Futu Research | How did investment guru Munger face the sharp decline in the market

As Warren Buffett's partner and frequent friend, Munger is an uncompromising investment guru. Buffett himself commented on Charlie Munger in this way: “Charlie has pushed me in a different direction. This is the power of his thoughts; he has broadened my horizons. I evolved from an orangutan to a human at an extraordinary rate, otherwise I would be much poorer than I am now.” As an extraordinary investment guru, how did Munger get through a period of sharp market decline?

Picture: Buffett and Munger (right)

“If you live long enough, sometimes you won't catch up with investment trends”

This phrase comes from Munger's late 20th century when Berkshire's Wesco Financial shares plummeted.

Munger experienced four major bear markets in his investment career. The worst one was from 1973 to 1974. During the “Beautiful 50” market, the market gave these leading companies high valuation premiums with average growth but strong profit stability. At that time, Munger invested 61% of his capital in blue chip printing companies. After the “Beautiful 50” crash, the biggest decline in the S&P 500 index reached 48%. Munger lost 31.9% and 31.5% respectively in these two years. In the worst bear market since the Great Depression, this company caused serious damage to his investment portfolio.

Picture: “Pretty 50” crashed in the 70s

The second time the third oil crisis broke out in 1990. The situation in the Middle East region continued to fluctuate. The US stock market experienced a sharp decline. Berkshire's stock price fell 35% from 8,625 US dollars per share at the beginning of that year to 5,600 US dollars in October. However, Berkshire showed optimism. In a letter to shareholders that year, it was written: “The main reason for poor stock prices is pessimism, sometimes comprehensive, and sometimes limited to some industries or companies. We are looking forward to doing business in this environment, not because we are naturally pessimistic, but because we can buy more good companies at cheap prices.”

Picture: 1990 oil crisis, S&P 500 shock

Another thing that separates Munger from most of us mediocre people is that he will never be attracted to investments outside his circle of ability. He once said, “We have three baskets, which are entry, exit, and too difficult.” Investors should follow his advice “If the investment target is too difficult to analyze, we will switch to other investment targets. Is there anything simpler than that?” .

This saved him from the bursting of the 2000-2002 internet bubble. At the time, the S&P 500 fell 40%, with the biggest drop reaching 49%. Facing the 1999 Internet bubble, Munger and Buffett insisted on not investing in Internet stocks, calling it an “irrational boom.” After the internet bubble burst, Munger and Buffett avoided significant losses by adhering to the investment principle of focusing on company value rather than market price.

Figure: From 2000 to 2002, the internet bubble burst, and the NASDAQ collapsed

In 2008, when the market was pessimistic, Buffett published “I'm Buying America”. Five months later, US stocks began to rebound, entering a ten-year bull market. Buffett and Munger emphasized the importance of emotional stability at the shareholders' meeting the following year, stating that investors should use the market rather than be used by it.

Picture: 2008 subprime mortgage crisis, S&P 500 dives

Judging from historical experience, Munger mainly relies on:

1. Avoid bubble sectors and don't go to crowded places;

2. Pay attention to enterprises with solid fundamentals and focus on corporate value;

3. Facing the future with a good mentality, throw high and hold low;

Well, one of the best lessons investors can learn from past history is that there are no good times. A long-term investment often contains large short-term phased losses. If you cannot accept short-term losses, then it is difficult to reap long-term market returns. In an interview with the BBC in 2012, Munger said:

“If you can't take it easy for the market to fall by more than 50% two or more times in a century, you are unfit to invest, and you can only get relatively mediocre investment returns compared to investors who can handle market fluctuations rationally.”

“Keep a good mindset and use leverage carefully”

According to Munger, the biggest risk of investing in the stock market is actually not the fluctuation of prices, but rather whether the investment will cause permanent losses in the future. “In fact, what people preparing to buy stocks should expect is a decline in stock prices. This is because as long as the market fluctuates more, some ultra-low prices are more likely to appear in good companies.”

When it comes to leverage, Munger suggests most people should avoid using:

Although leveraging may amplify gains when the market is going down, it can also amplify losses when the market goes down, which in turn may lead to a complete loss of capital. Financial leverage increases the risk and uncertainty of investment, and prudent investment should be based on rational analysis and risk control. He suggested that investors should aim to increase intrinsic value rather than rely on external borrowing to ensure long-term wealth accumulation and capital security.

After all: “No one wants to be rich twice”.

Investing is a matter of choice. Of course, it is also about how to face changes after making a choice.Munger thinks,

“A lot of people with high IQs are bad investors because of their moral flaws. I think excellent character is more important than the brain. You must strictly control those irrational emotions, you need to be calm, self-discipline, and take losses and misfortunes lightly; similarly, you must not be carried away by ecstasy.”

Therefore, it is particularly important to limit your investments to alternative projects that are simple and easy for you to understand, and continue to pursue wisdom and patience in an uncertain market.

In the downward phase of the market, focus on assets with a sufficiently high margin of safety, use leverage carefully, track fundamentals, and eventually cross the bear.

108K Views