Charlie Munger's quality investing, applied to PSX
Charlie Munger's idea of paying a fair price for an exceptional business, applied to the Pakistan Stock Exchange: his mental models, the kinds of PSX business with lasting advantages, the red flags, and why patience matters.
By the Nafa team · Updated · 4 min read
Charlie Munger, Warren Buffett's partner for decades, moved Buffett away from buying any business that was cheap enough towards buying great businesses at fair prices. His point: it is better to pay a fair price for an exceptional company than a low price for an ordinary one. This guide explains how that thinking applies on PSX. It describes an approach, not a list of shares to buy.
Munger's mental models on PSX
Munger judged businesses using ideas from many fields. Three are most useful to a PSX investor.
Circle of competence
Invest only in businesses you understand. For most people that means businesses whose economics are easy to follow: banks, everyday consumer goods, energy, fertiliser. Be wary of sprawling groups, holding companies with hard-to-read accounts, or niche industries you can't judge.
Moats
Munger asked: if a competitor with unlimited money tried to take this company's customers, what would stop them? On PSX, lasting advantages come from:
- licences that limit competition, such as in gas or power distribution
- brands people trust and buy again without thinking
- distribution networks that took decades to build
Businesses without a moat, such as commodity producers, tend to earn low returns over a full cycle.
Incentives
Managers who own a large stake, spend money carefully and don't keep issuing new shares tend to run the business for the long term rather than next quarter.
Kinds of PSX business with lasting advantages
- Branded consumer goods. Food, dairy and household products, where brand and reach keep customers. These companies can raise prices through inflation and a falling rupee, which commodity producers can't.
- Specialised chemicals and industrial inputs. Where switching to another supplier is costly for the customer, relationships last.
- Islamic banking. A strong Islamic banking franchise builds loyalty: customers who chose a bank for religious reasons rarely move. See banking stocks on PSX.
- Fertiliser. A few large producers, wide reach into farming and steady demand, since farmers need fertiliser whatever happens to prices.
Every PSX stock page on Nafa shows a company's return on equity, debt and yearly results, which is where judging any of these starts.
Red flags Munger would watch for
- Profit that doesn't come from the business. Currency gains, one-off sales of assets or investments, or subsidies can inflate a year's profit. Take them out before judging the business.
- Complicated dealings with related parties. Disclosure on PSX has improved, but deals within family-controlled groups remain a risk. Munger valued simple, open accounts.
- Growth by buying other companies. Companies that grow mainly through acquisitions often overpay. A business that reinvests in its own high-return operations is usually better.
- Frequent changes at the top. A chief executive or finance director leaving often can point to problems inside.
Patience
Munger's best-known quality was patience: he held some investments for decades. On PSX, that means looking past IMF reviews, rate decisions and political headlines when the business itself is sound and its position is getting stronger. Owning a business that earns 20% on its capital for ten years does far more for an investor than trading in and out on guesses about the economy.
Putting it into practice
- Make a short list of 10 to 15 businesses you understand well.
- For each, look at five years of numbers: average return on equity, growth in sales, operating cash flow and debt. See how to read PSX financial statements.
- Keep those with a consistently high return on equity (above 15%), stable or falling debt and real cash generation.
- Then consider the price. A great business can still be too expensive. Some investors also check that the share price trend has stopped falling before buying, so they aren't fighting the market.
Ticker Analysts, the research site from the company behind Nafa, runs a daily screen that combines these quality measures with the price trend.
