Charlie Munger: Investing During the 2023 Recession

If you think we might have on and off waves of inflation like we did prior to when Volcker stepped in at the Fed, the 70s era, of course it will happen some in the future. Yes, I think we'll have some of that in the future.

I think more inflation over the next 100 years is inevitable, given the nature of democratic politics. As we're all very much aware, at this point in 2023, the economy faces some very big challenges, and the US looks to be staring down the barrel of a decent sized recession. Inflation is up, causing interest rates to rise, savings rates are low, and the boom times are now over.

And while I personally have never really seen a big recession in my adult lifetime, one man that has seen many is Berkshire Hathaway Vice Chairman Charlie Munger. He's lived through the COVID Panic, the 2008 financial crisis, the dot-com bubble, the oil crises of the 70s and early 80s, the four recessions during the 50s and 60s, and heck, he might have been a kid, but he was even alive during the Great Depression. Suffice to say, Charlie has a lot of experience with investing during recessions.

So in this video, let's have a look at everything you said recently on the topic of the Daily Journal shareholders meeting and also a couple of bits of sage investing advice we can follow as value investors at times like right now. But first, let's hear what Charlie thinks of the current high interest rate environment that's been brought on by the Fed's efforts to control inflation.

Given the increasing rate environment, what are the ramifications of moving away from a close to zero interest rate policy? So what do you do now that the interest rate environment is changing? Well, there's no question about the fact that as the interest rates have gone up, it's hostile to stock prices. They should go up, but we couldn't have kept them forever at zero. I just think this is one more damn thing to adapt to in investment life: there are headwinds and there are tailwinds, and one of the headwinds is inflation.

And I think more inflation over the next 100 years is inevitable, given the nature of politics in a democracy. So I think we'll have more inflation. That's one of the reasons The Daily Journal owns common stocks instead of government bonds. This is very typical Charlie Munger. If you watch interviews with Charlie going back in time, one thing you'll notice is that as soon as the conversation hits macroeconomics, that being interest rates, inflation, currency, etc., his answer is always that you kind of just have to roll with it.

He never has a strong opinion on what's going to happen next or what the Fed should do or anything like that. And the reason for that is because what happens with inflation and what the Fed has to do in terms of interest rates is just totally unpredictable. You think about it this way: the Fed, who literally have their hands on the interest rate lever, can't even predict where inflation and interest rates will be in three or six months from now. They try and forecast, but they're basically always wrong.

Remember, it wasn't long ago that Jerome Powell was literally holding back interest rate hikes because he thought that inflation was totally transitory. Remember that? So for Charlie, instead of trying to make some sort of short-term prediction and then make investment decisions based on that hypothesis, he prefers to just carry on as per normal and simply treat the macro as a tide that is sometimes with you and sometimes against.

Charlie, our pitten writes in from Chicago and wants to know if you think we might have on and off waves of inflation like we did prior to when Volcker stepped in at the Fed in the 70s era. Of course, it will happen some in the future. Yes, I think we'll have some of that in the future.

Do you think we'll have it immediately, right now, with what Jay Powell is dealing with? I think I'm pretty good at long-run expectations, but I don't think I'm good at short-term wobbles. I don't know the famous idea of what's going to happen short term. And that clip really cements his viewpoint. Charlie is the first to put his hand up and say that in the short term, he doesn't have the faintest idea of what's going to happen.

But as he does say in the clip, one thing he is very good at is long-run expectations—not what will happen across the next year, but what is likely to occur across 10 or 20 years. And that's, of course, a major tenet of his investment strategy: focusing on the long term. He's made his money not by playing around with short-term bets, but by holding high-quality businesses like Berkshire Hathaway or Costco for then ultra-long time periods.

Did you start out having to work at delayed gratification, or is that just how you were born? No, I learned this trick early. And you know, I've done that experiment with the two marshmallows with little kids. Yeah, live your weight. The little kids who are good at deferring the marshmallows are all also the people that succeed in life. It's kind of sad that so much is inborn, so to speak, but you can learn it to some extent, too.

So I'm going to go home and test that out on my kids. Well, I was very lucky—I just naturally took the deferred gratification very early in life, and of course, it's helped me ever since. This is, hands down, one of the most useful hacks that always gets value investors ahead, and it's extremely important to investing success during recessions: delay your gratification, extend your investing time horizon.

Because there's no doubt recessions are painful times for stocks. As Charlie said, when interest rates are rising, of course, it's hostile to stock prices. So what you really need to do is change your mindset from trying to make money now to instead trying to make investments now to make money in 10 years' time. It would be nice if we could just make money reliably and immediately, but unfortunately, that's just not how the stock market works, especially in recessions.

So definitely be that kid that doesn't eat the marshmallow and instead waits for two. If you genuinely have that ability, then really investing during a downturn or a recession is a hell of a lot simpler. But with that said, let's hear another key philosophy for investing well during times like this. What quality has helped you the most in life?

Well, that's easy: rationality. If you're just not crazy, you have a big advantage over 95% of the people because most people have all kinds of crazy patches. And if you just are consistently not crazy, you had a big advantage in life. And here, patient and a gratification defer, in addition to being not crazy, then it's practically essential.

There you go, you had the man—the Holy Grail of investing: being patient plus staying rational. You do that, and investing is basically a cinch. And I know I talk about staying rational basically all the time, but I really do feel that people don't quite understand just how psychological successful investing is. I honestly reckon it's like 10% brains and 90% temperament.

Really, the ability to think for yourself and make your own decisions from objective evidence, as opposed to making decisions based on what the media is saying, is a huge advantage, especially during recession times where most of the media is naturally biased towards fear and uncertainty. So I'm definitely with Charlie on this one: delayed gratification plus rational thinking is the way in my opinion.

Is it harder with success, age, wealth to hold on to rationality? I think it's always hard, but you get better at it if you get good at young and keep practicing. But it's never easy. And I definitely agree with Charlie on this point: while we know that rationality and long-term thinking are keys to stock market riches, in practice, it is very hard to stay rational all the time, particularly when you see other people around you taking big risks on short-term gambles, and then, annoyingly, those bets actually paying off.

I know I've found that really annoying in the past with say the meme stocks. Because I was sitting here right, making these great investments in really solid companies that had great long-term prospects, and then some of my mates would go out and they'll just gamble on GameStop, and then they made like a thousand dollars in a week. It's very, very frustrating.

But if you've ever found yourself in a similar situation to me, I find this bit of wisdom from Charlie really useful: "You climb as hard as you can by just advancing one inch at a time. That's the secret of life." And now there's always somebody who's a little nuts and who succeeds, but for every guy who succeeds, there are a thousand failures. So instead of being one of the gamblers, just stick to the tried and true method of long-term value investing.

So that was Charlie's thoughts on investing philosophy during recessions, but he also highlights some important lessons about the actual value investing strategy itself. And this first clip is all about the harsh nature of capitalism. Some of the things that surprised me the most was how much the business world is very much like the physical world, where all the animals die in the course of improving all the species, so they can live in niches and so forth.

All the animals die, and eventually, all the species die—that's the system. And when I was young, I didn't realize that same system applied to what happens in capitalism: all the businesses—they're all on their way to dying. As the answer causes some remarkable deaths, imagine having Kodak die; it was one of the great trademarks of the world. There was nobody who didn't use film—they dominated film. They knew more about the chemistry of film than anybody else on Earth, and of course, the whole damn business went to zero.

And look at Xerox! It's a nothing compared to what it once was. So practically everything dies; none of the eminence lasts forever. I think there are two things to take away from this clip: firstly, it highlights the importance of having a durable economic advantage. This is the single most important characteristic to ensuring your company has a fighting hope of surviving for a very long time or particularly during a recession.

For example, Coca-Cola has been raising prices over the past year or so while the average consumer has been hurting, and their profits have only gone up. So those businesses with strong moats are very attractive in times of economic recession. But the clip also teaches us that nothing is forever—even companies with big moats will eventually die. You know, Apple will die one day; so will Google, and so will Tesla, as Charlie says.

Kodak and Xerox: rewind the clock, and nobody could have ever imagined those companies to die. Now, where are they? And this serves as a reminder to really check in with the companies you own and scrutinize them. You know, really look over them. How have they held up during the past year? You know, if their revenues and profits have stayed consistent or they've risen, that is a great sign they've got some sort of advantage.

But if their operating income has fallen a lot, that's probably a good sign that they don't have a strong enough moat to fight against the inevitable forces of capitalism. Guy Spiels actually talked to me about this exact topic not too long ago. You know, what is amazing to me about the period of 2022 is these companies that I yearned to own. Brandon, I was just like, "Wow! I would so love to own Roku. I'd so love to own Snowflake. They like, there's so clearly such amazing businesses."

Then suddenly I look at them again with a fresh set of eyes after the share prices have dropped so dramatically, and I kind of say, "How on Earth did the guy you were only six months ago want to own these things?" Then it's just a simple idea: do you, in a certain sense, make an operating profit at the end of the month or the end of the year? Do you have cash in the bank where you get to decide where to spend it? Or is your CFO wondering what to do with the excess cash, or is your CFO wondering where to get the money to fund your operations and your plans?

So just like how Guy went back and reevaluated Roku and Snowflake, it's a good time for us to do the same with our own portfolios. Highlight those businesses that simply can't deal with tough economic conditions. Because holding great businesses always comes first when you're evaluating a company for potential investment.

What do you place the most emphasis on, the business or the management, and do you differ with Warren when it comes to what you place first? No, I know I think we're the same. I think we like the business great first, and then second we want a great manager. But we have not made a huge success by investing in great managers who take over lousy businesses. That is not the way we rose.

And can a great business be run by a lousy manager? The inverse: sometimes Coca-Cola was run for years by a man with a very severe mental impairment, and the directors just assumed he was drunk and let him stay there year after year. Now, that's my idea of a wonderful business—that you can be mentally defective and run it pretty well. That was Coca-Cola.

And it's a day. Charlie has spoken about this many times in the past, but obviously holds true in any time period. The absolute most important thing is to ensure whatever you hold is fundamentally a good business. It has great economics, it has a great moat, it generates a lot of cash, it doesn't have too much debt, and it doesn't rely on raising more money to survive. Because in those instances, if a recession hits, it'll still be all right.

If it cops a bit of mismanagement, it'll be all right. If a factory blows up, it'll still be all right; the business itself has those characteristics that make it resilient, and that's what you really want to look for at times like right now. And another thing to remember is to stay honest. You know, if you had some speculative, you know, web 3 company in your portfolio that is now hemorrhaging cash, don't let your brain trick you into believing all is fine.

If I had to name one factor that dominates doing bad decisions, it would be what I call denial. If the truth is unpleasant enough, their mind plays tricks on them, and they think it isn't really happening. And of course, that causes enormous destruction of business where people go on throwing money into the way they used to do things isn't going to work at all well in the way the world is now having changed.

So at the end of the day, don't fall into that psychological trap—don't persist with something that you should really be getting rid of. Have your investing checklist, go back over it with each of your investments, and highlight all of the yellow or red flags.

So overall, my takeaways in terms of investing lessons from the Daily Journal shareholder meeting were definitely:

1. Stay rational while the sky is falling.
2. Focus on the long term, and decisions become a lot simpler.
3. Successful stock market investing is a game of taking small step after small step until eventually you've covered great ground.
4. Look for strong moats in tough times.
5. Keep up to date with the companies in your portfolio and chuck out the losers if you need to.
6. Don't let denial creep into your decision making.

But with that said, I want to hear from you guys! What is the best investment lesson, or maybe the best quote you've ever heard from Charlie Munger? Definitely leave that stuff down in the comments below, and let's keep the discussion going. But apart from that, guys, please leave a like if you did enjoy the video, subscribe if you'd like to see more, and with that said, I'll see you guys in the next video.