Charlie Munger: Ponzi scheme

“What makes common stock prices so hard to predict is that a general liquid market for common stocks creates, from time to time, either in sectors of the market or in the whole market, a Ponzi scheme. In other words, you have an automatic process where people get sucked in and other people come in because it worked last month or last year. And it can build to perfectly ridiculous levels, and the levels can last for considerable periods. Trying to predict that kind of thing, sort of a Ponzi scheme which is, if you will, accidentally thrown into the valuation of common stocks by just the forces of life, by definition that’s going to be very, very hard to predict. But that’s what makes it so dangerous to short stocks, even when they’re grossly overvalued. It’s hard to know just how overvalued they can become in addition to the overvaluation that exists. “—Charlie Munger (2002 Berkshire Hathaway Annual Meeting). 

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Charlie Munger: That’s the game

“The game in our kind of life is being able to recognize a good idea when…it rarely is presented to you. And I think that’s something you have to prepare for over a long period. What is the old saying? That opportunity comes to the prepared mind? And I don’t think you can teach people in two minutes how to have a prepared mind. But that’s the game.”

—Charlie Munger. 

Charlie Munger: Valued in two different ways

“Well, generally, you can say that stocks are valued in two different ways. One, they’re valued much the way wheat is valued, in terms of its perceived practical utility to the user of the wheat. And there’s a second way that stocks are valued, which is the way Rembrandts are valued. And to some extent, Rembrandts are valued high, because in the past, they’ve gone up in price. And once you get a lot of Rembrandt element into the stock market, and you fuel the stock market with massive retirement system purchases, you can get stocks selling at very high prices by past historical standards. And that can go on for a long, long time. That’s what makes life so interesting. It isn’t at all clear how it’s going to work out. It isn’t even clear what the level of interest rates is going to be. And nobody in this room ever expects to see 3 percent interest rates continue for a long time again. But that could happen. That would have an enormous effect on the price of equities. You live in a world where you can’t really predict these macroeconomic changes.” —Charlie Munger, 2000 Berkshire Hathaway Annual Meeting.