Charlie Munger's Comments on Index Funds versus "Stock Picking"

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NCPE
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Charlie Munger's Comments on Index Funds versus "Stock Picking"

Post by NCPE » Fri Feb 17, 2017 7:11 am

Didn't see this posted but a good affirmation from Charlie Munger (Berkshire Hathaway) on investing in Index funds versus picking stocks

"I would hate to manage a trillion dollars in the big stocks and try to beat the indexes. I don't think I could do it."

Link below:

http://finance.yahoo.com/news/stock-pic ... 42226.html

NCPE

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Re: Charlie Munger's Comments on Index Funds versus "Stock Picking"

Post by cinghiale » Fri Feb 17, 2017 7:46 am

You wonder how much more blunt someone of Munger's stature needs to be before this sinks in.

This quote should be front page news:
"The index thing is absolute agony for investment professionals … who have almost no chance of beating it," Munger said. "Most people handle that with denial ... I understand — I don't want to think about my own death, either."
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Re: Charlie Munger's Comments on Index Funds versus "Stock Picking"

Post by knpstr » Fri Feb 17, 2017 7:56 am

Buffett and Munger have been big advocates of indexing for the average person for many years now.

But to be clear, with small sums of money Buffett (and probably Munger) thinks he can still vastly outperform indexes.

:beer
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Charlie Munger on Index Funds

Post by JoMoney » Fri Feb 17, 2017 8:02 am

[Thread merged into here, see below. --admin LadyGeek]

Several news articles are out with quotes from Charlie Munger at the Daily Journal Annual Meeting. Someone posted a video of it on Youtube, and you can hear the full context of his comments responding to a question on index funds that some here might find interesting:
https://www.youtube.com/watch?v=BLctqhN ... e&t=53m35s
@53:35
Q: With regard to the proliferation of index funds do you think there may be a issues with liquidity if we go through another large crisis and discrepancies with the price of an index fund and the value of the securities underneath?

Charlie Munger:Well.. an index fund like the S&P is like 75% of the market so I don't think the exact problem you're talking about is going to be a big problem if you're talking about the S&P index... But is there a point when index funds theoretically can't work? Of course.
If everybody bought nothing but index funds the whole world wouldn't work as people expect. There's also the problem... one of the reasons you buy a big index like the S&P... is if you get a small index and it gets popular you have a self defeating situation. When the nifty fifty were the rage, JP Morgan talked everybody into buying just 50 stocks, and they didn't care what the price was. They just bought those 50 stocks and in due time their own buying forced those 50 stocks up to sixty times earnings, whereupon it broke and went down by about two-thirds quite fast. In other words if you get too much faddishness in one sector, or in one narrow index, of course you can get catastrophic changes like what they had with the nifty-fifty in that former era. I don't see that happening in the index that is three-quarters of the whole market. But the problem is the whole thing can't work perfectly forever but it will work for a long time.
The indexes have caused just absolute agony for intelligent investment professionals because basically 95% of the people have almost no chance of beating it over time. But other people expect that if they have some money they can hire someone to beat the indexes. And of course honest sensible people know they're selling something that they can't quite deliver, and that causes agony. Most people handle that with denial or they just don't want to think about it. I understand that, I don't want to think about my own death either. But it's a terrible problem beating those indexes, and it's a problem investment professionals didn't have in the past. And what's happening of course is the prices for managing really big sums of money is going down down down 20 basis points and so forth for them. The people who rose up in investment management didn't do it by getting paid 20 basis points, but that's where we're going I think. In terms for people who manage big portfolios of say American equities equivalent of the S&P it's a huge huge problem. It makes your generation of managers have way more difficulties and causes a lot of worry and fretfulness, and the people who are worried and fretful are absolutely right. I would hate to manage a trillion dollars in the big stocks and try to beat the indexes. I don't think I could do it.
in fact if you look at Berkshire and you take out 100 decisions, which is like 2 a year, the success at Berkshire came from 2 decisions a year
over 50 years. We're hardly greatness. We may have beat the indexes, but we didn't do it by having big portfolios of securities to manage, and having subdivisions managing and so on. So.. the indexes are a hell of a problem for you people. But you know.. why shouldn't life be hard.
It's what had to happen, what's happened. If you take some of these people trading by algorithm at work, then somebody else would come along with the same thing and the same algorithm and play the same game. And of course the returns went down. So that's what's happening in the whole field.
The returns you're really going to get being pushed down by the progress ...

Last edited by JoMoney on Fri Feb 17, 2017 8:52 am, edited 1 time in total.
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Re: Charline Munger on Index Funds

Post by bondsr4me » Fri Feb 17, 2017 8:29 am

Thanks for the link....will check it out.

Charlie is right there up on my Mt. Rushmore of Investing.

Currently reading "Charlie Munger The Complete Investor"; very interesting reading.

Don

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Re: Charlie Munger on Index Funds

Post by Peculiar_Investor » Fri Feb 17, 2017 8:51 am

OP might want to edit the Subject, unless Charline Munger is related somehow to Charlie Munger.
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Re: Charlie Munger on Index Funds

Post by JoMoney » Fri Feb 17, 2017 8:53 am

Peculiar_Investor wrote:OP might want to edit the Subject, unless Charline Munger is related somehow to Charlie Munger.

Done.. Thanks.
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Re: Charlie Munger on Index Funds

Post by nisiprius » Fri Feb 17, 2017 8:56 am

Very nice, very articulate, very sensible.
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Re: Charlie Munger's Comments on Index Funds versus "Stock Picking"

Post by LadyGeek » Fri Feb 17, 2017 9:18 am

FYI - I merged JoMoney's thread into here, which is a similar discussion.
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Re: Charlie Munger's Comments on Index Funds versus "Stock Picking"

Post by bradshaw1965 » Fri Feb 17, 2017 9:39 am

knpstr wrote:Buffett and Munger have been big advocates of indexing for the average person for many years now.

But to be clear, with small sums of money Buffett (and probably Munger) thinks he can still vastly outperform indexes.

:beer


In the same Q&A he talked about doing some calculations as a young man and determined he needed 3 stocks to be diversified. He's completely comfortable with a concentrated position but that's his livelihood. Also in the same session, he talks about how people in other professions should find something useful that society rewards and not even think about beating people at what's become an almost impossibly hard discipline.

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Re: Charlie Munger's Comments on Index Funds versus "Stock Picking"

Post by Phil DeMuth » Fri Feb 17, 2017 11:43 am

Attending the Daily Journal annual meeting with Munger is a high point of my year.

Munger and Buffett are in the interesting position of being outspoken critics of efficient market theory but proponents of the S&P 500 Index fund. Bogle reconciles this by saying it is not about efficient market theory but simply expenses. I don't know how Munger and Buffett see it.

Buffett's answer to efficient market theory ("The Superinvestors of Graham and Doddsville") cites seven individual value investors who had beaten the index by a wide margin. Of the four who are still alive, two (Buffett and Munger) are on the board of Berkshire Hathaway, and two (Munger and Rick Guerin) are on the board of the Daily Journal, which is why the company's stock holdings have performed so sensationally.

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Re: Charlie Munger's Comments on Index Funds versus "Stock Picking"

Post by JoMoney » Fri Feb 17, 2017 5:48 pm

Phil DeMuth wrote:...Munger and Buffett are in the interesting position of being outspoken critics of efficient market theory but proponents of the S&P 500 Index fund. Bogle reconciles this by saying it is not about efficient market theory but simply expenses. I don't know how Munger and Buffett see it...

Buffett's mentor, Benjamin Graham also advocated for index fund investing, but was also critical of the premises in the "Efficient Market Hypothesis"
Benjamin Graham in Ch.4 of The Intelligent Investor wrote:...there has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run. Our view is different. The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task. ...
Financial Analysts Journal - 1976 , A Conversation with Benjamin Graham wrote: http://www.aboveaverageodds.com/wp-cont ... graham.pdf
In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.

Prof. Robert Shiller has also disagreed with the "Efficient Market", but is also critical of those trying to beat the market:
http://www.marketwatch.com/story/robert ... 2014-04-03
"For most people, trying to pick among major investments might be a mistake because it's an overpopulated market. It's hard, ... You have to be realistic about how savvy you are."


I think there are some fundamental differences in the views about how markets work. It seems to me, on one side you have a particular school of thought that believes markets are these systematically egalitarian risk allocation machines, and this other school of thought that markets are evolutionary highly competitive systems where only the strongest thrive. Shiller wrote a book recently called "Phishing For Phools", it's not about the stock market specifically, but I think some of the ideas apply. I believe there is informational asymmetry in the market, even if specific news events were available to everyone at the same time, there is still an issue with the way risky investment products are peddled from people who don't understand them to people who know even less . In a competitive market being dumb can really hurt you, not just give you a coin-flip chance relative to the odds you take on some statically defined spectrum of 'risk'.

But on either side of the "efficient market" debate, lots of people can agree on an effective strategy that will capture the economic gains of American business, even if it won't garner you anything extra by out-smarting someone trading within that market through luck, skill, or efficiently allocating "risk preferences".
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Re: Charline Munger on Index Funds

Post by Fallible » Fri Feb 17, 2017 7:50 pm

bondsr4me wrote:Thanks for the link....will check it out.

Charlie is right there up on my Mt. Rushmore of Investing.

Currently reading "Charlie Munger The Complete Investor"; very interesting reading.

Don


The book is excellent, essentially about wisdom in investing, business, and life and what it takes to achieve it. Not at all surprising Munger sees the wisdom in indexing and how it's leaving active managers in "agony" and "denial."
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