Charlie Munger’s 1974 financial crisis marks the second major trough of his life, the first being the tragic loss of his 9-year-old son to leukemia, a painful divorce, and near-destitution in his 30s. At age 50, while managing the Wheeler, Munger & Co. investment partnership, Munger endured a brutal two-year cumulative loss of roughly 53.4%. His personal net worth was halved, his use of leverage squeezed him into debt, and the psychological toll left him feeling as though his career might be over.
Yet, relying on his extraordinary mental resilience, extreme patience, and an unwavering focus on intrinsic value, Munger survived the storm. This crisis became the ultimate turning point that led to the liquidation of his fund, his deepened partnership with Warren Buffett, and the rise of the Berkshire Hathaway empire.
Below is a comprehensive breakdown of this historical period, verified through Munger’s own accounts, historical market data, and authoritative financial literature.
1. The Background: The Rise and the 1973-1974 Bear Market
In 1962, at the age of 38, Munger co-founded the Wheeler, Munger & Co. partnership with Jack Wheeler (and later Al Marshall). Operating out of a low-rent office in the Pacific Coast Stock Exchange building, they kept overhead near zero. Munger deployed a highly concentrated value investing strategy, hunting for severely undervalued "cigar-butt" stocks and high-quality businesses. He cared entirely about underlying intrinsic value, aggressively ignoring daily market quotes.
The Golden Decade (1962–1972): For its first 11 years, the fund didn’t have a single down year. It generated a staggering gross annual return of 28.3% (roughly 20% net of fees), easily crushing the Dow Jones Industrial Average (Dow), which averaged just 6.7%. The fund grew from about $3 million to a peak of $60 million. Naturally, Munger became the "local oracle," and a degree of overconfidence crept in.
The 1973–1974 Storm: This era ushered in one of the most vicious bear markets since the Great Depression. Triggered by the 1973 Arab oil embargo, rampant stagflation (high inflation combined with high unemployment), the Watergate scandal, and tightening monetary policy, the market collapsed. The Dow plummeted 45%, dropping from over 1,000 in early 1973 to around 577 by late 1974. The high-flying "Nifty Fifty" blue-chip stocks were decimated. While Munger’s long-term thesis on his holdings was entirely correct, "Mr. Market" relentlessly punished their short-term share prices.
2. The Anatomy of the Crisis: A 53% Drawdown and the Margin Trap
Munger’s portfolio took back-to-back devastating hits, significantly underperforming the broader market due to extreme concentration and leverage.
1973 Performance: The fund lost 31.9% (vs. the Dow's 13.1% decline).
1974 Performance: The fund lost another 31.5% (vs. the Dow's 23.1% decline).
The Cumulative Damage: From peak to trough, the fund's net asset value plummeted by roughly 53.4%. A $1,000 investment with Munger on January 1, 1973, was worth just $467 by January 1, 1975.
The Concentration Problem (End of 1974 Data)
By late 1974, Munger’s remaining $7 million in assets was heavily skewed into just two positions, accounting for 84% of the portfolio:
Blue Chip Stamps (61%): Munger bought in at an average of $7.50. By late 1972, it was trading at $15.37. By the end of 1974, the market had crushed it down to $5.25. Munger knew the intrinsic value was vastly higher, and he was right, as Blue Chip eventually became the holding vehicle to acquire See’s Candies and Wesco Financial for Berkshire.
New America Fund (23%): Purchased at an average of $9.22, the market priced it at just $3.75 in 1974, despite the underlying net asset value remaining over $9.00.
The Fatal Flaw: Leverage
Success had made Munger comfortable using borrowed money to amplify his returns. When the crash came, leverage magnified his losses exponentially. Because the partnership required marking publicly traded securities to current market prices, the paper losses looked catastrophic. Munger’s personal net worth was cut in half, and margin debt left him in a severe liquidity bind.
Munger later reflected: "We were crushed by the market from 1973 to 1974, not because of undervalued assets, but due to market value... our publicly traded securities had to trade at less than half their true value. It was a very unpleasant time."
3. The Personal Toll: Hitting Rock Bottom at 50
At age 50, Munger found himself staring into the abyss for the second time in his life. The psychological burden of reporting massive paper losses to his limited partners caused him profound agony. He realized a harsh truth: managing "Other People’s Money" (OPM) is entirely different from managing your own.
Sitting in his office on Christmas Eve 1974, watching clients redeem their capital at the exact wrong time, he felt a crushing sense of failure. Compounding the pain was the heavy debt he carried. It would take him until 1990, 16 years later, even as Berkshire’s Vice Chairman, to fully recover his personal net worth to its pre-1973, inflation-adjusted peak.
4. Recovery and the Berkshire Pivot
The 1975 Rebound: Munger held his nerve, and in 1975, the fund furiously rebounded, posting a 73.2% gain.
Winding Down: Despite the recovery, the emotional toll was too high. Losing key investors made Munger realize he no longer wanted the burden of managing a traditional fund. He liquidated Wheeler, Munger & Co., distributing shares of Blue Chip Stamps and Diversified Retailing directly to his partners. Those who held onto those shares eventually saw them convert into Berkshire Hathaway stock, yielding astronomical wealth.
The Warren Buffett Intervention: It was during this era that Buffett and Munger's relationship solidified. Buffett had closed his own partnership in 1969 to focus on a holding company structure, and he encouraged Munger to do the same. By 1978, Munger officially became the Vice Chairman of Berkshire Hathaway. Together, they transitioned away from "cigar-butt" investing toward buying wonderful businesses at fair prices, building a trillion-dollar conglomerate.
Reflecting on his life at age 99, Munger noted that all it took was surviving the brutal drops and holding quality assets to turn his age-50 "bankruptcy" into a multi-billion dollar fortune.
5. Deep Analysis and Core Takeaways
The Root Causes of the Crisis:
External: A systemic, macroeconomic bear market that indiscriminately slaughtered even high-quality assets.
Internal: Extreme portfolio concentration mixed with margin debt, leaving zero buffer for short-term liquidity shocks.
Psychological: The hubris of early success that led to leverage, combined with the extreme stress of managing client expectations during a market panic.
Munger’s Structural Lessons:
Accept Volatility as the Price of Admission: Munger famously stated that if you cannot handle a 50% decline in your portfolio with equanimity two or three times a century, you do not belong in the stock market and deserve the mediocre results you will get.
Avoid Leverage: Debt introduces the risk of forced liquidation. Had Munger not used margin, the 1974 crash would have merely been a frustrating waiting game, rather than an existential threat.
Focus on the Business, Not the Quote: The market is a voting machine in the short term, but a weighing machine in the long term. Blue Chip Stamps was a magnificent asset entirely mispriced by a panicked market.
Conclusion
Charlie Munger’s 14-year fund track record ultimately posted a compound annual growth rate (CAGR) of roughly 19.8%, obliterating the Dow’s 5% return. His 1974 crisis proves that temporary agony does not equal permanent failure. His story remains the ultimate masterclass in financial stoicism: greatness isn't achieved by avoiding drawdowns, but by how you endure them.