This interview by John Collison with Charles Munger was scheduled to air for a while, coinciding with Stripe Press’s launch of the reprint of Poor Charlie’s Almanack, which is launching today. In the interview Charles Munger explains why investors should be prepared for lower returns in the future, saying the period of high returns was an anomaly. Here’s an excerpt from the interview:
John: Has investing gotten harder?
Charlie: Of course, it’s gotten harder, way harder. It’s gotten so hard that most of the people who are in wealth management have an almost zero chance of outperforming an unmanaged index like the S&P.
John: How has it gotten harder?
Charlie: It’s gotten, a, there’s so much more of this wealth invested in securities. And so we’ll get a whole lot of big sums to manage. And of course, it’s a long time to buy in, a long time to sell out, costs are higher. And so it’s way harder to manage a large sum of money to make a lot of money at high returns than it is to manage a small sum of money. And then way more brains came into the business. So it’s gotten brutally competitive.
And then we have these manias that get — when things are hot and they’ll start running like the behavior gets almost crazy. It’s almost like a delusion. Of course, it’s harder.
And in my lifetime, a guy just bought the best common stocks and sat on his ass, would have made about 10% per annum before inflation. Maybe 8% after inflation. That is not the standard return that a man can expect from investment. That was a very unusual period in a very unusual place. And I do not anticipate that the average result is going to be nearly that good over the next 100 years.
John: Why was the results so good? Why was it 10% per annum?
Charlie: Let’s call it 8% after inflation. The Great Depression so demoralized everybody, they were utterly despised and then the economic system improved a lot.
And the combination of the investment climate, the economic situation together evolving, just made it unusually good. If you go back to what the rich people of England did back, say, in 1900, they bought consoles, 2.5%, no inflation. Two and a half percent return was considered, that was, you wanted to stay safe, you’d be satisfied with that. No rich people thought there was any safe way of getting 8% if you go back to 1880 among the rich people of England.
And so this is an unusual period. And now everybody who’s in investment management teaches everybody, you’ll get 8% after inflation by dealing with us because that’s the way it worked for the last 100 years. Just because it worked for the last 100 years does not mean it’s going to work for the next 100 years.
You can listen to the entire discussion here:
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