Words of Wisdom from an Investing Legend

Charlie Munger today is nearly 98 years young and throughout his lifetime earned a reputation for being one of the most intelligent investors, attorneys, and philanthropists of the last hundred years. (For more on Munger, see our summary of the time we spent with Charlie.) Charlie’s business partner Warren Buffett believes Munger is the closest embodiment to a modern-day Ben Franklin, so when Charlie speaks, we listen. And in the past few weeks, he has been interviewed twice. We found a few of his thoughts worthy of sharing with you. At the Sohn Hearts and Minds Investment Conference, Munger stated that the current investment climate is unlike anything he’s seen since the dot com bubble of 1999-2000. “I think the dot com boom was crazier in terms of valuations than even what we have now. But overall, I consider this era even crazier than the dot-com era,” Munger said. This is a function of the widespread nature of speculation occurring today, from bubbly real estate prices to the action in cryptocurrencies which he abhors. (He believes they will eventually prove disastrous for many participating in them today.) Today’s elevated valuations for most stocks make it difficult for sensible investors to find intelligent investments. “Of course it’s possible, but you have pay a great deal more for the good companies now,” he said. “There’s no great company that can’t be turned into a bad investment, just by raising the price [of the stock].” Market participants have “bid the good businesses up and up and up and up. In America, at least, almost every great business is selling at 35 times earnings or more.” “In the past, you had all the growth plus they went from a 10 multiple to a 35 multiple – so you feel like a genius, but that doesn’t mean that it’s going to go up at that same rate in the future.” Companies like Apple fit this bill. “I think all successful investing is value investing in the sense that you’re trying to get better prospects than you’re paying for,” he says. But that’s become much harder to achieve today as many market valuations are sky high. Successful investing the Buffett and Munger way requires first the identification of a high-quality business and then the requirement that one doesn’t vastly overpay to be a part owner of that company. In a recent podcast interview on Steven Pinker’s “Think with Pinker,” Charlie was in great form, sharing his thoughts on how he and Buffett use noise in the markets as a signal for where to hunt for potential bargains, a description of one of Munger’s biggest investment failures, and how Charlie aggressively learns from his own errors. “I just go through life rubbing my nose in my own past mistakes. If it works in training a dog, I figured it would work for me,” he says. Munger turned his attention to the deceptive practices asset gatherers use when they try to convince individuals to invest money with them. Charlie skewered large investment firms for over-representing their historical performance as a way to lure people into their investment vehicles: “It’s even worse than you think! What they do in creating new funds is they create ten or twelve of them and [years later] they pick the one that happens to win [perform the best over time]. Then they show the historical record showing this big return. Of course, the big return happened when they had virtually no assets [in that fund] and the return per dollar a year in those funds is terrible but it looks great when you look at the historical record. But it’s really fraudulent.” “Nobody seems to find the practice of picking a phony winner like that and using it in the advertising as crooked and detestable but it is crooked and detestable.” For an overview of the gambler’s fallacy, quotes from Demosthenes, and more wisdom from Charlie and economist Tim Harford, check out Steve Pinker’s podcast “Think with Pinker” and the recent episode titled “Methinks it is a weasel.” Please be in touch with any thoughts about this or the current financial environment.


Darren Pollock, David Horvitz, James Whiting

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