buffett recounted how he haggled with the seller of See’s Candies over the last few million dollars of the sale price, Munger interjected: “Few million? You didn’t want to pay the last $25,000.”

Buffett ultimately saw the light and did the deal, which has earned him $2 billion as of last year. The credit, in part, went to his lifelong business partner. “Charlie reminded me I was slipping back into the stone age,” Buffett said.

This story was originally featured on Fortune.com