Charlie Munger on Inflation and Fossil Fuels

Takeaways from the billionaire investor's latest interview

Author's Avatar
Jul 13, 2022
Summary
  • Charlie Munger believes the world will always have to deal with inflation.
  • He's also a bull on fossil fuels.
Article's Main Image

Charlie Munger (Trades, Portfolio) gave a rare interview this week following his personal investment with Melbourne-based investment company Stonehouse Corporation. As usual, the conversation was full of fascinating insights from this highly experienced and successful investor. Some of his comments are particularly relevant considering the current financial environment.

I think younger investors often get caught up in the mindset that the current financial environment (and I’m not just talking about the market today) is unique and has never happened before. However, it's usually the case that there has been a similar environment in the past, and experienced investors know all too well how to handle the situation.

That’s one of the reasons why I believe Munger’s comments are so valuable. He has seen almost every market environment with nearly 100 years of knowledge and at least 80 years of investing experience.

Two of the topics the billionaire covered in the interview were fossil fuels and inflation, which are very hot topics today considering the current energy market and rising inflation around the world.

Speaking about the world’s need for fossil fuels, Munger said:

“I think we’re going to be using fossil fuels for a long time ahead, because we have to. If you stop to think about it, the present population of the world couldn’t eat if we didn’t use natural gas to create nitrogen fixer fertilizer. We’re not going to get rid of fossil fuels, we’re just going to use less of them.”

This seems to be part of the reasoning behind Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) recent fossil fuel investments, notably in Chevron (CVX, Financial) and Occidental Petroleum (OXY, Financial). Indeed, Munger picked out Chevron for being able to push ahead with large, costly projects such as the $54 billion Gorgon gas project, which he described as “a brilliant feat of engineering... But it required a certain amount of patience on Chevron’s part. That thing was very expensive."

Munger isn’t against renewable energy. He’s just aware that the world isn’t building enough to keep up with demand. Despite all of the investment that went into the sector last year, it only covered 50% of the world’s extra energy demand. That’s why he thinks “we’ll be using fossil fuels for a long time ahead. And I also think more of the world’s power generation will come from renewables… Both things are going to happen.”

The billionaire investor also discussed inflation in the interview. “I’m 98½ years of age, and I’ve seen a lot of inflation,” he stated. “I intend to live through inflation. I’ve lived through a lot of it already in my long life. It doesn’t discourage.”

He went on to add that inflation is always going to have an impact on the world as that’s what “modernity causes.” So, in many ways, we just have to learn to live with it.

He also believes that as the Federal Reserve increases interest rates to try and tame inflation, it will have a significant impact on asset prices. This is something all investors should be prepared for, as the “stock market’s always having plunges up and down.”

Berkshire has already been taking advantage of lower share prices by deploying some of its capital accumulated over the past couple of years. The corporation was not timing the market. It just couldn’t find any attractive opportunities to deploy capital in the past few years due to nothing big enough trading with a margin of safety.

“We accumulated the cash because things got so competitive and prices for good businesses... we couldn’t find any good buy,” Munger said.

After years of waiting, the corporation is now finding opportunities to deploy its capital, as other market participants are having to pull back. The accumulated cash is giving the group a competitive edge in the increasingly hostile market. As volatility continues, I wouldn’t be surprised if we see more deals from the conglomerate and its billionaire managers.

Disclosures

I am/we currently own positions in the stocks mentioned, and have NO plans to sell some or all of the positions in the stocks mentioned over the next 72 hours. Click for the complete disclosure