Timeless Investment Insights

Charlie Munger’s Secrets to Navigating Equity Markets

As wealth managers, we are always on the lookout for valuable insights and wisdom to share with you. Today, we’d like to recount an experience that our friend Larry McDonald had with none other than Charlie Munger, the legendary investor and partner of Warren Buffett. It sheds light on how these brilliant minds approach equity market risks and how we can apply their thinking to our own portfolios.

Larry’s journey took him to Omaha, NE, where he was invited to meet with Charlie in person. Charlie had read and admired Larry’s book, “A Colossal Failure of Common Sense”, which detailed the inside story of the Lehman Brothers collapse. Their meeting was an opportunity to compare notes on the financial crisis and to learn from Charlie’s decades of investment experience.

During their conversation, Charlie shared a fascinating tidbit about how he and Warren Buffett assessed equity valuation and sentiment. Whenever the S&P 500 of the Dow Jones Industrial Average reached specific thresholds, Warren would ask Charlie for his thoughts on the economy, consumer credit, and the risk-reward balance at the time.

Let’s apply this exercise to our present situation. As of April 21, 2023, the S&P 500 closed at 4133. This number has been consistently associated with several dates in recent years, including April 12, 2021; February 4, 2022; June 1, 2022; August 26, 2022; and February 8, 2023.

As wealth managers, we ask ourselves this question: How did you feel about consumer credit risk, the banking system, and commercial real estate risks on each of these dates? Reflecting on these dates and comparing them to today, we can observe a series of strange divergences across the U.S. consumer, banking, and technology sectors. It’s clear that our current landscape exhibits far more deterioration and elevated risks than during those previous dates.

There’s one Munger Principle that Charlie shared, “Larry, the hardest thing to do, is to stare at a screen all day and do nothing. Sometimes, it’s best to sit back in the chair and let the market come to you.” This principle encourages us to examine these differences and determine how they impact our investment strategies. This wisdom can help us remain patient and discerning as we navigate the complexities of the market.

Our goal is to help you understand the risks, identify opportunities, and make informed decisions about your investments. This particular Munger Principle serves as a reminder that we must continuously evaluate market conditions and adapt our strategies accordingly.

Here’s what you can take away from Larry’s encounter with Charlie Munger:

  1. Assess equity valuation and sentiment by comparing the present state of the economy, consumer credit, and risk-reward balance to past benchmarks.
  2. Recognize the changes in the market and understand their implications for your investments.
  3. Be patient and let the market come to you. Make informed decisions based on a thorough analysis of the current landscape.

By applying this Munger Principle to our investment approach, we can better navigate the ever-changing market conditions and work toward achieving your financial goals.