Rising interest rates and more people joining the fray are the reasons why investing in stocks is no longer as easy and profitable as it used to be.
In a recent interview with the Financial Times , Berkshire Hathaway Vice Chairman Charlie Munger - the right-hand man of investment legend Warren Buffett - warned that the golden era for stocks is over because of high interest rates and too many people entering the game.
Charlie Munger was born and raised in Omaha, Nebraska, just a few hundred yards from billionaire Warren Buffett's home. The pair met in 1959, when Buffett was 28 and Munger was 35.
Before entering the investment world, Mr. Munger worked in Buffett's grandfather's grocery store and also practiced law.
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Billionaire Charlie Munger and billionaire Warren Buffet are a "perfect pair". Photo: Bloomberg . |
Special investment strategy
Few people know that it was this Vice President who urged billionaire Warren Buffett to abandon the "cigar-butt strategy" associated with the name of Benjamin Graham - the author of the book The Intelligent Investor - and move in a new direction.
Under the cigar-butt strategy, investors look for companies that are undervalued and have the potential to increase in price in the short term, much like someone picking up a cigar butt from the ground and taking one last puff before throwing it away.
When he switched to a new strategy in 2015, Mr. Buffett wrote in his letter to shareholders: “The plan that Munger gave me was simple: Don't hope to buy a fair business at a wonderful price; instead, buy a wonderful business at a fair price.”
This approach has paid off for the pair. Berkshire Hathaway has grown at a phenomenal rate, with a compound annual return of nearly 20% since 1965, more than double the S&P 500.
However, Mr. Charlie Munger still believes that the high rate of return is because they were born at a time when America had so many opportunities.
“We came in at a unique and opportunistic time,” the Berkshire Hathaway vice chairman said, adding that he was living in “a perfect time for equity investors.” He and Buffett benefited “primarily from low interest rates, low valuations and opportunities.”
The 99-year-old legend said he made most of his money from four investments: Berkshire Hathaway, retailer Costco, investments in funds managed by Li Lu's Himalaya Capital, and his real estate venture Afton Properties, which owns apartment buildings in California and New Jersey. Forbes estimates his total wealth at $2.4 billion .
“Typically, a very smart and diligent person can get three, four or five opportunities to buy great companies at cheap prices, which are really good long-term opportunities and they don't come around very often,” he said.
The Golden Age is Over
However, now that Mr. Munger has assessed that the golden era of stock investing is over, market participants will certainly face a period of lower performance.
“It's very difficult to get past performance,” he said.
That’s because interest rates are higher and there are too many investors chasing bargains or looking for undervalued companies. “The game is getting tougher as more people enter the investing world ,” he said.
Even Berkshire Hathaway has struggled to find worthwhile investments over the past decade and has failed to do so. This is reflected in the cash pile that has consistently maintained more than $100 billion for a long time and the corporation has had to choose to buy back tens of billions of dollars of treasury stock.
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Mr. Munger said the market became more difficult because interest rates were rising and too many investors were entering. Photo: Bloomberg . |
Mr. Munger even took aim at the investment industry, saying that “having too many fund managers is a bad thing for America.” Most of them are nothing more than “fortune tellers or astrologers who are taking money out of their clients’ accounts when their services are not worth the fees.”
“In fact, companies that are not profitable and only receive fees from customers can survive. However, if customers are not rewarded appropriately for the fees they pay, they will eventually leave,” Mr. Munger warned.
While Mr. Buffett has explicitly told Berkshire Hathaway shareholders to “never bet against America,” Mr. Munger has been more cautious.
“I don’t think we can be sure that American democracy will thrive and flourish forever. But I think we’ll be fine for a long time,” he said.
Regarding his own mark on the world, Mr. Munger said: “I want my legacy to be an unrelenting determination to develop and use what I call uncommon sense.”
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Warren Buffett S&P 500 Stock Investing Warren Buffett Charlie Munger Berkshire Hathaway
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