3 key takeaways from the June 2024 edition of Netra

Welcome to the June 2024 edition of Netra, where we present data-driven market insights that can inform your investing decisions.

This edition, which marks three years of Netra, pays homage to the remarkable wisdom of Charlie Munger, who passed away late last year. Munger and his partner, the legendary Warren Buffett, grew Berkshire Hathaway into a behemoth and became immensely wealthy in the process. However, significantly for the rest of us, they were also forthright and candid about the principles that had led them to success, three of which we will explore below.

The titles of the next three sections are examples of “the right stuff” that Munger espoused, and all quotes are Munger’s unless indicated otherwise.

A long-term orientation

Over-activity is something far too many investors fall prey to. For most investors, setting up a simple SIP (Systematic Investment Plan) and then consistently adhering to it can already be enough to get decent long-term returns. That’s because by averaging your investments over the long haul, you accept average valuations, average returns, and average volatility.

This might seem like a disappointing outcome, but it really isn’t once you realise that most investors don’t even get average returns.

As you can see in the table below, in India, the long-term real returns generated by an SIP are greater than those generated by a lumpsum investment!

So as Munger said, rather than trying to be the smartest, it’s usually better to just be less unwise.

Working in your ‘circle of competence’

Investors get the returns they deserve. And like in the world at large, to deserve more, you need to do something not everyone can, even if that something is quite simple.

Do you have a psychological or analytical edge? Can you zig when markets zags? Can you invest in value when the market is rallying behind momentum investing?

Or have you put in the work to understand the ins and outs of a handful of sectors? For instance, Munger and Buffett were extremely knowledgeable about a few sectors, including Financials, Insurance, and Consumer/Retail, and 75% of their bets were in these sectors.

Luckily, even if you don't have any obvious edge, Investing can still smile upon you benevolently. It can let you gain an edge by simply buying and holding a multi-asset fund that gives you a smooth ride to your financial goals. After all, as billionaire investor and hedge fund manager Seth Klarman succinctly put it, “If you can’t beat the market, be the market.”

As the table below shows, a multi-asset fund can deliver long-term returns that are very close to those of equities, while demonstrating significantly less volatility.

Reasonably intelligent but not blinded by high IQs

The bull market euphoria that got going after the Covid-19 market downturn lasted roughly from March 2020 to November 2021. This period spawned numerous books and blogs on “making millions” through stock picking, and luck began to be mistakenly seen as skill. Retail investors, riding popular stock picks, outpaced the NASDAQ100. Many accomplished professional investors got onto the bandwagon, probably thinking that their market smarts were incontestable.

Berkshire made >3x returns in 4 years on its large Apple purchase, but investors in their 20s began calling Warren Buffett a washed-up old man. However, once the Federal Reserve began raising interest rates to curb inflation, the market’s enthusiasm waned. The NASDAQ100, climbing from under 6,900 in March 2020 to 16,440, had plunged to 10,440 by November 2022: a 37.63% decline. A number of soaring tech stocks suffered similarly ignominious crashes, as can be seen below.

Thus, at such a juncture, the relative restraint shown by Berkshire ended up performing better than some “obviously smart” moves by market experts. This should serve as a lesson in humility for all of us: even if we’re smart, it’s folly to invest on the basis of the belief that we’ve managed to see something few others have.

Munger, the wisdom-monger

Charlie Munger's influence extends far beyond the realm of investing. His legacy of wit and sagacity possess the potential to elevate us not just as investors, but as thinkers and individuals striving for personal growth.

If there is one overarching lesson from Charlie that serves as a gateway to acquiring all other lessons, it is reading.

“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”

So in that spirit, we invite you to read the latest edition of Netra in its entirety to learn more about the life-changing investing wisdom of Charles T. Munger.