Known as Warren Buffet’s right hand man, Charlie Munger has been managing investments for a long time, and he claims it’s never been more difficult for young people to make and keep the money.

Munger recently noted that successfully navigating the investment world has gotten a lot harder over the last few decades. He also pointed out that, even after accounting for inflation, living costs in many places of the United States are much higher than they have ever been.

The median price of a house in California was $80,055 in 1980, two years after Munger became vice chairman of Berkshire Hathaway. According to the Bureau of Labor Statistics, that would be worth just over $275,600 now after inflation. According to the California Association of Realtors, the median house price in California surpassed $800,000 for the first time last year.

Munger argued that inversion should be used to solve tough investing problems. Munger got the idea from the 1800s German mathematician Carl Gustav Jacob Jacobi. Many perplexing mathematical problems, he believed, could be answered if they were flipped. This inversion concept is just one of Munger’s mental models for making better judgments, but it is unquestionably one of the most potent.

It’s Harder for Young People to Get Rich Off Investments

The disparity, according to Munger, makes it difficult to provide “one-size-fits-all investment” advice to today’s youth. His go-to advice for decades was to “own a diversified portfolio of common stocks,” a technique he claimed could give clever investors a 10% return.

However, given how complicated investing has gotten, this is no longer a surefire strategy. As the investment game has become more complicated, he is no longer able to give this advice. Understanding one’s level of skill and receiving personalized counsel could help in such a case, he suggested.

Munger is stating that the gap between the rich and the poor in the millennial generation will be considerably less since it will be more difficult for young people to generate as much money as their parent’s generation did.

In some ways, Munger is probably correct. Take a look at how well the financial markets have done during the last 40 years, from 1980 to 2020:

  • The U.S. Stock Market (S&P 500) +9745%
  • The U.S. Bond Market (10 Year Treasuries) +1831%
  • Cash (3 Month T-Bills) +412%

Those total returns were good enough for annualized gains of 12%, 8%, and 4%, respectively.

Over the next 40 years, financial markets will be unable to match those gains. It’s not going to happen. Because interest rates were in the double digits (so was inflation) in 1980, stock values were dirt cheap.

Do Nothing When There is Nothing Worth Doing

Doing nothing is not typically associated with success in any endeavor. It is linked to sloth and failure. That is undoubtedly true in most aspects of life, but not in investment.

This is true for employees, students, athletes, politicians, and, of course, while driving on Indian roads. As a result, we think that it must also apply to savings and investments. Consider the actions that are typically connected with investing.

Most individuals probably believe that investing entails actions such as researching investments, selecting them, monitoring them, looking for new ones, filtering out old ones, and so on. That’s a lot to take care of. If you have ten or twenty investments (many individuals have more), it can be a full-time job.

Whether you’re new to investing or a seasoned pro, experiencing times of significant underperformance can be emotionally draining. During times like these, investors frequently feel compelled to take action, whether it’s selling out of the market or adding to their portfolios.

The decision to do nothing and remain invested is sometimes ignored, but it is frequently the best course of action. While it may seem paradoxical, especially when market values are rapidly decreasing, sticking to the course can add significant value to your portfolio if you’re patient.

Knowing The Edge Of Your Circle Of Competence

The concept of the Circle of Competence is simple: each of us has acquired useful knowledge in some areas of the world through experience or study. Some topics are familiar to most of us, while others necessitate a higher level of expertise to assess.

Most of us, for example, have a basic understanding of restaurant economics: You rent or acquire a location, invest money on furnishings, and then hire people to seat, serve, cook, and clean. (And manage it if you don’t want to do it yourself.) After all of your operational expenditures have been covered, it’s just a matter of creating enough traffic and setting the appropriate rates to make a profit on the food and drinks you sell. Though each restaurant’s cuisine, environment, and pricing points will differ, they must all adhere to the same economic formula.

With that foundation, a rudimentary understanding of accounting, and a little research, one might analyze and invest in a variety of restaurants and restaurant chains, both public and private. It isn’t all that difficult.

Can most of us, on the other hand, say we have a similar understanding of the inner workings of a microchip company or a biotech medicine company? Possibly not. But, as Warren Buffett so brilliantly stated, we do not need to comprehend these more arcane areas to invest money.

It’s far more vital, to be honest about what we do know and stick to it. Our competency circle can be enlarged, but only gradually and over time. When you deviate from this discipline, you’re more likely to make mistakes.

Understand Value Investing

Value investing refers to buying stocks that seem to be trading for less than their intrinsic or book value. Value investors actively search out stocks that they believe are undervalued by the market.

They believe that the market overreacts to both positive and bad news, resulting in stock price swings that are out of line with a company’s long-term fundamentals. The market’s response provides an opportunity to benefit by purchasing equities at a discount—on sale.

Buy Shares Like You’re Buying The Business

Most individuals are aware that purchasing a stock entails purchasing a percentage of a firm’s ownership. Treat stocks as if they were your company, and carefully select which stock to purchase.

Be mindful of cashing out too soon as you follow your equities and the performance of the company you invested in. Individual stock investments should be made with money you are comfortable tying up for at least the next five years.

Holding for the long term, especially during periods of volatility, is the greatest way to optimize your gains. One of the most common investing blunders, according to experts, is not giving your investments enough time to grow.

Make “Mr. Market” Your Servant, Not Your Master

Mr. Market, according to Graham, is a gloomy man who offers to purchase and sell stocks every day at irrational prices. Mr. Market’s moods should have no bearing on your price judgment. He does, however, occasionally allow purchasing low and selling high.

With the help of a character he coined as Mr. Market, Benjamin Graham proposed managing behavior and emotions in investing a long time ago.  He will always provide you with the opportunity to purchase low and sell high; all you have to do is wait for the perfect time and price.

Be Rational, Objective, And Dispassionate

Rationality isn’t just something you do to make more money; it’s a philosophy that must be followed. Rationality is a fantastic concept. It is necessary to avoid the foolishness that is prevalent in one’s day. It necessitates the development of thought processes that raise your batting average over time.

A moral obligation to keep up as much as you reasonably can is not something you select or don’t choose; it’s a moral duty to stay up as much as you reasonably can. It worked so well at Berkshire because none of us were bright, to begin with—in fact, we were utterly clueless. Any of Berkshire’s great accomplishments began with folly and failure. The concept of objectivity and impartiality will never be outmoded.

Conclusion

The art of investing may very well be a timeless one, but trends and developments of the passing eras dictate changes that we must all take note of. Regardless, it helps to learn from the experience of the financial giants that have built their reputation by withstanding challenges over the years, and Charlie Munger provides a great start to the learning process.

 

What other tips would you have for people looking into investing these days? Let us know in the comments down below.