Charlie Munger on why index funds perform better than active stock picking? | [C:C.M Ep.29]

Published on May 18, 2021

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In this episode, Charlie Munger discussed an issue of the portfolio managers in the investment industry and why index funds perform better than active stock picking?

In this episode, you’ll learn:
– What is Charlie Munger comments on investment managers and its industry?
– Why it is better to invest into index funds?
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#CharlieMunger #DailyJournal

[Transcript]
CHARLIE MUNGER 00:08
Another issue of course that’s happened in the world of stock picking, where all this money and effort goes into trying to be rational, is that we’ve had a really horrible thing happen to the investment counseling class.

And that is these index funds have come along and they basically beat everybody. And not only that, the amount by which they beat everybody is roughly the amount of cost of running the operation and making the changes in investments.

So you have a whole profession that is basically being paid for accomplishing practically nothing. This is very peculiar. This is not the case with bowel surgery or even the criminal defense bar in the law or something. They have a whole profession where the chosen activity they’ve selected they can’t do anything.

Now in the old days the people in the profession always had some of this problem and they rationalized as follows. ‘We are saving our clients from the insurance salesman and the stock broker, the standard stock broker that serves the active trader.’ And they were saving people from the life insurance salesman and the hustling stockbroker who liked active trading. And I suppose in a sense that the investing class is still saving those people from an even worse fate.

But it is very peculiar when a whole profession that works so hard, and is so admirable, and the members of which we are delighted when they marry into our families, and they just can’t do what their profession is really trying to do, which is get better than average results. How is that profession handling this terrible situation, as index investing gets more and more popular and including a lot of fancy places?

Well it’s a very simple answer, they’re handling it with denial. They have a horrible problem they can’t fix, so they just treat it as nonexistent. This is a very stupid way to handle a problem. Now it may be good when you’re thinking about your own death which you can’t fix and it’s just denial all the way to the end. But in all the practical fields of life, this problem thoroughly understood is half solved or better coped with.

So it’s wrong to have all these people in just a state of denial and doing what they always did year after year and hoping that the world would keep paying them for it even though an unmanaged index is virtually certain to do better. It’s a very serious problem.

And think of how much New York say needs a flow of money from finance. Think what would happen to Manhattan if there weren’t any fees for investment management or trading spreads and so on.

So it’s a weird situation and of course it’s unpleasant. Big investment counseling shops, some of them shrink and some go out of business. And the value investors, of course who many of I know because we came from that tradition, the value investors who were honorable are quitting. Boom. Boom. Boom.

And what worked for them for years stopped working and they’re honorable people they just quit. And they’re also rich which makes it easy. But those who aren’t rich have a hell of a problem.

And it costs about fifty thousand dollars in the city of Manhattan to send your kid to pre-school. Non-deductible. And that’s just the start of an endless procession of years of vast expense. So if your game is money management you have a serious problem. And I don’t have any solution for this problem. I do think that index investing, if everybody did it won’t work. But for another considerable period, index investing is going to work better than active stock picking where you try and know a lot.

Individual Stocks Are Better Than Index Funds

Individual Stocks Are Better Than Index Funds, Charlie Munger on why index funds perform better than active stock picking? | [C:C.M Ep.29].

Effective Investing: The Truth About Investing

Why purchase a mutual fund they stated, the costs are high and you had a sales load of, in many cases, 8%. It must be a method to go for Catholics as well, is it not? A ten percent return over the long term is absolutely nothing to sneer at.

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Cfd Misconception 1 – If You Lose Cash The Market Maker Makes Money

I wager you’ll be delighted that you kept 95% of your cash bought proven earnings investments. One would make use of a Roth IRA for a wide range of investment choices.

If you like shared funds to a point, but dislike extra fees and not being able to exit and get in as you like, exchange traded funds are for you. When you purchase an ETF, you’re getting a basket of securities, which is why lots of people like them. They have numerous excellent indicate them. More so, than private stock picking.

Purchasing stocks is more like hypothesizing than investing! My wealth management company lies in Las Vegas. There are a lot of things to bet on here. Individual Stocks shouldn’t be one of them.

Option: Use dollar cost averaging by investing the same quantity of money methodically at established intervals. In this case our financial investment strategy will be to invest the $50,000 by investing $10,000 every 3 months, for 5 quarters, into a varied stock fund. Enjoy what takes place as we invest the same amount of money each time duration as the fund rate changes over time.

I constantly prevent trading the runaway trains, this can likewise be called “do not chase”. You see a stock on a good trend then enter at your price, I normally await pullbacks and after that enter at the cost I desire. Once in a while I miss out on a trade and that’s OK. You can likewise trade these pullbacks, if your currently in and the stock goes crazy discover a point to take revenue or a minimum of raise your stops and re enter upon Individual Stocks any pullbacks.

The advantage of this group of ETFs (Exchange Traded Funds) is that you get 2 for 1 leverage, so they begin to trade with the very same volatility as Individual Stocks. Plus there’s amazing range. from Exchange Index funds and Sector Funds to Country Funds and Fixed Earnings Funds.

House Put a Roofing Over Your Head. That won’t happen in stocks. You need to pay lease when you invest in stocks. When you bought a home, you can stay in it and prevent paying leas. Moreover, you will not likely to offer your home checking out the heading: “Home Costs Take A Dive”. Likewise, the afternoon papers do not publish the everyday closing rate of your house in the classifieds and ten most active home in the area.

There is no doubt that a stock made from male made material can be produced a lot more affordable than a product made from wood. But again a lot lots of gun owners will still prefer the great old wooden stock for their guns and rifles. Let us hope they do not fade away.

History has actually revealed us that they tend to take turns. It is really typical for the best cent stocks to move 10-25% in just one day and over 1000% in one year. Start with making sensible financial investment choices.

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