Why Charlie Munger says market returns will be lower next decade

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Why Charlie Munger says market returns will be lower next decade


Legendary investor Charlie Munger says successful investing requires a fine balance and a weird combination of patience and aggression.

But most investors these days are not able to maintain this fine balance, and thus make many mistakes in their investment decisions, says he.

Munger says successful investing requires a huge amount of self-awareness about how much investors know and how much they don’t know. “All successful investment involves trying to get into something where it’s worth more than what you’re paying. That’s what successful investment is. There are a lot of different ways to find something worth more than what you’re paying,” he said in a virtual interview hosted by the California Institute of Technology, whose video is now available on YouTube.

Munger was all praises for Sequoia and felt it is the most remarkable investment firm in America right now. “That venture capital firm absolutely fanatically stays right on the cutting edge of modern technology. They have made more money than anybody else and have the best investment record. It’s amazing what they have done,” he said.

Start early and work hard

Munger says to succeed in investing, one needs to start early, try hard and keep doing it until all the success comes her way.

“To some extent, great investors are like great chess players. They’re almost born to be investors. You have to know a lot, but partly it’s temperament, partly deferred gratification. You got to be willing to wait,” he says.

Munger says it is important for investors to know the edge of their own competency if they want to be successful. “A lot of brilliant people are no good knowing the edge of their own competency. They think they’re way smarter than they are. Of course, that’s dangerous and causes a lot trouble,” he says.

How times have changed

Munger says a lot has changed since he had begun his investing career, as there was hardly anybody involved in investing when he was young and people were not that smart.

“When I was young, there was practically nobody involved in investing and they weren’t very smart. Now almost everybody is smart. A good proportion of people in investing are sucked into finance by the money. That’s an important development. I don’t welcome it at all,” he said.

Munger says all the things that were really great when he was young have receded enormously. He believes there are some new things that have come up and some of them have already started to die, which makes the long-term investment climate very interesting.

“Look at what’s died: department stores, newspapers, steel. John D Rockefeller’s Standard Oil is a pale shadow of what it was. It is just like biology. They have their little hour, they have their little time and then they get clobbered,” he says.

Market returns to lower in the next decade

There has been a frenzy of activity in the investment field and investors these days want to outsmart one another.

“I don’t think we want the whole world trying to get rich by outsmarting the rest of the world. But that’s what’s happened. There’s been frenzies of speculation and so on. It’s been very interesting, but it’s not been all good,” he said.

Munger said due to this frenzy, market returns are expected to be lower over the next 10 years than what it was in the previous decade. “So many people are in it, the frenzy is so great and the reward systems are so foolish. I think the returns will go down,” he says.

He said the recent months have seen unprecedented monetary easing and aggressive fiscal spending which he feels can be very dangerous. “We’re in very uncharted waters. Nobody has gotten by with the kind of money printing now for a very extended period without some kind of trouble. We’re very near the edge of playing with fire,” he said.

Commenting on the surge in technology companies’ valuations in recent years, Munger said: “Think about what Apple is worth compared with John D Rockefeller’s empire. It’s been the most dramatic thing that’s almost ever happened in the entire world history of finance.”

Avoid mental biases

Munger says it’s very common for investors to get over-confident, as they start getting a taste of success. He says although some people may be utterly brilliant, they make the mistake of thinking they’re way smarter than they actually are, and end up doing worse than even the dumbest people.

Investors should try and keep things as simple and fundamental as possible and should try to avoid their own mental biases, Munger said.

“I spent a lifetime trying to avoid my own mental biases. A) I rubbed my own nose in my own mistakes. B) I try and keep it simple and fundamental as much as I can. I like the engineering concept of a margin of safety. I’m a very blocking and tackling kind of a thinker,” he says.

Avoid being stupid

Explaining his approach to investment, Munger says he just tries to avoid being stupid. He said he has his own way of handling a lot of problems.

Munger puts them on what he calls a ‘too-hard pile’ and just leaves them there and doesn’t try to succeed in the too-hard pile, because sometimes he faces challenges that are too hard and when that happens, he fails to overcome them.

Munger says if investors want to avoid stupid errors, they should know their areas of competencies. Identifying these areas is not easy due to the bias of the human mind, he said.

“The single most important thing, if you want to avoid a lot of stupid errors, is knowing where you’re competent and where you aren’t. That’s a very hard thing to do, because the human mind naturally tries to make you think you’re way smarter than you are,” he said.

Why Munger didn’t take up academia as a career

Reflecting upon his investing career, Munger said he had enjoyed every bit of it and had learnt a lot from both his successes and failures. He said he could have taken up academia as a career, but chose to avoid it because he knew he wouldn’t win big at it.

“I would have been a perfectly successful professor by ordinary standards, but I would not have been a star. Academia is not very good at the interdisciplinary stuff. Academia rewards a researcher who knows more and more about less and less, and there are real difficulties with that approach,” he said.

Don’t constantly rely on experts for investment advice

Munger said he is a big fan of knowing big ideas in pretty much all of the disciplines which are pretty easy to assimilate, and then he uses them routinely in his judgments.

He said there is no point in just constantly consulting with experts for investment advice. “I might consult experts in building a chemical plant or something. But in making investment decisions, it’s very helpful to be comfortable with the big ideas in all the disciplines. I think that life is more fun if you do that,” he said.

Have a rational investment approach

Munger said investors should have a rational approach and it is best to avoid things they don’t like. “I’m proudest of avoiding some things I don’t like. I don’t like irrationality, and I’ve worked to try and avoid it in my life. I haven’t succeeded completely of course. Nobody does. It’s been a pleasant way of going through life,” he said.

How to lead a successful life

Munger felt in order to lead a successful life, it is important for investors to act with courage and make some bold decisions which may or may not be right. “You can’t live a successful life without doing some difficult things that go wrong. That’s just the nature of the game, and you wouldn’t be sufficiently courageous if you tried to avoid every single reverse,” he says.

The easiest route to success

Munger said the easiest route to success for investors is to jump on to the bandwagon of something that is going up, as it can carry them to success without much talent or work.

Advice to youngsters

Munger advised youngsters to enter the investment world only if they are passionate about it and enjoy themselves as investors if they want to succeed.

“If you pursue any career with enough fanaticism, that’s very likely to work better than not having fanaticism. Look at Warren Buffett, he had this fanatic interest in making investments from an early age, and he kept on making small investments, and he finally learned how to be very good at it,” he said.

Duty of every successful investor

Munger said it should be the duty of reasonably successful investors to be generous and have a giving nature as that is a bare minimum they can be expected to do for the benefit of the society and human kind.

“I’m not that proud of my philanthropy. I regard it as an absolute minimum duty for somebody who’s reasonably successful to be reasonably generous. I don’t think you get big merit points for the philanthropy you do,” he said.

(Disclaimer: This article is based on Charlie Munger’s virtual interview hosted by the California Institute of Technology)





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