Charlie Munger’s Final Warning for Investors in 2024

It's a radically different world from the world we started in. I think it's going to get tougher. That was Charlie Munger speaking at the Berkshire Hathaway shareholders' meeting earlier this year. I was there, sitting alongside tens of thousands of people, listening to Charlie warn us that we're heading into the toughest period of investing that he's ever seen in his lifetime.

Now, normally Charlie isn't the one to say things twice unless it's something he really wants people to understand. That's why I was quite surprised when this topic came up multiple times again in a recent interview he did for the Acquired podcast. "Of course you do. It's very difficult to invest money well, and I think it's almost impossible to do time after time after time. We're in the opposite of the cigar butt era these days. Are there opportunities out there? Somebody will find a few, but it gets harder and harder."

So why, in Charlie's eyes, is it such a rough time to invest in the stock market, and what can we do about it? Well, on that first question, Charlie breaks the problem down into three main points, the first of which he explained back in May at the Berkshire Hathaway meeting. "I think value investors are going to have a harder time now that there's so many of them competing for a diminished bunch of opportunities. So my advice to value investors is to get used to making less."

There is so much money now in the hands of so many smart people, all trying to outsmart one another and not promote one another, getting more money out of other people. It's a radically different world from the world we started in. I suppose it will have its opportunities, but it's also going to have some unasked episodes.

The first problem, as Charlie notes, is the oversaturation we see in financial analysis. Back when Charlie and Warren first started investing, financial data and more broadly the stock market was far less accessible. But as investors started making big money in the market, and as the market itself became increasingly accessible over the last three decades thanks to technological advancements, stock market investing itself has seen a big gold rush effect.

More players have been attracted to investing, which means that there's a lot more analysis and scrutiny of publicly traded companies. You couple that with the ease of getting into and out of positions almost immediately in any major market around the world, and all of a sudden, you've got a saturated environment where it's extremely hard to find outstanding investment opportunities frequently. Everything is just so analyzed that it's very unlikely to find high-quality businesses at cheap value.

So that's Charlie's first point as to why it's so hard to be an investor in this era. But going deeper as to why it's a harder environment specifically right now, of course, it has to do with interest rates rising. When interest rates rise, it's harder for our companies to repay their loans. It's harder for them to access debt and to grow quickly, and these factors generally weigh on profitability and thus stock prices.

It's certainly a far cry from the wild worst conditions we've seen play out across the last decade, where basically anything and everything was rising. So certainly, that factor is at play. And there's also the risk-free rate to consider. Remember, as interest rates rise, new government bonds offer juicier returns. We just made a video on how U.S. Treasury yields are rising. So during a high-interest rate environment, a lot of institutional money will naturally filter out of stocks and back into the safety of bonds, which again makes it harder for shares to rise.

It's like the stock market has gone from paddling with the current to now paddling against the current. So they are the three big factors at play that together make opportunities increasingly scarce: the saturation in the field of investment analysis, the impact of rising rates on businesses generally, and also the filtering of institutional money out of stocks and into bonds.

At age 99, what is something that you believe today that 70-year-old Charlie would have disagreed with? "I think I knew what I was. 70, it was plenty hard, but it is just so hard. I know how hard it is now. Yes, it's not a bit easy; it's very hard. There was a lot of low-hanging fruit in the early days of our operation. You don't have any low-hanging fruit that is easy to recognize."

You mean in investment opportunities? "Yeah, that's right."

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But back to Charlie. So we've spoken about why right now is such a hard time to invest, but what on Earth do we do about it? Is it better to wait things out? Do we need to look at different asset classes? How do we combat this difficult time?

Well, luckily for us, this was a very strong focus point during Charlie's recent interview on the Acquired podcast, and I would definitely encourage you guys to go and check out the full interview if you haven't done so already. But I'll let Charlie explain: "I don't think you're saying there are no opportunities whatsoever. I think you're just saying low, low expectations and fewer bonanzas. And the beauty of it is you only have to get rich once. You do not have to climb this mountain four times. You just have to do it once."

Well, that's sort of your philosophy on both sides; you've got to be patient for the great opportunities, but when they come, you've got to recognize them when they come and pounce. "There aren't many times in a lifetime when you know you're right and you know you have one that's really going to work wonderfully. Maybe five, six times in a lifetime you get a chance to do it, and people do it two or three times early, or they all go broke because they think it's easy. In fact, it's very hard and rare. That's the secret sauce: staying patient and waiting for the golden opportunity."

As Charlie says, you only have to get rich once. With Buffett-Munger style value investing, there is a big focus on waiting for the golden opportunities that come around once every, you know, 5 to 10 years instead of just settling for more frequent mediocre investments. Warren Buffett uses a punch card analogy. He says, "To be a better investor, imagine in your whole life you can only make 20 investments. You know each time you make an investment, you punch a hole in that punch card, and once you've punched all 20 holes, then you're done. You've got to live with that portfolio for the rest of your life."

This is a really good way to think about investing because it means you really want to wait for those big opportunities. And the reality is the good opportunities are very infrequent. If we look at just my entire life, starting back in 1995, there have only been three big stock market opportunities in my lifetime: the dot-com crash, the 2008 Global financial crisis, and the 2020 COVID crash. That's three times in 28 years, and really I've only been an adult for one of those time periods.

So I think that punch card analogy really puts things in perspective. Because, as Monish Pabrai has been talking about recently, what you'll find over time is the vast majority of your returns will come from just like three or four big winners. Think about this: Warren Buffett has said the bulk of Berkshire's success really boils down to about 12 or so killer investments. Now, they've made hundreds and hundreds of investments over the decades.

So it's interesting that when you factor in the 12 or so amazing investments plus the hundreds of mediocre ones, well, Berkshire still comes out with an average annual return that's about double the S&P 500. So what does this tell us? Well, it really tells us that we need to focus heavily on finding those big winners, those long-term compounders, and we need to seize those opportunities when they present.

It's fascinating, this concept. I think Warren, in the last Berkshire letter, pointed out it's been a handful of really good decisions. Or you look at venture capital; that's classically power law distributed. Any of these asset classes comes down to a few really good decisions with high conviction over an entire career.

"Yeah, that's exactly what I—that's exactly the way it works. Low-hanging fruit for the idiots is not gone, but it's very small."

As you reflect back on, you know, one of these few great companies in a lifetime that you should bet big on, what advice would you have for David and I as young partners looking for a few of these in our lifetime things to look out for?

"Well, when you find, well, you may find it five years after you bought it. You know, these things may work into it, or your understanding may get better. But when you know you have an edge, you should bet heavily. You know you're right, and most people—they don't teach that in business school. It's insane."

Of course, you've got to bet heavily on your best bets. And how do you develop that level of conviction to know you? "You work at it. You do a lot of reading and thinking and visiting." And that's exactly what both Warren and Charlie do. They don't mess around making a million trades per year. They wait and wait and wait, and then they pounce. They research heavily, analyzing the financial statements, making sure they understand the business, making sure the business has a competitive advantage, making sure the management team is sound, and honing in on the valuation to make sure they get a margin of safety.

Then, when the opportunity presents, they bet big. An obvious example of this patience, this hunt for the big deal at the killer time, is perfectly represented by their investment in Apple.

"Not being a tech person, how did you think about the Apple investment, and what gave you the conviction to be so big?"

"What everybody has learned is that everybody needs some significant participation in the top 12 companies to do better than everybody else, and you need two or three of them at least. And if you have that mindset, Apple is a logical candidate to be on the list for which you're going to select your companies."

And it's not very hard to come up with the idea. "It may be okay making the list; it doesn't sound too hard. In fact, there are these acronyms: FANG or M; you know, Microsoft, Apple, Google, Facebook. But selecting the one and putting hundreds of billions of dollars into it? We didn't put hundreds of billions into it to create hundreds of billions of value. That, to me, sounds hard."

"To pick the one—how did you guys pick the one?"

"We couldn't find anything else."

"Was it valuation or..."

"Yeah, it got cheap; it got to about 10 times earnings more."

So Charlie notes how early on in the process they figured out that of these big 7 to 10 tech stocks in the world, people generally need to do business with at least two or three of them. They all have massive moats and vital products to our modern way of life. But if you look at the historical PE values of these big businesses around 2015-2016, when Berkshire bought Apple, you notice something curious.

Amazon's PE was wildly high, Meta's PE was over 50, Google and Microsoft's PE values were in the 20s or 30s. But then you get to Apple now; it sat very firmly in the conversation alongside these other companies, but the PE was significantly lower, around 10 to 13 times earnings. That's a rare yet huge opportunity, and the result is that Buffett sank 30-odd billion into it, and these days that position is worth around $180 billion.

Another example is Berkshire's recent investment in the Japanese trading houses. "There's been a lot of discussion about Berkshire's investments in the Japanese trading houses. Well, that is a no-brainer. Something like that, if you're as smart as Warren Buffett, maybe two or three times a century, you get an idea like that. The interest rates in Japan were half a percent per year for 10 years, and these trading companies were really entrenched old companies, and they had all these cheap copper mines and rubber plantations.

So you could borrow for 10 years ahead all the money, and you could buy the stocks, and the stocks made 5% dividends. So there's a huge flow of cash with no investment, no thought, no anything. How often do you do that? You'll be lucky if you get one or two a century. We could do that; nobody else could. It looked attractive at half—or you couldn't get it—but Berkshire, with this credit, could, and the only way you could get it was to be very patient, just pick away at little pieces at a time. It took forever to get 10 billion dollars invested, but it was like having God just opening a chest and just pouring money into it. It's awfully easy money."

There's another big opportunity that might have taken a while to research and properly figure out, but when the opportunity presented itself, they took full advantage and invested heavily. You know, Berkshire could sell yen-denominated bonds at half a percent interest and then turn around, invest that cash in the Japanese trading houses, and make around 5% in dividends, and it was relatively safe to do that.

Now that's obviously a very rare opportunity; it doesn't happen often. And as Charlie noted, they had to show a lot of patience. But when it came along, Berkshire grabbed it with both hands, and that's really the way to think about investing in a really difficult time period in the market.

Despite interest rates being against us and the investment field being overcrowded, remember that we don't need to be investing all the time. The best thing about the value investing approach is the ability to just chill out, stay patient, and wait for those killer opportunities.

And one thing that Warren Buffett notes is that even though it's a much harder environment to make money in right now, there will always be opportunities eventually purely just from human nature. "I would argue that there's going to be plenty of opportunities, new things coming along. Don't take away the opportunities. What gives you opportunities is other people doing dumb things."

Seth Klarman has also made this point recently. Despite the field being overcrowded, just the fact that humans follow the herd—they get greedy together, they get fearful together—even that can give some very enticing opportunities. And even the biggest and most analyzed companies out there, we just have to do the research and be patient for those times, eyeing off the three or four big investments that you'll make over your lifetime that will build the vast majority of your wealth.

But with that said, that's Charlie's updated thoughts on investing in this economic environment. Definitely check out the full Acquired podcast if you have the time. Those lads did an absolutely amazing job interviewing Charlie and actually getting new information out of him that we just don't always hear on repeat from things like CNBC.

I'll leave it linked down in the description if you're interested in checking it out. But apart from that, guys, please leave a like on this video if you did enjoy it, and I'll see you guys in the next one.