I can't think of any other 97 year-old-person I'd rather listen to than Charlie Munger. Billionaire Charlie Munger is one of the most successful investors of all time and he also happens to be Warren Buffett's partner for over 50 years.
Charlie Munger is Vice-Chairman of Berkshire Hathaway, on the Board of Costco, and Chairman of the Board of the Daily Journal Corporation (a newspaper publisher and software developer).
Of course Mr. Munger is well-known for his investing prowess, but he is equally respected for his thoughts outside of investing. Investors and just about everyone would be well advised to follow many of the principals and ideas Mr. Munger has shared over the years.
This content comes from Theron Mohamed at Markets Insider. Below are lightly edited comments from yesterday's Daily Journal annual shareholder meeting covering his thoughts from Bitcoin to marriage, and many things in-between. Enjoy...and here's to soaking up some of Mr. Mungers worldly wisdom.
"These things do happen in a market economy, you get crazy booms. I've been around for a long time and my policy's always been to just ride it out."
"A lot of investors are buying stocks in a frenzy, frequently on credit, because they see them going up. That's a very dangerous way to invest."
"Shareholders should be more sensible and not crowd into stocks and just buy them just because they're going up and they like to gamble."
"I think it must end badly but I don't know when."
"That's the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would bet on racehorses."
"The frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. When things get extreme you have things like that short squeeze."
"It's very dangerous and it's really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors. Of course that is going to cause trouble, as it did."
Robinhood and Trading Apps
"If you're selling people gambling services where you make profits off the top like many of these new brokers who specialize in luring gamblers in, it's a dirty way to make money and I think we're crazy to allow it."
"[Wretched excess in the financial system] is most egregious in the momentum trading by novice investors lured in by new types of brokerage operations like Robinhood. All of this activity is regrettable, civilization would do better without it."
"Human greed and the aggression of the brokerage community creates these bubbles from time to time. Wise people just stay out of them."
"When you pay for order flow, you're probably charging your customers more in pretending to be free. It's a very dishonorable, low-grade way to talk. Nobody should believe that Robinhood's trades are free."
Stock Valuations When Interest Rates Are Low
"Everybody is willing to hold stocks at higher price-earnings multiples when interest rates are as low as they are now. I don't think it's necessarily crazy that good companies sell at way higher multiples than they used to."
"On the other hand, I didn't get rich by buying stocks at high price-earnings multiples in the midst of crazy, speculative booms, and I'm not going to change."
"The world would be better off without them. This kind of crazy speculation, in enterprises not even found or picked out yet, is a sign of an irritating bubble. The investment-banking profession will sell shit as long as shit can be sold."
"I don't think bitcoin is going to end up the medium of exchange for the world. It's too volatile to serve well as a medium of exchange."
"It's really kind of an artificial substitute for gold and since I never buy any gold, I never buy any bitcoin. I recommend that other people follow my practice."
"[The Daily Journal] will not be following Tesla into bitcoin."
Tesla and Bitcoin
Munger was asked to choose which was more ridiculous, bitcoin trading at $50,000 or Tesla's fully diluted enterprise value of $1 trillion.
He quoted author Samuel Johnson, who when presented with two choices, said, "I can't decide the order of precedency between a flea and a louse."
"I feel the same way about those choices," Munger said. "I don't know which is worse."
"Banking, run intelligently, is a very good business. The kind of executives who have a Buffett-like mindset and never get in trouble are a minority group, not a majority group."
"It's hard to run a bank intelligently. There's a lot of temptation to do dumb things which will make the earnings next quarter go up, but are bad for the long term."
"There's no question that Wells Fargo has disappointed long-term investors like Berkshire. The old management were not consciously malevolent or thieving, but they had terrible judgment in having a culture of cross-selling, with incentives on the poorly paid employees that were too great to sell stuff the customers didn't really need.
"When the evidence came in that the system wasn't working very well because some of the employees were cheating some of the customers, they came down hard on the employees instead of changing the system. That was a big error in judgment. It's regrettable."
"You can understand why Warren [Buffett] got disenchanted with Wells Fargo I'm a little more lenient. I expect less out of bankers than he does."
"BYD stock did nothing for the first five years we held it and last year it quintupled. What happened was that BYD is very well-positioned for the transfer of Chinese automobile production from gasoline-driven cars to electricity-driven cars."
"It's in a wonderful position and that excited the people in China - which has its share of crazy speculators - and so the stock went way up."
Selling Overvalued Stocks
"I so rarely hold a company like BYD that goes to a nosebleed price, that I don't think I've got a system yet. I'm just learning as I go along."
"It's been amazing that one little company, starting up not all that many decades ago, could become as big as Costco did, as fast as Costco did. Part of the reason for that was cultural. They have created a strong culture of fanaticism about cost and quality and efficiency and honor, all the good things, and it's all worked."
"People really trust Costco to deliver enormous values and that is why Costco presents some danger to Amazon. They've got a better reputation for providing value than practically anybody, including Amazon."
"Value investing, the way I conceive it, is always wanting to get more value than you pay for when you buy a stock. That approach will never go out of style."
"All good investing is value investing. It's just that some people look for value in strong companies and some people look for value in weak companies."
Amazon Founder Jeff Bezos
"I'm a great admirer of Jeff Bezos, whom I consider one of the smartest businessmen who ever lived."
Alibaba Founder Jack Ma
"Jack Ma was very arrogant to be telling the Chinese government how dumb they were and how stupid their policies were and so forth. Considering their system, that is not what he should have been doing."
The Pandemic Enriching the Wealthy
"We were trying to save the whole economy under terrible conditions. We made the rich richer not as a deliberate choice; it was an accidental byproduct of trying to save the whole civilization. It was probably wise that we acted exactly as we did."
Modern Monetary Theory
"So far, the evidence would be that maybe the modern monetary theory is right. Put me down as skeptical."
"I'm way less afraid of inequality than most people who are bleating about it. Inequality is absolutely an inevitable consequence of having the policies that make a nation grow richer and richer and elevate the poor. I don't mind a little inequality."
Munger bemoaned the rising amount of "hatred and irrationality" in politics, but argued the country had been well-governed for the past century.
"The system of checks and balances and elections that our founders gave us, actually gave us pretty much the right policies during my lifetime, and I hope that will continue in the future."
The Evolution of Business
"Long-term business success is a lot like biology. In biology, the individuals all die and eventually so do all the species. And capitalism is almost as brutal as that."
"Think of what's died in my lifetime. Who ever dreamed when I was young that Kodak and General Motors would go bankrupt? It's incredible what's happened in terms of the destruction."
"I think I had the right temperament. When people gave me a good idea, I quickly mastered it and started using it and just used it for the rest of my life. It's such a simple idea. Without the method of learning, you're like a one-legged man in an ass-kicking contest."
"It's one of the most ignorant professions in the world," Munger said, highlighting that many psychologists fail to connect their theories and insights with other types of knowledge.
Adapting to Technological Change
"If you have a fixable disadvantage, remove it, and if it's unfixable, learn to live without it. What else can you do?"
Challenging One's Beliefs
"I'm not really equipped to comment on a subject until I can state the arguments against my conclusion better than the people on the other side. If you're looking for disconfirming evidence, that's a good way to help remove ignorance."
"When we shout our knowledge out, we're really pounding it in, we're not enlarging it."
"Warren and I are better at buying mature industries than we are at backing startups. I would hate to compete with Sequoia in their field, they would run rings around me."
"I got close to Sequoia when, with Li Lu, we bought into BYD. We were buying into a venture-capital-type investment, but in the public market. With that one exception, I've stayed out of Sequoia's business because they're so much better at it than I would be."
The Queen's Gambit and Investing
"I have seen an episode or two. What I think is interesting about chess is to some extent, you can't learn it unless you have a natural gift. And even if you have a natural gift, you can't be good at it unless you start playing at a very young age and get huge experience."
"Any intelligent person can get to be pretty good as an investor and avoid certain obvious traps, but I don't think everybody can be a great investor or a great chess player."
Do Managers Have a Moral Responsibility to Have their Shares Trade as Close to Fair Value as Possible?
"I don't think you can make that a moral responsibility because if you do that, I'm a moral leper. The Daily Journal stock sells way above the price I would pay if I were buying a new stock."
"The management should tell it like it is as all times and not be a big promoter of its own stock."
Oil and Gas
"The oil-and-gas industry will be here for a long, long time even if we stop using many hydrocarbons in transportation. The hydrocarbons are also needed as chemical feedstocks. I'm not saying that oil and gas is going to be a wonderful business, but I don't think it's going away."
Wealth and Happiness
"Most people are born with a happy stat, and their happy stat has more to do with their [inherent] happiness than their outcomes in life," Munger said. He argued that most people wouldn't be significantly happier if they were richer or much more miserable if they were poorer.
Physics and Investing
"I don't use much physics in solving my investing problems. Occasionally some damn fool will suggest something that violates the laws of physics, and I will always turn off my mind the minute I realize the poor bastard doesn't know any physics."
"A little wisdom in spouse selection is very desirable. You can hardly think of a decision that matters more to human felicity than who you marry."
Creativity in Old Age
"I don't have any wonderful new thoughts. To the extent that my thoughts have helped my life, I've pretty well run the course. I don't think I'm likely to have any new thoughts that are going to work miracles either. But I find that the old ways of doing things still work. I'm kind of pleased that I'm still functioning at all. I'm not trying to move mountains."
Secrets to a Long, Happy, and Healthy Life
"I'm alive because of a lucky genetic accident. I don't have any secrets. I think I would have lived a long time if I'd lived a different life."
"The first rule of a happy life is low expectations. If you have unrealistic expectations, you're going to be miserable all your life. Also, when you get reverses, if you just suck it up and cope, that helps more than if you just fretfully stew yourself into a lot of misery."
Rose Blumkin [of Nebraska Furniture Mart] had quite an effect on the Berkshire culture. Her mottos were, 'Always tell the truth' and 'Never lie to anybody about anything.' Those are pretty good rules and they're pretty simple."
Life After the Pandemic
"When the pandemic is over, I don't think we're going back to just the way things were. We're going to do a lot less travel and a lot more Zooming. The world is going to be quite different."
-Paul R. Ross, CFA
Does the thought of plowing money into a start-up company or buying shares of a company that recently went public excite you? Are you enticed by high-risk/high-return investments?
Or do you prefer the "sure thing," believing that slow and steady can win a lot of races? If so, you might be considered a more risk-averse investor.
There is no right or wrong type of investor, just what's right for you. Most people fall somewhere in between these two extremes. But knowing what your needs are, and what type of investor you are, can help get a sense of your risk tolerance and ultimately help you invest in a way that will build wealth over time.
Like a finger print is unique to each individual, no two people will have the same views on investing.
In less than 2 minutes, you can find out where you stand, are you a Tortoise or a Hare?
Mark the responses below after each sentence that best describe your immediate reaction to each of the following statements.
Try not to overthink your answers.
Score yourself below.
Drum roll please...
Whatever your score, be it 8 or 40, or somewhere in between, knowing this number is critical to your investing success. Knowing your comfort level will go a long way in determining what type of investments are suitable for you and which ones are not.
Investors would be wise to follow the ancient Greek aphorism "nosce te ipsum," more commonly known as "know thyself."
-Paul R. Rossi, CFA
For a deeper dive into your risk tolerance and to see if your investment/retirement portfolio is correctly aligned with who you are, click here.
One of the fundamental laws of the universe, is the Law of Gravity. Einstein taught us that gravity is the bending of space/time, which we perceive as objects being drawn toward each other.
Finance's "Law of Gravity" is the idea of the relationship between risk and return. The idea is pretty straight forward: The riskier the investment, the potential greater the return. Said another way, the lower the risk, the lower the expected return. The relationship between risk and return is positivity correlated, therefore the more an investor is willing to dial up their risk, the more return they expect to make.
Let's take two relatively straight forward examples which will clearly reveal the gravity law in finance.
Low Risk example: Putting your money in your local FDIC insured bank is a extremely safe investment. In a nut shell, there is next to no chance that you will lose your principal amount (up to the FDIC limit of course). For this ultra safe investment, investors today are earning between 0.0% - 0.50% (annually).
Keep in mind, when you factor in inflation, this 'safe' investment actually loses purchasing power over time - but this for another conversation (read here) which talks about inflation and its effect on purchasing power.
High Risk example: Taking this same money out of your bank and placing all of it on one hand of Black Jack at your favorite casino. The risk is extremely high that you will lose all of your money on that single bet, however, there is a chance that you will 'win' your bet and double your money in an extremely short period of time - a great return over an extremely short period of time. So this high risk action has the potential of high returns.
So next time you hear of an investment opportunity that sounds 'too good to be true,' take a minute to think of the simple relationship that return = risk.
-Paul R. Rossi, CFA
The 10-Year Treasury is down over 59% AND is up over 94%.
How is this possible?
If you measure over the last 3 years, the 10-Year Treasury is down 59%.
If you measure over the last 6 months the 10-Year Treasury is up over 94%.
Time frames matter.
-Paul R. Rossi, CFA
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.” – Charles Dickens, the famous opening quote from the 1859 book, A Tale of Two Cities.
Eerily, this quote sounds like it could have been written yesterday.
At one point, A Tale of Two Cities was cited as the best-selling novel of all time. Dickens was a champion of the poor in his writings and in his life as he became the most popular novelist of his time. Astoundingly, his works have never gone out of print.
Growing up in England he lived in poverty, leaving school as a young boy to work in a factory to help support his family due to his father continually living beyond his means. His father eventually went to debtors' prison. Looking at his early life, most would never have predicted who he would eventually become, and the impact he would have.
Looking back over the past 10-years, for some investors, it was as Dicken’s wrote, it ‘was the season of Light…it was the best of times.”
What have the 5 best performing companies in the S&P 500 done over the last 10 years?
The top 5 performing stocks were:
Doing a thought experiment, investing $10k into each company 10-years ago would have turned this combined $50,000 investment into over $2,800,000. A gain of 5,752% gain. It truly was, “the best of times” for these investors.
Conversely, how did the 5 worst performing companies in the S&P 500 do over the last 10 years?
Investing $10,000 into each of these companies would have turned the $50,000 investment into less than $12,000, losing -$38,000. A whopping loss of -75% and a difference of over $2,838,000 in terminal wealth between these two investors. For these investors, “it was the worst of times.”
What can we learn from this?
Different investors can experience wildly different returns. Investing can be extremely rewarding and horribly painful over the exact same time-period.
-Paul R. Rossi, CFA
Paul R. Rossi, CFA