The NASDAQ fell below its 50-day moving average Tuesday, as the TSX Venture traded down a whopping 5% in early trading. From Bitcoin to silver, most stocks and commodities fell Tuesday. While days like today (sharp sell-offs) are standard and necessary during a bull market, some fear we may be nearing the end of the incredible run in stocks. Charlie Munger took the time to share some wisdom a few weeks back that could help us decipher where the market may be heading.
The Great Charlie Munger on Today’s Market
Charlie Munger gave his grim outlook on future market gains, citing concern over real returns.
Cooper Academy breaks down Munger’s comments, with its own thesis, noting,
“A lot of people who are currently in the stock market don’t know a thing about market history. About previous lost decades in the market or anything like that, all they see is the neighbors and friends getting rich through investing, so they want to join in on the party.”
Munger specifically singled out real returns, which he believes will be lower over the next decade. Real returns are returns after inflation and taxes. Biden is expected to raise taxes on businesses and investors, but inflation may be the real threat.
Will Rising Inflation Crush Real Returns?
When asked about QE and large fiscal deficits, Munger responds that,
“It’s one of the most interesting questions anyone could ask, and we’re in very unchartered waters. We have, nobody has gotten by with the kind of money printing we are doing now for a very extended period without some trouble. I think we’re very near the edge of playing with fire.”
Cooper Academy points out that the Fed, ECB, and the Bank of Japan collectively expanded their balance sheets by $8 trillion in 2020 – noting that it took almost 8 years to do that after 2008.
While all this new money should result in widespread inflation, it isn’t because the velocity of money remains at all-time lows.
When asked if the NASDAQ is in a bubble, Munger responds that,
“Nobody knows when bubbles are going to blow up. Just because it’s NASDAQ doesn’t mean it’ll have another run like this one, very quickly again. This has been quite unbelievable. Again, there has never been anything quite like it.”
Finally, Munger likens companies to biology, in that all change and ultimately, all die.
Munger’s Final Thoughts on Good Investing
Munger leaves investors with a final thought:
“But, I would say is the single most important thing if you want to avoid a lot of stupid errors. Is knowing where your competent and where you aren’t. Knowing the edge of your own competency. And that’s very hard to do because your own mind naturally tries to make you think you’re way smarter than you are.”
And that,
“Good investing requires a weird combination of patience and aggression. And, not many people have it. It also requires a big amount of self-awareness.”
Now, I’ll leave you with two of Munger’s most famous quotes:
“You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.”
“You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long time.”
To read more about Charlie Munger’s life before and after Berkshire Hathaway, the once failing textile business for which Buffett and Munger named their holding company, click here.
