People should invest in index funds, not stock-picking charlatans – Charlie Munger

The late billionaire investor and vice-president of Berkshire Hathaway, Charlie Munger, said fewer and fewer people should try to pick stocks and, instead, should not do anything other than invest in index funds. 

Before his death, Munger gave some investment advice in an interview with the Wall Street Journal, where he admitted that he is concerned about Berkshire’s success in encouraging more people to pick stocks. 

“I like stock picking because it reminds me of hunting and fishing. Any day, you can have a new thing that might be interesting, but very few people are going to get rich that way,” Munger said. 

“I think fewer and fewer people are really needed in stock picking. Mostly, it is charlatanism to charge three percentage points per year or something like that to manage somebody else’s money.”

Munger cited several reasons for his preference for index funds. He argues that the stock market is efficient, meaning it is difficult to consistently outperform it by picking individual stocks. 

He also noted that index funds are very low-cost, making them a more affordable option for most investors.

“Most people should not do anything other than have index funds. That is a perfectly rational thing to do for somebody who just does not want to think much about it and has no reason to think he has any advantage as a stock picker,” Munger explained. 

“Why should he try and pick his own stocks? He does not design his own electric motors and his egg beater.”

When asked why he went into stock picking if it is so difficult, Munger explained that the conditions were much different when he began in the 1960s. 

“There were a lot of what we used to call ‘loaded laggards’. There were two or three times as much in assets per-share value as there was in stock-market value per share,” Munger said. 

“Ben Graham taught us all to buy that kind of stuff. It was underpriced, and hold it as long as it was underpriced, then sell it when the price got more normal and buy another undervalued asset.”

He said that could be done for around four decades after the 1930s Great Depression. “That’s gone, all of that low-hanging fruit.”

“I think that the modern investor, to get ahead, almost has to get in a few stocks that are way above average and are extremely difficult to find,” Munger said. 

“They try and have a few Apples or Googles or so on just to keep up because they know that a significant percentage of all the gains is going to come from a few of these super competitors.”