Date
23 September 2017
To achieve extraordinary return, Charlie Munger always tries to wait for the rare chance to buy great companies at great prices. Photo: Reuters
To achieve extraordinary return, Charlie Munger always tries to wait for the rare chance to buy great companies at great prices. Photo: Reuters

Applying Munger’s horse betting theory to investing

When betting on horses, Berkshire Hathaway vice chairman Charlie Munger defines a good bet as a horse that has a more than 50 percent chance of winning with a payoff that is at least three to one.

Applying that to investing, punters should not only look for a good stock but also buy it at a good price.

Such opportunities are rare but they do come by from time to time.

Now if you are interested in Berkshire Hathaway, here is a way to do it:

Munger’s long-time partner Warren Buffett said previously he would be interested in buying back Berkshire Hathaway shares if the market price is at or below 1.2 times book value. That means at this level, prices are considered low enough.

Berkshire Hathaway B shares now trade at around US$170, against a book value of US$120, working out to a price to book ratio of 1.42. So we are not there yet.

We can either wait, or we can sell put options to collect some premium income while waiting for the share price to reach the 1.2 times P/B ratio.

A good horse needs to give enough payoff to qualify as a good bet; the same applies to great companies like Berkshire Hathaway.

The full article appeared in the Hong Kong Economic Journal in Chinese on June 16

Translation by Raymond Tsoi

[Chinese version 中文版]

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RT/CG

Columnist at the Hong Kong Economic Journal

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