A Charlie Munger Legacy – The Healthy Returns And Health Conundrum

Charlie Munger, investing Titan and Warren Buffet’s business partner, passed away on November 28^th, a month shy of his 100^th birthday. Regardless of one’s opinion of Munger the man, there can be no doubt that his life influenced investing and business, quite literally, affecting the entire world. But what if his greatest impact was on the health of the globe?

As vice chairman of Berkshire Hathaway (BRK), Munger irrevocably changed not only investment strategies, as detailed in a July 20, 1996 speech titled “Practical Thought About Practical Thought.” In it, he outlined Five Simple Notions that Solve Problems which was a ground-breaking soliloquy explaining his investment strategy using the success story of Coca-Cola (KO). However, the speech was much more than an investment primer for it also detailed a trajectory for the soft drink product using the simplest and most fundamental of academic models. (Today, Berkshire Hathaway is the single largest holder of 400 million shares of Coca-Cola stock valued at $22 billion and close to 10% of the company.)

Munger explained one aspect of his approach by stating, “it will be wise to have our beverage look pretty much like wine instead of sugared water. And so, we will artificially color our beverage if it comes out clear. And we will carbonate our water, making our product seem like champagne, or some other expensive beverage, while also making its flavor better and imitation harder to arrange for competing products. And, because we are going to attach so many expensive psychological effects to our flavor, that flavor should be different from any other standard flavor so that we maximize difficulties for competitors and give no accidental same-flavor benefit to any existing product.” (This was true about Coke when it was invented. He didn’t change the color or add carbonation. There is even a clear Coke variant. What color was Coca-Cola originally? (foodly.tn)

The Coca-Cola Company started in Atlanta but strategically spread worldwide and now boasts of offering over 500 brands and 3,500 beverages in over 200 countries. It is not an exaggeration to state that Munger and his “simple” notions not only helped enrich Berkshire Hathaway, but it also helped transform Coca-Cola into a company with a market cap of $250.36 billion. But, Munger’s influence did not end with Coca-Cola.

Convincing people to switch from drinking water to a colored, carbonated, high sugar content drink did not come without a price. In this case, the cost is more than the cost of a single original 6.5-ounce bottle bottle. What Size Was The Original Coke Bottle? – PaperJaper) More significantly, it is the cost to human health. Thirty-eight million Americans (1 in 10) have diabetes while an additional 97.6 million adults (38% of the US population) are prediabetic.

While increased sugar consumption alone doesn’t cause diabetes, it does play a role in the development of obesity and that is the critical dilemma. The primary cause of Type 2 diabetes (T2D) is obesity, and obesity has become a nationwide epidemic. The number of adults diagnosed with diabetes is projected to increase from 22.3 million (9.1% of the U.S. population) in 2014 to 60.6 million (17.9%) in 2060. Those affected will include half of the population over the age of 65. The obesity problem even affects national security; 31% of young applicants are disqualified from military service because of obesity. The US is not alone in facing an obesity crisis, the global estimate of people with diabetes is 462 million or 6.28% of the world population.

Diabetes develops due to two main conditions. The first is when the pancreas does not produce enough insulin to keep blood sugar levels in a healthy range. The second is when cells don’t take in enough sugar because they become insulin resistant. There are many causes of diabetes but it is well established that people who consume sugary drinks regularly – 1-2 or more cans per day – have a 26% greater risk of developing T2D. Counterintuitively, drinking diet soda does not eliminate the increased risk.

In one study, almost 90% of diabetics were obese. It should come as no surprise that there is an almost evangelical demand for everything from specialized diets to drugs designed to not only facilitate weight loss (the fastest growing sector of drugs in healthcare) but also to achieve attendant health improvement. Weight loss is associated with remission of diabetes as well as improvement of other conditions such as hypertension.

Returning to Munger’s Berkshire-Hathaway, the holding company owns more than half of Kraft-Heinz (makers of Kraft Macaroni and Cheese, Heinz Mayonnaise, Cool Whip, and Kool-Aid). One of Munger’s simple notions was the need for both operant and conditional conditioning of consumers. He argued for the practice of the operant reward system associated with buying these brand products and which simultaneously discouraged the consideration of buying from a proprietor marketing a competing product. As for conditional (Pavlovian) conditioning, Munger believed that the “effects of mere association” would dictate product development. The success of his reasoning speaks for itself.

Once conditioned, consumers found many of the products irresistible if not addicting. Comfort foods have always provided a temporary relief from many of life’s problems. Taken to extremes, they also can lead to obesity.

Now here’s where it becomes a bit uncomfortable, obesity is associated with diabetes and high blood pressure, the two most common causes of Chronic Kidney Disease (CKD). Progressive CKD can lead to end-stage renal disease (ESRD), that is, kidney failure. Approximately 808,000 people in the United States are living with kidney failure. Of those, 69% require dialysis. The dialysis market is a growth business.

Recognizing this growth potential, Berkshire Hathaway bought 36 million shares of DaVita, Inc. (more than 40% of the company) worth $3.4 billion. DaVita (DVA) is the largest provider of dialysis in the U.S., operating more than 3,000 dialysis facilities. DaVita stock is one of his best performing stocks of 2023 with share performance increasing by 36.63% as of November 26. What makes this even more striking is that of all of the trillion dollars in assets Munger managed, DaVita is the only healthcare concern in the current portfolio.

Charlie Munger was indeed a prodigy. He recognized value and acted boldly as he employed his Five Simple Notions to groom a population of loyal consumers who helped turn Coca-Cola into today’s behemoth. While Charlie Munger’s investment acumen will be subject to studies for many years to come, so too might be the health implications of the investments he helped to sponsor.