4 tips from Charlie Munger for under bear markets


Berkshire Hathaway’s second husband, Charlie Munger, has said worthy things about investing over the years. Applying these four principles can help you avoid costly mistakes in this bear market, Mark Blank writes in a column on The Motley Fool.

The stock market can be a scary place if prices start to fall rapidly. Doubts may arise as to whether it is wise to invest in stocks. And yet, despite dozens of bear markets throughout history, equities have generated more than $ 47 trillion in wealth for shareholders since 1926.

It took full advantage of Charlie Munger. These four old-fashioned tips apply to all market environments, but are especially relevant during a declining market because a mistake is quickly made. With Munger’s guidelines, you will continue to do well in the long run.

Tip 1. Avoid stupid mistakes instead of trying to be smart

Many investors try to make money by outsmarting the market, but in most cases it is an impossible thing. The smartest people in the world work on Wall Street with seemingly unlimited resources at their disposal and barely manage to beat the market.

Successful investing is more about avoiding stupid mistakes. Munger thinks it’s remarkable how much long – term benefit people like Buffett and him have gained by consistently trying not to be stupid instead of very intelligent.

The stock market is one of the few places where you can outperform simply by making average, sober decisions over an extended period of time. You do not have to be a genius. You just have to avoid mistakes, especially in a declining market.

Munger then talks about mistakes like selling stocks at the bottom, chasing hyped stocks without doing research or trying to time the market. Keep your head cool and your portfolio will be fine in the long run.

Tip 2. The quality of a business is more important than the price

In 1994, Munger gave a speech at the University of Southern California Marshall School of Business. In it, he stated that a share in the long run will not exceed the company’s earnings growth much.

If you buy a share with a significant discount from a company that gives a capital return of 6% over 40 years, you will not get much more return on your shares than the 6% in the 40 years. But if you buy an expensive company with a capital return of 18% over 20 years, you can achieve great results with it.

Since the market has been penalizing stocks lately, investors can quickly become focused on a stock’s price target while ignoring the quality of the underlying asset.

Apple is a perfect example of this. The tech giant has rarely been cheap, but has nevertheless rewarded investors richly over the years. This is largely due to an impressive return on invested capital (ROIC), which has been around 20% for over a decade.

The price of stocks is certainly important, but the analysis should include other performance measures, such as ROIC. Expensive stocks with high ROIC are likely to outperform cheap stocks with low ROIC. A cheap stock does not have to be a good investment; a lower price often has a reason.

Tip 3. Do not go overboard with spread

“Excessive diversification is madness.” It is also one of Munger’s brilliant statements.

Many see diversification as a universally sound investment principle. And it is also important for a successful investment. But one can exceed it. You should not just buy a lot of shares for not having knowledge of the companies you own.

Munger warns against the cost of overdiversification. As an investor adds more stocks to the portfolio, it becomes harder and harder to keep an eye on them. You will also lower your potential profits, which will ultimately bring you close to the average return on the market.

If your risk tolerance is such that you need to have hundreds of stocks in your portfolio to sleep at night, you should probably not choose stocks and instead invest in cheap index funds.

Tip 4. Focus on micro instead of macro

Both Warren Buffett and Charlie Munger have consistently stated that they do not make investment decisions based on macroeconomic conditions. “Macroeconomic forecasts are something I’ve never made money on, and neither has Warren,” Munger says. Large companies continue to perform at a high level regardless of the state of the economy and return profits to investors in the long run.

The macro environment is incredibly difficult to predict and can change very quickly. Even the best economists in the world are constantly making mistakes with their forecasts and forecasts. In a 2018 study, the International Monetary Fund concluded that large margin experts erred in their recession forecasts.

If you can avoid big mistakes like overdiversification, focusing solely on price or trying to time the market according to macroeconomic conditions, you will do well in the long run.

Also read: 5 tips from Warren Buffett’s right hand man

Leave a Comment