Does Charlie Munger consider companies with high ROIC to be core investment targets?

Does Munger Regard Companies with High ROIC as Core Investment Targets? The Answer is: Absolutely.

For Charlie Munger, seeking out and investing in companies with consistently high returns on invested capital (ROIC) is a cornerstone of his investment philosophy. This is not merely a financial metric; it is the quantitative embodiment of his principle to "buy wonderful companies at a fair price."

Here is a detailed elaboration:

1. High ROIC is the Core Financial Characteristic of a "Wonderful Company"

Munger's investment philosophy evolved from Benjamin Graham's early focus on "cigar butt" stocks (buying mediocre companies far below their liquidation value) to the "buy wonderful companies at a fair price" approach he championed with Warren Buffett.

So, how is a "wonderful company" defined? Munger believes one of the most critical characteristics is its ability to deploy invested capital at a very high rate of return. ROIC (Return on Invested Capital) is precisely the best metric to measure this capability.

Meaning of ROIC: ROIC = (Net Operating Profit After Tax) / (Invested Capital). It measures the efficiency with which a company generates profits from all its invested capital (including both equity and debt).
Munger's Perspective: A company that consistently maintains a high ROIC (e.g., persistently above 15% or 20%) usually signifies that it possesses a strong, sustainable competitive advantage—what Munger and Buffett call an "Economic Moat".

2. High ROIC is the Engine of the Compounding Machine

Munger deeply understands the magic of compound interest, famously stating: "Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things." Companies with high ROIC are the most powerful "compounding machines."

Growth in Intrinsic Value: A high-ROIC company can reinvest the profits it earns each year and continue to achieve the same high rate of return.
- Example: Company A has an ROIC of 25%, Company B has an ROIC of 8%. Both reinvest all profits. Company A's intrinsic value will grow at close to 25% per year, while Company B's will only grow at 8%. Over the long term, this difference is enormous.
Munger's Quote as Evidence: Munger explicitly stated: "Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount." This quote directly highlights the decisive role of ROIC in long-term investment returns.

3. High ROIC is Evidence of an Existing "Moat"

A single high ROIC figure might be meaningless, but a persistently high and stable ROIC over many years is strong evidence that a company possesses a powerful "moat." In a free market, high profits attract numerous competitors who attempt to imitate and undercut prices, ultimately driving down industry profitability.

If a company can withstand this competitive pressure long-term and maintain a high ROIC, it indicates the presence of one or more of these "moats":

Intangible Assets: Such as a powerful brand (Coca-Cola), patents (pharmaceutical companies).
Switching Costs: Extremely high costs for users to switch products or services (Apple's ecosystem, banks).
Network Effects: The product becomes more valuable as more users join (WeChat, Visa).
Cost Advantages: Unique scale or process advantages leading to significantly lower costs than competitors (Costco).

Munger specifically seeks out these high-ROIC companies protected by wide "economic moats."

The Complete Picture of Munger's Investment Philosophy: ROIC is Not the Sole Criterion

While high ROIC is central, Munger's decision-making is a holistic framework based on "multiple mental models," never relying on a single metric.

Price Must Be Reasonable (A Fair Price): Even the world's greatest company can be a poor investment if bought at too high a price. Munger emphasizes the necessity to operate within one's "circle of competence," make a conservative estimate of the company's intrinsic value, and buy at a reasonable price below that value.
Understanding the Business Model and Moat Sustainability: Investors must deeply understand why the company achieves a high ROIC. Will its "moat" remain strong 5 or 10 years from now? Could technological change, regulatory risk, or shifting consumer preferences erode it? Munger places companies he doesn't understand or those with excessive future uncertainty into his "Too Hard Pile."
Quality of Management: Munger places immense importance on the integrity and competence of management. Exceptional management allocates capital rationally, directing the ample cash flow generated by high ROIC into projects that continue to yield high returns, or returning capital to shareholders via stock buybacks and dividends when no good investment opportunities exist. Poor management can destroy even a great company.

Conclusion

Yes, Munger absolutely regards companies with high ROIC as his core investment targets.

In his view, a consistent, stable, and predictable high ROIC is the most important and intuitive quantitative signal for identifying "wonderful companies" with "strong economic moats." It is the fundamental engine driving long-term compound growth.

However, this is only the starting point for investment decisions. The final investment decision requires combining this with a profound understanding of the business model, an assessment of the moat's sustainability, an evaluation of management quality, and paying a reasonable price. Together, these elements constitute the essence of Munger's value investing philosophy.