Munger and Buffett Don’t Care About Market Corrections, They Care About Buying Cheap
On the issue of prices vs timing.
In the midst of a large market correction, Charlie Munger, the vice chairman of Berkshire Hathaway and Warren Buffett’s longtime friend, was asked how worried he was about declines in the share price of Berkshire. He replied,
“Zero. This is the third time that Warren and I have seen our holdings in Berkshire go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding, the normal vicissitudes in worldly outcomes, and in markets, that the long term holder has his quoted value of his stock go down by say 50%.”
According to Munger, a 50% decline should not be viewed as an unexpected event in the markets. Rather, it should be considered a normal feature. Long term investors should be comfortable with normal behavior.
Get Comfortable with Corrections
Paradoxically, most investors become alarmed when their stocks decline by 50%. How can something, which is a normal feature of markets, be so jarring to investors? Munger provides an answer:
“You can argue that if you are not willing to react with equanimity, to a market price decline of 50% two or three times a century, you are not fit to be a common shareholder and you deserve the mediocre result you are going to get — compared to the people who do have the temperament, who can be more philosophical about these market fluctuations,” said Munger.
Therefore, the problem is that most people who invest do not have the mindset or “temperament” of true long term investors. Many who think they are long term investors haven’t embraced the psychology of long term investors. A 50% decline serves as a convenient litmus test for those who are true long term investors versus market speculators.
Focus on Price
The truth of the matter is, when the markets take a plunge, assets become cheaper relative to their value. Downside risk decreases. These are all good things for a true long term investor. Charlie Munger and Warren Buffett understand these simple concepts better than most.
“If the market gets cheaper, we will have many more opportunities to do intelligent things with money. Now, whether we will blow the money in the meantime, or something, is another question. But, we are going to be buying things, one thing or another, operating businesses, stocks, high yield bonds, whatever,…as long as I live, just like I’m going to be buying groceries,” said Buffett.
It is interesting that Buffett finds himself reiterating concepts that should be self-evident to us as consumers. If you are a consumer of goods, it is clear that you would rather buy those goods when the price is low, rather than when the price is high. By doing so, you can get more for less money. By saving money, you can do other “intelligent” things with that money.
The really interesting thing is, when we become investors, many of us lose this rational instinct. But the idea is exactly the same. Investors are consumers of assets such as stocks. Therefore, we should be excited when stocks are selling at a discount, just as we become excited when we get a good deal on food, or gas, or anything we buy.
“Would I rather have grocery prices go up or down if I’m going to be buying groceries tomorrow, and next week, and next month, and next year? The answer is, obviously, if I’m a net buyer, I will do better if prices are lower,” said Buffett.
One of the difficulties of being a good investor is purchasing stocks when they are cheap relative to their value. The problem is, many people conflate timing the market with buying at a discounted price. In an interview with Andrew Serwer, Buffett emphasized the distinction between timing markets and buying at good price:
“We care a lot about the price, we do not care about the next 12 months…Economic predictions just don’t enter into our decisions…In the hard sciences you know that, if an apple falls from a tree, it isn’t going to change over the centuries because of anything, or political developments, or 400 other variables that go in. But, when you get into economics, there are so many variables. And the truth is, you’ve got to expect good times and bad times in business. If you were to buy a [business], you wouldn’t try to time the purchase, you would try to make the right purchase at the right price…”
Thus, long term investors should care about what they are buying and the price at which they buy. This requires patience, because it is very difficult to time exactly when prices will reach discounted levels. It also requires having cash at the ready when an opportunity presents itself.
Munger and Buffett are both experts at waiting patiently while sitting on an enormous pile of cash. Berkshire Hathaway currently holds around $149 billion in cash on its balance sheet, the largest cash pile in the company’s history. It is particularly interesting, considering they do not want to hold cash. Moreover, inflation, which is at a multi-decade high of 7%, is eroding away the purchasing power of that cash. This has created a bit of cognitive dissonance for some Berkshire investors and those looking in from the outside.
Given their investing philosophy, it reasons that Munger and Buffett cannot find good businesses at good prices. Perhaps they view the risk of purchasing at today’s prices more dangerous than holding cash in a period of record high inflation. The real question is, how much lower will prices have to fall or, alternatively, how high will inflation have to rise, before they strike. Of course, they do not know when they will strike, but they surely know the price.