Charlie Munger's New Warning for the 2023 Stock Market

I used to come to the Berkshire annual meetings on coach from Los Angeles, and it was full of rich stockholders, and they would clap when I came into the coach section. I really like that.

Holly mentioned Warren Buffett's right-hand man, the vice chairman and chief culture officer at Berkshire Hathaway. Charlie is certainly well-known for his quick wit, but equally for being pretty blunt. And while this does lead to some funny one-liners, just hold the goddamn stock.

"Have we ever made an emotional decision?"

"No, I think you thought it was mine."

Yeah, there's no doubt it can also be a little concerning, especially when he starts talking about the state of the economy. I think he's gonna get tougher. I think the best road ahead to human happiness is to expect less.

So in this video, we're going to be discussing everything Charlie Munger said recently on the US economy and his discussion around the future of value investing.

So firstly, what does Charlie see for the future of the American economy, particularly after the Fed's approximate four trillion dollar money printing spree that's occurred over the last few years? Does the current size of the Federal Reserve balance sheet concern you?

"Well, I don't know where we're headed with all of this. It's been very extreme. I think you could be pretty extreme in fighting depressions and so forth if you were versioned afterwards to a period of some discipline. But if you're going to just keep borrowing, your printing money and spending it, I think eventually it causes bad trouble."

It's no secret that in response to the Covid panic, the Fed has printed a lot of money, which has incidentally triggered the highest inflation in 40 years.

But the problem we currently face is that, unfortunately, we've still got high inflation in an economy that's struggling, or stagflation, as Ray Dalio would call it.

Now what Charlie is saying here is that printing money can be prudent if you counter it in the future with a tighter economic period. But his concern is that because macroeconomic conditions are poor at the moment, the country is also divided politically. The government and the Federal Reserve may instead elect to keep the loosest monetary policy possible so they can keep their citizens happy.

"I mean, even in the news, there's already been discussions around when the first interest rate decrease could be."

And remember, this is at a time where inflation is still more than double what's considered normal.

Charlie has also discussed this in the past that he just doesn't believe enough in the government and the Fed, that they will be able to resist the temptation to print money.

"However, as Charlie says, at some point, ing money to buy votes will be counterproductive."

Yep, and we don't know exactly where that comes and if something is going to be dangerous and unproductive, you ought to keep it a fair distance away.

What Charlie's referring to here would be a terrible outcome for the US economy. Why? Well, if the government and the Federal Reserve choose to maintain the loosest monetary policy they can and perhaps continue to print money or lower rates in this inflationary environment, well, eventually this will simply trigger more and more inflation.

And of course, at the extreme, it could even get bad enough that even politically and economically ignorant people won't stand for accepting more and more freshly printed money because it completely devalues their currency.

So people suffer more because of rising prices than what they benefit from all the money printing.

Here's Warren Buffett adding to the discussion.

"We paid a price in World War II, school kids and everybody else, myself included. We bought what were originally called war bonds and defense bonds and savings bonds and all that. But from 1940 to 1944 or five, you paid out $1,875, and you got $25 back. But when you got all through, you had 120 percent of GDP in the national debt instead of 30 or 40 percent, and we had a lot of inflation subsequently; a lot. So the people that bought those bonds and supported the war had a portion of their purchasing power taken away from them. When the country gets in the habit of doing that, I think it's tough to figure out where the breaking point is with society, but I don't think you want to come anywhere close to it. We're bidding is subject to death, but it is a problem I wish we had a solution."

So clearly, both Warren and Charlie are concerned that the US is getting too comfortable with printing money to solve its problems. And left unchecked, this could result in worse pain for everyone, even though it seems counter-intuitive on the surface level.

So I thought that was a really interesting discussion, but beyond this, another topic that Warren and Charlie discussed later in the meeting is how US value investors should be looking at the future, whether value investing has now lost its sparkle.

What's really interesting is this is one of the few points that Warren and Charlie don't necessarily agree on.

But before we get to that, I would love it if you could just take a quick listen to this message from our sponsor because quite frankly, they are the reason that we are even here in America covering this meeting for you guys. So I really appreciate it. I'll see you guys in a second.

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How do you envision the future of value investing in this new era?

"Well, I'm glad to take that one. 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."

Charlie has been telling me the same thing the whole time we've known each other. We get along wonderfully because we are making less.

"Yeah, well, but that's mostly because that I think is because it's larger. When we were younger, it was..."

But I would argue that there's gonna be plenty of opportunities, new things coming along.

"Don't take away the opportunities."

What gives you opportunities is other people doing dumb things.

I find this clip interesting because I think they're both right, but they approach the issue from two different perspectives. As Charlie notes, value investing is getting harder and harder because there are more market participants and also because more smart people are covering a broader range of stocks.

In the last 25 years, there's been an incredible increase in accessibility of financial data as well as the number of people working in the field of stock analysis. Naturally, this leads to more people having a really good understanding of more businesses, which ultimately leads to most of the good stocks being bought up and thus being overvalued.

This is what many proprietors said on repeat over the past few years, and it's why he's looking at places more like Turkey as opposed to the US right now.

So yes, opportunities are fewer, but turning to Warren's perspective, they're not all gone. The businesses may be more accurately priced most of the time, even overpriced, but the big events in the market that give us sudden opportunities actually seem to be happening more frequently than ever.

Remember, for value investors, volatility is awesome.

So it's interesting that Charlie and Warren use similar logic, but they also come to slightly different conclusions.

"Well, the 58 years we've been running Berkshire, I would say there's been a great increase in the number of people doing dumb things. And they do big dumb things, and the reason they do it to some extent is because they can get money from other people so much easier than when we started. So if that's not on a large scale, which it couldn't be done what 58 years ago, you couldn't get the money to do some of the dumb things that we wanted to do, fortunately."

So I know, I think the investing has disappeared so much from this huge capitalistic market that anybody can play in. But the big money is in selling other people's ideas. It isn't outperforming.

So Warren's point is that in an environment where raising money is so easy, there will naturally be an increase in business people making big speculative plays—ones that can eventually lead to drastic failures and market opportunities.

I mean, just have a look at what happens in terms of initial public offerings. When there's more money in the system, they absolutely skyrocket. Everybody and their dog is trying to get cash injected into their business by going public, and the cash stop investors are just desperate to put their money somewhere.

"But do you reckon all of that money that went into those 1,000 IPOs in 2021 was going into great cash-flowing businesses?"

Of course not! I mean, the reason they're IPOing in the first place is because they need money.

So it's an interesting perspective that actually, as economic conditions get a little too juicy and there's more and more money in the system, that's typically a precursor to great opportunities for us patient value investors.

"If you're running small amounts of money, I think the opportunities will be greater."

"Charlie, would you want to budget an edge on that or not?"

"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 unpleasant episodes."

So Charlie is half coming around that yes, there will be some opportunities, but Charlie still raises the point that certainly when you compare when he started investing to right now, there are way fewer opportunities.

Honestly, take Seeking Alpha for example. You can get basically any stat you want or could ever need on their website. But back when Charlie started, you'd need to send a letter to the company and then hope that they sent you back their annual report, and that would take weeks.

But now, with the ease of access and the popularity of investing as a profession, there are, as Charlie says, a lot more smart people out there now with a lot more money to put to work.

So of course, generally speaking, there will be fewer opportunities; but don't fear because, as Warren notes, they're trying to outsmart each other in arenas that you don't have to play.

"I mean, the world is overwhelmingly short-term focused, and if you go to an investor relations call, they're all trying to figure out how to fill out a sheet to show the earnings for the year. And the management is interested in feeding him expectations that will slightly be beaten. I mean, that is the world that's made to order for anybody that's trying to think about what you do that should work over five or ten or twenty years."

This is an extremely important thing to remember—these analysts and asset managers are playing a very different game to long-term value investors, and it's due to the industry that they operate in.

For example, imagine you gave a fund manager ten thousand dollars of your own money, and in one year's time, he or she had collected a two percent fee and also told you they hadn't found anything good to invest in yet. Sorry, most people are going to get annoyed at that, right?

So for these fund managers, they are notoriously short-term focused, trying to get returns quarter to quarter to keep clients happy, but as Warren knows, that actually gives us little guys an edge.

We can sit and wait until a market event causes all these money managers to sell in the short term, causing the share price to crash to unusually low levels, and as Warren says, this is happening more and more frequently these days.

But remember, we have to stay long-term focused and not get sucked into the fund managers' game—one which we can't possibly win: patience and rationality.

"Because as Charlie says, I would not like the thrill of losing my big pile into a small fight."

"We agree on that, incidentally."

"Okay, we do." You're one of the most extreme lovers of the big pile.

Anyway, guys, that will just about do us for this video. Please leave a like if you enjoyed. Subscribe if you would like to see more videos, and as always, thanks for watching. I'll see you guys in the next one.