Charlie Munger hasn't invested following the stock market crash. Here's how Warren Buffett's right-hand man defended that decision.
Like many people, you may be worried about another stock market crash. You may wonder if you should buy stocks to profit from lower prices.
If you don’t know what to do with your investment portfolio, you’re not the only one. While Berkshire Hathaway is sitting on a big $128 billion cash pile, it’s doing nothing with it.
Charlie Munger, vice chairman of Berkshire Hathaway and longtime business partner of Warren Buffett, likes to say that one of the keys to good investment results is “sitting on your a**.”
He’s clearly applying this principle during the coronavirus crisis, as he’s watching and waiting. Berkshire has sold $30 million worth of stocks during the stock market crash but hasn’t bought anything yet.
During the financial crisis of 2008-2009, Berkshire spent tens of billions of dollars in companies badly hurt financially to bail them out. The company invested $5 billion in Goldman Sachs (NYSE:GS). But Berkshire has done nothing of the sort during the current crisis.
Why is Berkshire doing nothing with its cash pile?
Well, I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes. We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing, ‘Oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses].’
Munger is basically saying that the crisis we are in ranks among the worst ever. He prefers to go through the storm with a lot of liquidity, as he sees the situation as very risky.
Warren wants to keep Berkshire safe for people who have 90% of their net worth invested in it. We’re always going to be on the safe side. That doesn’t mean we couldn’t do something pretty aggressive or seize some opportunity. But basically we will be fairly conservative. And we’ll emerge on the other side very strong.
Charlie Munger prefers to be cautious rather than buying stocks because he doesn’t want to put investors’ money in danger.
The coronavirus is a crisis like we have never seen. Like everybody else, Munger doesn’t know what’s going to happen, so he prefers not to take action. He doesn’t know how long the recession will last and how much damage it will cause to the economy. Nobody knows what to do.
Munger doesn’t believe we’ll have a Great Depression, but he thinks it’s quite possible that never again have a level of employment like we just lost.
I don’t have the faintest idea whether the stock market is going to go lower than the old lows or whether it’s not.
He might really have no idea if there will be another stock market plunge. But his lack of action suggests he might think the market will go down again. He probably doesn’t want to cause more fear by saying so.
Munger likely thinks the market is still not cheap enough to start buying stocks. But he might begin to invest if there is a deeper stock market sell-off. Berkshire’s philosophy is to buy when bargains abound.
Nobody knows if there will be another stock market crash. But with the dark economic outlook, it may be wise to mimic Munger and stay on the sidelines until things stabilize.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 1:50 PM