Speaker 1: One of the things that we all know about Charlie Munger is he’s not afraid to express his opinion if he has something on his mind, something that he wants to tell you. He won’t mince words. He’ll say it up front. So he got asked recently what his thoughts were on the stock market returns over the next decade. Here’s what he said.
Speaker 2: You expect the next 10 years to have lower returns in the equity markets than the last 10. It doesn’t give us an idea what the answer is. Yes. And could you give us a hint as to why that might happen? Yes, because so many people are in the. Frenzy is so great and the systems of management, the reward systems are so foolish that I don’t think it’s going to work. I don’t think I think the returns will go down. Yes. In real terms, the returns will be lower.
Speaker 1: OK, I want to try and explain that for those who don’t fully understand what he’s talking about, the first thing that he mentions is the fact that everyone is looking to invest in the stock market. So what’s happened over the past decade and stocks? We’ve seen unprecedented growth since the end of the last stock market crash 11 years ago. The stock market is up over 400 percent, a.k.a. over five times in price. Now, what this does is it makes everyone flocking to the market what you put your money in a decade ago and now you have five times the amounts. I want to do the same. And then what happens is you get the cook, the cleaner, the sports coach, they all want to put their money in the stock market and prices get higher and higher. It’s kind of similar as to what was going on in the 1920s in the market. So the 1920s was known as the roaring 20s. Back then, the Ford Model T’s were being sold, the economy was firing and everyone wanted to invest. And they made a lot of money with this. That was until 1929 came along. The market was clearly overpriced. People realized they didn’t understand their investments and they sold out and it crashed, only recovered 30 years later in 1959. And that’s the thing. 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, or they see as their neighbors and friends getting rich through investing. So they want to join in on the party. But among other things, there’s only so long that the party can go on as much as we would like to believe. You can’t just keep making infinite returns and the market, eventually things have to simmer down. And if you look at history, you will see that you will see periods where the market went boom and you see periods just like from 1929 to 1959 where the market went nowhere. The other thing I don’t know if you picked it up was that Munger said, I think the returns will go down, real returns will be lower. So why did he specifically point out returns? In fact, what I should probably ask you first is, do you know what real returns are? Real return is what is earned on an investments. After accounting for taxes and inflation, real returns are lower than nominal returns, which do not subtract taxes and inflation. So Mangahas puts a specific focus in that inflation and or taxes are probably going to be higher over the next decade. Let’s start by looking at taxes. Unless you’ve been living under a rock, I’m sure you guys know this. We have a new president in twenty twenty one. His name is Joe Biden. He has taken over from Donald Trump. Now, Trump was not a big fan of the old taxes. In fact, one of the major moves that he made when he came to power was to majorly cut taxes, especially the corporate tax rates, which he lowered from 35 percent to 15 percent. Biden is going to be doing the opposite, raising taxes, particularly on the wealthy, on corporations and on estates, a.k.a. higher taxes for investors and businesses. So that’s something that we’re going to have to watch out for over the next decade. Higher taxes, but arguably even more important than this is inflation. For those who don’t know, inflation is simply the rise in the prices of goods and services. For example, did your grandma ever tell you of how she used to buy a loaf of bread for ten cents and now it’s a rip off? It’s three dollars. Why is that the case? It’s inflation, the increase of prices. So let’s say you made a 10 percent return on the stock market next year. If inflation was 10 percent, you essentially made no money. The real return was zero. This is why inflation is so important. Now, one of the biggest causes of inflation is printing money. Or we can put a more complicated financial terms, quantitative easing. And right now we are seeing a lot of this going on in the USA. This is what Charlie Munger said on the matter.
Speaker 2: What do you think of the combinations of quantitative easing and large fiscal deficit and where are they going to lead us? Well, I’ve got a very simple answer, and that is it’s one of the most interesting questions anybody could ask. And we’re very. Uncharted waters. We have. Nobody has gotten by with the kind of money printing we’re doing now, we’re very extended period without some trouble and I think we’re we’re very near the edge of playing with fire.
Speaker 1: If you look at the Federal Reserve, the European Central Bank and the Bank of Japan, they’ve collectively expanded their balance sheets by around a trillion dollars in 2020. It took them almost eight years to do the same following the collapse of the global financial markets in 2008. Twenty twenty. They did it in just one year. So right now they’re doing something that they’ve never done before. Printing money at what Charlie Munger calls a standing writes. The problem with all of this printing of money is that it leads to inflation because the more money that is artificially pumped into the system, the more demand that there is for products. And inevitably, at some point in time, they will go up in price. That’s simple economics. And this is one thing that we all need to watch out for as investors because they affect our real return that we will get in the market over the next decade. Another thing that will affect our return is the current prices of stocks. If stocks are priced too high, obviously our returns will be lower. So the question becomes, is the market in a bubble? Here’s what he said on the matter.
Speaker 2: Is the Nasdaq in a bubble? Well, I mean, nobody knows when bubbles are going to blow up. Just because the Nasdaq doesn’t mean it will have another run like this one very quickly. Again, this has been unbelievable. Again, there was never anything quite like it. If you stop to think about it. I think what Apple is worth compared to John D. Rockefeller or Empire. It’s been the most dramatic thing that’s almost ever happened in the entire world history of finance.
Speaker 1: I don’t know if you guys remember, but in 2018, there was this big fuss about who would be the first company to be worth one trillion dollars. It was out of Apple, Microsoft and Amazon. Apple was the company that hit that milestone first. But fast forward to today. Apple is worth over two trillion dollars. Microsoft one point six trillion, Amazon one point five trillion. So these companies have just been increasing in growth at a humongous rate of knots. And a lot of people are saying these companies are way overpriced because you’re paying trillions of dollars for a company that may be disrupted again and new technology may take over. As Charlie Munger says, companies behave like biology and over time they all die
Speaker 2: from big companies of America. Behave more like biology than they do anything else in biology, all the individuals die and so do all the species. It’s just a question time. And that’s pretty well what happens in the economy to all the things that were really great when I were young have receded enormously and new things have come up and some of them started to die. And that is what the long term investment climate is. And it does make it very interesting. Look at what’s died. All the department stores, all the newspapers, U.S. Steel, John D. Rockefeller statter, all the shit out of us or so now it’s just like biology. So have little or they have their little time and them then they get clobbered.
Speaker 1: So the real question is, how do we balance our investments if we know that some companies will die through disruption? Do we invest in the disruptive companies? Do we invest in the companies that will struggle to be disrupted? What’s the style we should adopt?
Speaker 2: Well, some people try to get on the cutting edge of change, so they’re destroying other people instead of being themselves. And those are the Googles and the Apples and so forth. Other people like me. Do some of that. Joining things like Apple and and in some ways, we just try and avoid big change that we think is likely to hurt us. And so. Berkshire, for instance, owns the Burlington Northern Railroad, you can hardly think of a more Old-Fashioned business than a road business, but who knows what we’re going to create in another Trump railroad? So it’s a very good asset for us. So and we make that success not by conquering change, but by avoiding it. Now, Burlington Northern itself has been quite clever at adapting technology to the railroad. Imagine the good luck of being able to take an existing railroad and double decker all the trains and raise the heights of the tunnels and so forth. And all of a sudden you got twice the capacity and very little incremental cost, which is what the river has done. So that is a pretty everybody uses no technology, but it really helps to have a position that almost can’t be taken away by technology. How else are you going to carry goods from the Port of Los Angeles, Chicago, except our railroad?
Speaker 1: Essentially, you try do both. You look at those companies, those industries that over the next decade or two, they will be the disruptors. They will change the way the world works and inevitably make investors a lot of money. But too, you also want those companies who can be disruptive or at least struggle to be disrupted the likes of railroad or food sectors. These are industries that we’ve had for hundreds of years in the past. And over the next hundred years we will have them as well. So that’s smart, balanced investing, not like modern day investing, where everyone seems to overestimate their ability in the stock market. What a bull market does is it gets everyone to believe that they’re all geniuses. Look at the huge returns I’ve made over the past year and they go and boast about it to their friends and the investors that will do the best over the next decade will be those who can look at things objectively. They know their limitations and they will invest within those limitations.
Speaker 2: I spent a lifetime trying to avoid my own biases. I myself, I rub my own nose in my own mistakes by trying to keep it simple and remember as much as I can. And I like the engineering concept of a margin of safety. I’m a very blocking and tackling, tackling kind of a thinker. I just try and avoid being stupid. So I have a way of handling a lot of problems. I put them on like, oh, my, too hard and I just leave them there. I’m not trying to succeed in my two hard pile, but I would say is the single most important thing if you want to avoid all the stupid errors, is knowing where you’re competent and where you aren’t knowing the edge of your own competency. And that’s very hard to do because the human mind naturally tries to make you think you’re way smarter than you are. But partly it’s temperament. Partly it’s deferred gratification. You’ve got to be willing to wait. And it’s a weird good investing requires a weird combination of patience and aggression. And not many people have it. It also has to it requires a big amount of self-awareness and how much you know and how much you don’t know. You have to know the edge of your own thing. And a lot of brilliant people are no good knowing the edge of their own competency. They think they’re way smarter than they are. And, of course, that that’s dangerous because there’s trouble
Speaker 1: if you go and the YouTube comments, if you go on CNBC, if you go on investing forums, they all think they know everything. Just go talk to Jim Cramer. I think those that are going to succeed over the next decade will be the ones who are humble and what they know and what they don’t know. Those like Warren Buffett who stick to their circle of competence, they understand the risks of market prices, understand inflation and invest wisely around what they do know. Let’s see how many people will still be investing in ten years. I hope you guys who are watching this video will be.