Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) vice chairman Charlie Munger (Trades, Portfolio) can draw on a vast amount of investment experience when allocating capital. Indeed, in his 97 years, he has lived through a wide range of economic and political events, as well as numerous bull and bear markets, that together have shaped his view of the investment world.
Of course, most investors do not have so many years of experience to draw upon when allocating capital. This may mean they find it more difficult to put current events and asset price changes into perspective. It could even lead them to make inaccurate assumptions, such as wrongly anticipating that the current bull market will continue unabated or that volatile assets such as cryptocurrencies will surge perennially higher.
As such, it may be prudent to consult history when investing. Although the past is never perfectly mirrored in future events, it can provide very useful insights into how investors behave and how asset prices perform over the long run. As Munger once said, “There is no better teacher than history in determining the future... There are answers worth billions of dollars in a $30 history book.”
History repeats itself
In my view, consulting history could be particularly useful at the present time. The track record of the stock market shows it has always followed a cycle. While the past is never perfectly repeated, the movement between bull and bear markets has always been a constant. Certainly, the time between them has varied from weeks to years. However, history shows that no bull or bear market has ever lasted in perpetuity.
Similarly, there have always been investment fads during Munger’s lifetime, and throughout history, where specific assets have sold for significantly more than their intrinsic value. For example, the price of tulips reached the same level as the cost of a house in Europe in the 17th century. Meanwhile, the prices of companies with no revenue surged to excessive levels that bore little resemblance to their intrinsic value during the dot-com bubble at the turn of the 20th century.
It’s never different this time
Clearly, the current bull market could continue for some time. Likewise, the prices of assets such as cryptocurrencies, which investors including Munger argue are vastly overpriced, may move even higher following recent gains. However, history suggests that neither situation is likely to be sustainable. Ultimately, some economic or political event or regulatory change will occur that harms their prospects or hurts investor confidence in them.
As such, it may be logical to avoid buying any asset that is priced above its intrinsic value. Moreover, planning for the next decline in asset prices may be a prudent strategy. Doing so can mean missing out on short-term gains if prices rise further. However, as Munger’s performance has shown, patiently waiting for the right opportunities has provided scope for significant long-term gains throughout history.
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