168 THE WARREN BUFFETT WAY
“His portfolio was concentrated in very few securities and there-
fore, his record was much more volatile,” Buffett explained, “but it
was based on the same discount-from-value approach.” In making in-
vestment decisions for his partnership, Charlie followed the Graham
methodology and would look only at companies that were selling
below their intrinsic value. “He was willing to accept greater peaks
and valleys in performance, and he happens to be a fellow whose psy-
che goes toward concentration.”^16
Notice that Buffett does not use the word risk in describing
Charlie’s performance. Using the conventional def inition of risk
(price volatility), we would have to say that over its thirteen-year his-
tory Charlie’s partnership was extremely risky, with a standard devia-
tion almost twice that of the market. But beating the average annual
return of the market by 18 points over those same thirteen years was
not the act of a risky man, but of an astute investor.
Table 10.1 Charles Munger Partnership
Annual Percentage Change
Overall Dow Jones
Year Partnership (%) Industrial Average (%)
1962 30.1 −7.6
1963 71.7 20.6
1964 49.7 18.7
1965 8.4 14.2
1966 12.4 −15.8
1967 56.2 19.0
1968 40.4 7.7
1969 28.3 −11.6
1970 −0.1 8.7
1971 25.4 9.8
1972 8.3 18.2
1973 −31.9 −13.1
1974 −31.5 −23.1
1975 73.2 44.4
Average Return 24.3 6.4
Standard Deviation 33.0 18.5
Minimum −31.9 −23.1
Maximum 73.2 44.4