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Everybody knows that Warren Buffett is the greatest investor of all time. But very few know the story of the philosophical transformation that made him so.

Buffett started out as a disciple of Ben Graham. Graham was a deep value investor who sought to buy bargain stocks based on current quantitative metrics. This frequently resulted in “cigar butts”, businesses that were in decline but currently worth more than the stock price. This strategy worked for Buffett in his early years but never would have allowed him to build Berkshire into the empire it is today.

Buffett tells the story of his transformation through his relationship with Munger in his 2014 Letter To Shareholders in the section titled “Charlie Straightens Me Out”. Buffett met Munger in 1959 when he was 29 and Munger 35. 1972 was a turning point for Buffett and Berkshire due to the purchase of See’s Candy which Munger recommended. Buffett thought the asking price of $30 million was too high based on his Graham philosophy but the seller fortunately accepted his $25 million bid. Through his successful investment in See’s, Buffett learned the value of great brands and businesses. In other words, he learned that Charlie was right that it’s better to buy a wonderful business at a fair price rather than a fair business at a wonderful price.

Buffett would never have been able to build Berkshire into what it is today without the philosophical transformation catalyzed by Munger for a couple of reasons he lists in the letter. First, the cigar butt strategy can work with a small amount of money but there simply aren’t enough of them to scale. Second – and more important – you can’t build a flourishing and enduring enterprise like Berkshire on low quality businesses. You need high quality companies that can efficiently utilize fresh capital and compound over long periods of time.

History will rightly remember Warren Buffett as the greatest investor of all time. But it shouldn’t forget the essential role Charlie Munger played.

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