Back in May of 2012, Charlie Munger shared some bits of wisdom with Becky Quick in an interview that was recorded and aired on CNBC. This is our recap of what he said in the interview. Please note that the wisdom he shares is timeless, so no matter when you happen to stumble upon this article, you should devote yourself to studying these principles as it will improve your life and your investing philosophy without question.
1. On the Great Recession of 2008
Most recessions have a common theme–too much leverage, too much greed and crazy delusions from all parties involved. Munger said, “I knew it was going to have a bad result, I just can’t tell you when” when discussing the lead up to the financial crisis of 2008-2009. In fact, he believes that we are lucky it wasn’t worse.
To quote Mark Twain, ” History doesn’t repeat itself but it does rhyme.” So, we should be wise to keep all these lessons in mind as we are likely to see similar circumstances arise in the future.
2. Government or Keynsian Intervention can work only if the country’s bank account is full of virtue
An economy with a basic virtue like that of Japan, Germany or the U.S. can deal with a certain level of Keynsian intervention because they still have some virtue as a whole. On the other hand, a country like Greece, where there is an obvious cultural breakdown has a significant problem because the people expect to the government to provide everything without working for anything.
The reason Keynsian intervention worked for the United States in the lead up to WWII is because we possessed so much virtue as a country. As a country’s virtue crumbles, as people turn to the voting booth as a way to get easy money instead of earning money through hard work and innovation, the Keynsian philosophy works less and less. At that point, the basic fabric of virtue has become rotten and torn.
3. Don’t Blame the Fed
When you’re looking for a scapegoat in financial crisis, any old body will do. Many people are shaking there finger at the Federal Reserve for having an ‘easy money’ policy as the next house of cards for the financial system. Mr. Munger points out that the Fed has a limited repertoire and they can only choose from their own playbook.
Only Congress can legislate spending and in turn effect fiscal policy…which is where the real problem lies. So, the Federal Reserve and its board of governors are controlling what they can, which is to have an easy monetary policy. If you want to look back at some lackluster Fed policy, look back at the reign of Alan Greenspan as Fed chairman. Munger points out that Greenspan, “overdosed on Ayn Rand” He didn’t hit the stop button on the way up and created an environment for lending to get out of control within the financial institutions fueled by the unregulated casino-like environment of the derivatives market.
4. Does buying Gold as an investment make sense?
Munger is very clear on this when he says
Well not to me, uh…I think gold is a great thing to sew into your garments if your a Jewish family in Vienna in 1939 but I think civilized people won’t buy gold, they’ll invest in productive businesses.
5. Invest like Berkshire Hathaway
Munger loves the portfolio that he and Warren Buffett have put together at Berkshire Hathaway over the years. He believes that when you’re looking at the whole bunch averaged out they are very productive businesses and for the most part do useful work in the world. That’s something to be proud of.
He and Buffett don’t use computers to try and outsmart the trading markets, they just buy companies that make money and have a durable competitive advantage.
6. Grasp the opportunities at hand as they arise
Mr. Munger quotes the Scottish author and historian Thomas Carlyle once wrote, “Our grand business is not to see what lies dimly at a distance, but to do what lies clearly at hand.”
He goes on to say that masterplanning is a complete waste of time. Masterplans are merely delusions of grandeur and people often think their plans are wonderful simply because they created it themselves. It ruins their objectivity of evaluating any deal that comes along. What you must have is the “propensity to disbelieve” by being willing to change what you originally thought. Munger and Buffett have been masterful at carrying out that philospophy and it has paid off in spades for their shareholders.
7. Experience in business makes you a better investor
When you are deeply involved in a specific business, you are able to more easily identify trends within that can be extrapolated to the rest of the world. Example: Berkshire Hathaway has a huge equity stake in IBM due in large part to how deeply entrenched they observed IBM being into the infrastructure of the Burlington Northern Santa Fe railroad, which is wholly owned by Berkshire. This told Charlie Munger and Warren Buffett that IBM is deeply embedded with its customers and thus had a strangle-hold on that business.
A company with that sort of advantage is a worthy investment target for any investor.
8. Own it lock, stock and barrel
The best way to invest is to own the company outright. The second best way is to own the stock of companies with great ideas and a durable competitive advantage.
9. There’s nothing new under the sun
Politics are not all that important to long term investment. It just doesn’t matter that much who’s in the White House. So far throughout the course of our history, our system has worked pretty well to keep out the crazies at both ends of the political spectrum from having too much power. It’s not a perfect system by any stretch of the imagination but it has served us well.
The way we have it now neither Democrates nor Republicans will get it exactly the way they want, which is best for us all. Conservatives will not be allowed to limit government as much as they would like and liberals won’t be able to have the government control everything the way they’d like. So, don’t worry so much about elections in terms of investing, it won’t change much either way.
10. Short term trading is a perfect casino
Our stock markets have too much liquidity as it stands for now. The by product of that is an ideal environment for gamblers. Mr. Munger says, “it’s the equivalent of letting rats in the grainery” There’s just nothing good to come of it.
The brightest minds of the world are spending their time writing software to exploit loopholes in the market and loot companies of their value. Algorithms shouldn’t be allowed so much power. One way to control this would be “Tobin Taxes”. For instance, a 99% tax on short term trading gains would be a clear disincentive for computerized trading…that would be a pretty blunt tool but it would force the focus to return to long-term investing.
The real problem with creating a system of easy money like has happened with computerized trading is that once you allow this sort of thing, you create tremendous political power that can be used to protect the bad behavior. Politicians have allowed it to continue because these folks (hedge funds by in large) are making huge campaign/political donations to both sides of the aisle.