As Warren Buffett (Trades, Portfolio)’s confidante and long-time wingman at Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial), Charlie Munger (Trades, Portfolio) has developed a fearsome reputation as a master investor, but he is also renowned for his penchant for pithy and quotable lines. The venerable value investor has coined many aphorisms that are both profound and simple to understand.
Yet, while much of Munger’s comments are timeless, he is also a great resource for timely insights on the markets of today. Both Munger’s advice, and his active management style, were in full evidence at the annual meeting of Daily Journal Corp. (DJCO, Financial) this year.
With the longest bull market in history continuing to chug along as value stocks trade at their steepest discount in many years, it would serve investors well to listen to what Munger has to say about the current stock market.
Confronting a challenging stock market
No one can doubt that value investing opportunities have proven few and far between in recent years. Truly, it seems as if there are no bargains to be had anymore.
Even Berkshire seems to think so these days, as evidenced by Buffett’s uncharacteristic investment in Amazon.com Inc. (AMZN) last month. At the Daily Journal annual meeting, Munger reflected on this historically trying market:
“If you have trouble finding good investments, join the club… My advice to the seeker of high compound interest is to reduce your expectations. Things are likely to be tough for a while.”
Lowering expectations
Munger’s relative pessimism is understandable, if one considers Berkshire’s recent quite lackluster performance. The massive conglomerate has barely managed to mirror the performance of the broader stock market in recent years, and has even underperformed of late. This is due to a myriad of factors, but the long bull market and upward re-pricing across virtually all asset classes is undoubtedly part of the issue.
Munger seems to be skeptical of whether the market will be able to deliver the sort of returns going forward that have been expected of the stock market after a decade of upward running. Indeed, Munger cautioned his shareholders that the era of 10% annual market returns will not last, with single-digit growth likely to become the norm ere long.
Looking elsewhere for opportunity
With the U.S. stock market offering up few opportunities, Munger offered Daily Journal shareholders some advice on exploring opportunities further afield. He seems to be particularly bullish on China, which he believes will remain a place for outsized growth opportunities:
“The first rule of fishing is to fish where the fish are.”
While solid advice overall, it seems like a rather odd choice on Munger’s part. He is all about circles of competence, which he admits he does not have with regard to China.
Entrusting his capital to outside managers who understand the Chinese market may be wise in terms of penetrating that market, but it is a bit out of character for the control-freak value investor.
Verdict
Some value investors are holding out hope for a turnaround, perhaps after the next correction. However, Munger is offering a word of caution. It may take such a correction for the strategy to pay off significantly.
However, Munger’s warning about U.S. stock market growth going forward cuts to issues facing the whole stock market. The returns of recent years are hardly sustainable, so expectations founded on the average performance of the past couple decades may be rather ill-founded.
Investors should tread with great caution in the years ahead. Hoping for the market return to be anything like it has been for the past couple decades looks more like wishful thinking than serious strategy. That may mean opportunities for thoughtful value investors going forward.
Disclosure: No positions.
