Charlie Munger's Three-Investment Philosophy: Concentrated Bets Over Diversification and Their Recent Market Results

The Philosophy Behind Extreme Concentration

When Charlie Munger, the late vice chairman of Berkshire Hathaway, discussed his investment approach at a 2017 conference, he made a striking declaration: nearly his entire $2.6 billion family fortune was concentrated in just three assets. This wasn’t a temporary position but a deliberate strategy rooted in a specific investment ideology.

Munger openly criticized diversification as a refuge for the uninformed, famously characterizing it as “a rule for those who don’t know anything.” His stance aligned perfectly with Berkshire Hathaway’s Warren Buffett, who similarly argued that spreading capital thin “makes very little sense for anyone that knows what they’re doing.” Both investors believed that true expertise meant the ability to identify exceptional businesses and commit capital accordingly.

Before joining Berkshire, Munger demonstrated his investment acumen by running his own fund that generated 19.5% average annual returns between 1962 and 1975—nearly quadrupling the Dow Jones Industrial Average’s performance. This track record wasn’t luck; it reflected a disciplined approach to finding companies with durable competitive advantages, or what Buffett termed “moats”—structural protections that shield businesses from competition across varying economic cycles.

Investment One: The Costco Conviction

Munger’s longest-held conviction was his attachment to Costco Wholesale. Serving on the company’s board for decades, he described himself as “a total addict” who loved “everything about Costco.” In 2022, he made a bold public commitment: never to sell a single share of the warehouse retailer.

At that time, Munger controlled over 187,000 shares valued at $110 million, positioning him as the company’s second-largest shareholder. His thesis proved prescient. From November 2023 through the present, Costco shares have appreciated 47%, while the company simultaneously raised its dividend by 27%. Additionally, shareholders received a $15-per-share special dividend in January 2024, delivering a 2.3% yield as a standalone reward. This performance reflects both capital appreciation and income generation—hallmarks of quality businesses.

Investment Two: Himalaya Capital and Value Investing Abroad

In the early 2000s, Munger executed a strategic move that revealed his confidence in identifying exceptional investment talent: he entrusted $88 million to Li Lu, founder of Himalaya Capital. Li Lu earned the nickname “the Chinese Warren Buffett” for successfully adapting classic value investing principles to Asian markets, drawing inspiration from Buffett, Munger, and Benjamin Graham’s frameworks.

This decision proved vindicated. Munger later described the fund’s results as generating “ungodly returns,” though Himalaya Capital, operating as a private hedge fund, doesn’t publicly disclose detailed performance records. However, analysis of its recent 13F filings reveals instructive patterns. The fund’s largest position, Alphabet (Google’s parent company), represented nearly 40% of assets and has climbed 130% since Munger’s November 2023 passing. Berkshire Hathaway, another core holding within Himalaya’s portfolio, has simultaneously delivered solid gains.

Investment Three: Berkshire Hathaway Itself

Perhaps most revealing is how Munger deployed his personal wealth. With a net worth around $2.6 billion, he held approximately 4,033 Class A shares of Berkshire Hathaway worth roughly $2.2 billion at his passing—representing nearly 90% of his personal fortune.

This concentration appears even more significant when considering history. In 1996, the earliest year with available records, Munger owned 18,829 Berkshire Class A shares. Had he retained this entire stake instead of selling or donating 75% of those holdings, his net worth would have reached an estimated $10 billion. His eventual decision to reduce his stake didn’t reflect doubt in the company but rather a conscious wealth distribution strategy aligned with his philanthropic goals.

The payoff in recent performance has been substantial. Berkshire Class A shares have climbed 37% in the two-plus years since his passing, validating his core thesis that the company remains a premier wealth creation vehicle.

Performance Assessment: Context Beyond Raw Returns

Evaluating these three positions reveals a nuanced picture. Since late November 2023, Berkshire Hathaway Class A shares returned 38%, while Costco shares gained 47%. By comparison, the S&P 500 rose 52% over the identical period—suggesting that even Munger’s carefully selected portfolio slightly underperformed the broader index.

Yet this comparison requires context. Market returns are forward-looking and cyclical; value-oriented investments have faced headwinds during periods when growth and momentum dominated. Munger’s three holdings represent fundamentally different risk-return profiles compared to the diversified S&P 500. These are established businesses with defensible competitive positions, lower volatility profiles, and proven management teams—characteristics typically associated with reduced downside risk.

More importantly, the continued strength of these positions during a period unfavorable to value investing suggests that the underlying principles Charlie Munger practiced remain durable. His concentrated conviction in exceptional businesses, his willingness to hold for decades, and his resistance to diversification as a substitute for knowledge continue to generate returns that validate rather than contradict his philosophy.

The lesson extends beyond mere historical performance: disciplined investors who understand their holdings can still build wealth through concentration, even when market-wide movements temporarily exceed individual position gains.