Charlie Munger's Words On Real Estate Being A "Lousy Investment" Show The Difference Between Knowledge And Wisdom

It is common knowledge that real estate is a solid investment that can accelerate an investor’s ascent to financial freedom. So why is it that the late Charlie Munger, Warren Buffett's right-hand man, is credited with saying he thought real estate was a "lousy investment?" Was he crazy? Benzinga takes a deeper dive into this famous quote and how it illustrates Munger's profound wisdom about investing.

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Who is Charlie Munger?

Charlie Munger is most well known as the former Vice Chairman of Berkshire Hathaway, but his roots in investing and his relationship with the Buffett family go much deeper than that. Like Buffett, Munger was born in Omaha, Nebraska, where he worked in a grocery store owned by Warren's grandfather, Ernest P. Buffett. After graduating from law school, he practiced law briefly before transitioning into wealth management.

He formed an investment firm called Wheeler, Munger, and Company, where he garnered a reputation as a serious investor. The firm eventually gained a seat on the Pacific Stock Exchange. Munger's prowess as an investor came to Warren Buffett's attention when Buffett noted that Munger's firm had generated returns of nearly 20% from 1962-1975.

Wesco Financial and Warren Buffett

Munger eventually became chairman of Wesco Financial Corporation, a savings and loan at the time. Munger grew the company's portfolio by buying and holding a small but diverse stock portfolio in companies that were well-suited to provide long-term growth. Warren Buffett's Blue Chip firm eventually bought Wesco Financial Corp.

At the time of the merger, Wesco's portfolio was worth $1.5 billion and consisted almost exclusively of blue-chip stocks. This is the same strategy that Buffett has successfully adopted at Berkshire Hathaway. Buffett himself has called Munger an "architect" of Berkshire Hathaway in an interview with Fortune Magazine. It was in his capacity as Vice-Chairman that Munger made his infamous quote about real estate being a "very lousy investment."

Why Was Munger So Down on Real Estate?

Charlie Munger was speaking at a Berkshire Hathaway investor's meeting in 2002 at the time, and the full context of the quote explains his meaning a little more clearly. He was speaking about real estate's fit within the Berkshire Hathaway portfolio. Munger said at the time that "real estate was a very lousy investment for companies like his."

Munger went on to explain an essential aspect of his investment strategy was finding undervalued assets to buy and hold. His experience with stocks and traditional investments gave him an advantage in that area. However, he recognized when it came to real estate that other, more experienced investors were likely to be one step ahead of him in identifying good deals.

 He also noted that the taxation structure of real estate investment trusts (REITs) would expose Berkshire Hathaway to "a whole layer of corporate taxes" that he wanted to avoid. So, it's not that Munger was down on real estate writ large; he just thought it was outside of his wheelhouse.

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 What Investors Can Learn From Munger's Thoughts

Charlie Munger's thoughts on real estate investing show why he and Warren Buffett worked together so well. Munger has not just a knowledge of investing but the wisdom to recognize what's a good investment for his shareholders and why. He didn't want to compete on a playing field that was tilted against him, least of all when he had a responsibility to act in the best interest of his shareholders.

 Keeping this mindset before investing or even considering it can only serve you well in the long run. Whether it's a real estate investment trust, stocks, precious metals, or even cryptocurrency, your knowledge of what could make money must be guided by the wisdom Charlie Munger was famous for.

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