“This Is A Sign Of A Bubble” (Charlie Munger)

Speaker 1: I think this kind of crazy speculation and enterprise is not even found or picked out yet is a sign of an irritating bubble.

Speaker 2: Charlie Munger is vice chairman of the biggest investment firm in the world, right hand man to Warren Buffett. And truly, I believe, one of the greatest thinkers of our time. It’d be hard to argue, not now. Every year, nerdy investors like myself flock to listen, says annual meeting over at the Daily Journal Corporation. Here, people get to ask Charlie basically any question that they want. And to no surprise, a lot of people asked about a stock market bubble forming in twenty twenty one. Let’s take a look at what he said.

Speaker 3: Many observers see market behavior that reminds them of the dot com bubble, wild speculation, endless facts and IPOs soaring on their first day of trading. Do you agree that there is a close parallel to the late 90s, this therefore, quote, must end badly?

Speaker 1: Yes, I think it must end badly, but I don’t know when I think this kind of crazy speculation in enterprise is not even found or picked out yet is a sign of an irritating bubble. Its most egregious in the moment of trading by novice investors lured in by new types of brokerage operation like Robin Hood. And I think all of this activity is regrettable. I think civilization would do better without it. You’ll remember that when the first big bubble came, which was the South Sea bubble in England back then, seventeen hundreds. It created such havoc eventually when it blew up. England didn’t allow hardly any public trading and securities of any companies for decades thereafter. It just created the most unholy mess. So human greed and the aggression of the brokerage community creates these bubbles from time to time. And I think wise people just stay out of.

Speaker 2: So I’m sure that we’re all aware that the market has changed from where it was three, five, 10 years ago, and as Ray Dalio puts it, we’re in the later stages of the bull market. Now, what happens here and what we’re seeing everywhere is the drive towards short term profits. A lot of novice investors are in the market to get rich and get rich quickly. So they look for the stocks that are the most hyped, most talked about, and they place what is called a momentum trade. Here you buy a stock because it’s been going up. You ride the momentum and then you hope to sell a couple of months later for quick profits. And there’s not just a few groups of people doing this. A lot of investors are buying stocks this way. This causes prices to go up and up and up. And it sounds all well and good, but prices can’t keep going up forever. At some point, the direction will change because as Warren Buffett says, no stock is worth an infinite value. At some point, stock prices have to come back to their intrinsic value. And this is why Monáe thinks this momentum trading is dangerous. And a lot of people could get Bernz just like what happened in the South Sea bubble in England, Welbeck and the seventeen hundreds. So these are just signs that the market is very high, signs that the market’s in a bubble. But by no means does this mean that we’re definitely going to see the market come down quickly in. The key reason behind this is interest rates.

Speaker 1: Well, I think everybody is willing to hold stocks at higher price earnings multiples when interest rates as low as they are now. So I don’t think it’s necessarily crazy that good companies where multiples and they used to on the other hand, as you say, I didn’t get rich by buying stocks at high price earnings multiples in the midst of crazy speculative booms. And I’m not going to change. I am more willing to hold stocks at high multiples than I would be if interest rates were a lot lower. Everybody is.

Speaker 2: You see, for every stock investor, we have two key options to put our money. One is in the bank, in treasuries and in bonds. And the other option is stocks. But the problem that we have today is that interest rates are ridiculously low. As you can see, the federal funds rate is around zero point one, pretty much the lowest that it’s ever been in history. So we could have our money in the bank, in treasuries or in bonds. But because rates are so low, we get close to nothing when we have our money here. So that means our leftover cash has to go somewhere and it ends up in stocks. And this is what money is saying here. Yes, stock prices are very high right now, but that’s because interest rates are very low. This is the key thing that justifies where stock prices are right now. And what Munger said in the clip is that he’s obviously not rushing in to buy stocks at these prices, but he’s also not going to sell. And that’s because there’s no other great place to put your money. And one of the natural things that we’re seeing in this market is that people are saying the old school value, investment style of buying stocks is dead. It will not work in the future. Even investors like Kathy would. She’s had this warning towards old school type value investors. Munger says value investing will never die.

Speaker 1: Value investing, the way I regard it will never go out of style because value investing, the way I can see it is is always wanting to get more value and you pay for when you buy a stock and that approach will never go out of style. Some people think that value investing is you chase companies which have a lot of cash and they’re a lousy business or something. But I don’t define that as value investing. I think all good investing is value investing. It’s just that some people look for values and strong companies and some look for values and weak companies. But every value investor tries to get more value than he pays for. What is interesting is that in wealth management, a lot of people think they have one hundred stocks. They’re investing more professionally than they are. They have four or five. I regard this is insanity, the absolute insanity. I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they’re way above average. I think it’s much easier to find five than it is to find one hundred. I think the people who argue for all this diversification, by the way, I call it diversification, which I copied from somebody, and I’m way more comfortable owning two or three stocks were. I think I know something about and where I think I have an advantage,

Speaker 2: because the true concept of value investing is very simple, you simply pay a price that is below the value of a stock, a.k.a. value investing is all about finding bargains with the price that you pay. What people don’t understand is you can still find a bargain on a growth stock. Tesler was a bargain four years ago. It was a cheap price, even though it’s a growth company. Among Asain, value investing is not just finding Ziga, but businesses with a low pay and a low price to book. The simple concept of value investing is paying a price below the worth of the business that’s investing style will never die. And it’s a lot harder to find these bargains on hundreds of different stocks. Then it is compared to just three or four stocks that you truly understand. And this is why Munger hates diversification, because if you do it too much, the odds are you haven’t put enough research into each individual stock. That’s why he calls it diversification. And you see that with the portfolio that Munger holds with the money a family trust, this trust only holds three stocks, Berkshire Hathaway, Costco and Leyla’s fund in China. So that’s the thing I like about Munger. He keeps things short and sweet and he puts his money where his mouth is. And I think that we can all agree that the market has fundamentally changed with the rise of technology. You look at every stock, every business, and pretty much all of them are highly technology based. But the question becomes, has this rise of technology impacted the way we should view stocks and stock prices?

Speaker 3: Do you believe the market is going through a long term value slump similar to nineteen ninety nine? Or do you believe technology has caused a permanent change in how companies should be valued?

Speaker 1: Well, I don’t know how permanent it’s going to be, but it certainly caused the change. And of course, it’s hard to know what the future holds in a complex system where you can’t predict a lot of things. And generally what people do is they have financial reserves, so they have some options if trouble comes and they adapt the way Jerry has to require downsizing to a required uprisings,

Speaker 2: Money is saying that no one knows for sure how technology will impact the market over the long term. There’s too many contrasting variables. The only thing that you can control is your own strategy. And as he mentioned, one thing that is important is having the cash on the sidelines as a form of safety for if the bubble pops. But you also need your portfolio exposed to stocks as well, because this bull market could continue and nobody knows when it will pop. Yes, there are signs that are pointing to a potential bubble forming with this momentum trading, the rise of Speck’s, the high prices of companies that aren’t even making a profits, but no one knows the exact time that a pop could occur.

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