Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) vice chairman Charlie Munger (Trades, Portfolio) is a man of few words. However, his quotes can be extremely informative. As such, they are often helpful in guiding investors through a range of stock market conditions.
His comments at the Daily Journal (DJCO) annual meeting in February were typically succinct. One notable example was when he was asked whether the current stock market environment is akin to the technology bubble of the late 90s, in terms of wild speculation being rife and investor sentiment being excessively high.
Munger's response was very straightforward. His full answer to the question was: "I think it must end badly but I don't know when."
In my opinion, his short answer perfectly sums up the current investing environment. The stock market's past performance shows that upward trends do not last in perpetuity. Instead of gradually coming to an end and experiencing a slow-paced reversal, stock markets have often delivered short, sharp declines after bull runs.
This situation occurred when the technology bubble, which burst in the early 2000s. A similar event could realistically take place at some point in future after the S&P 500's 85% surge since March 2020.
Timing the market
Munger's answer to the question also highlighted the dilemma that investors face at the present time. Even though a market crash is very likely to take place in future, anticipating when it will occur is impossible. Irrational behavior among investors can persist for many months and even years. Indeed, the dot com bubble continued to grow in size long after many value investors declared that the stock market was trading at excessively high levels.
In my view, a sensible approach to the current situation is to avoid trying to second-guess market movements. Instead, preparing for the next bear market could be a prudent approach. For example, ensuring any new purchases or current holdings are not trading at excessive prices versus their intrinsic values. If they are, selling them and moving into other stocks or cash could be a sound strategy.
In addition, diversifying across a range of companies and sectors may help to protect an investor against a particularly challenging period for specific sectors. This took place in the dot-com crash, when technology stocks were impacted to a greater extent than many other sectors.
These views can perhaps best be summarized by Munger's partner at Berkshire Hathaway, Warren Buffett (Trades, Portfolio). When discussing the prospect of a stock market crash, he previously stated: "Predicting rain doesn't count, building an ark does."
Now could be an opportune moment to start planning for the almost inevitable stock market crash, given Munger's track record as an investor and his recent negative comments regarding the ending of the current bull market.
Disclosure: The author has no position in any stocks mentioned.
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