Charlie Munger Thinks You Should Buy Index Funds and Sit on Your A**

I’m an admirer of Warren Buffett, the Oracle of Omaha and Chairman of Berkshire Hathaway. I cite his words of wisdom often in my blogs.

Buffett has a 99-year-old-sidekick, Charlie Munger. Also a multi-billionaire, Charlie is a longtime business partner and vice chairman of Berkshire who shares a pragmatic investment philosophy not unlike Buffett’s. Forbes’ real-time estimated net worth of Charlie (as of November 4, 2023) was in the neighborhood of $2.6 billion.

The Berkshire boys are considered among the best investors of all time…in the esteemed company of chaps like Ben Graham, author of The Intelligent Investor, who Munger credits as teaching Buffett and himself a few things about investing in their younger years.

In a recent interview with the Wall Street Journal, Munger expressed an opinion that caught my eye mainly because it’s a point I like to drive home with the younger followers of this blog. He mused that most folks probably shouldn’t do anything in the stock market EXCEPT deal in index funds.

And why is that? To Munger, index funds are a “perfectly rational” investment tool for new - or less experienced - investors, many of whom frankly don’t wish to get too involved in investing but need to develop a quality retirement portfolio. No offense, but these folks often have minimal skills as stock pickers.

“Why pick your own stocks and/or bonds? You don’t design your own electric motors or egg beaters.” --- Charlie Munger

He also cautioned investors to, “Be aware of the cognitive biases in the marketplace. Particularly the tendency of investors to overrate their own intelligence and skills in deciding what to do and what not to do in the marketplace.”

Index fund investing, whether it involves building a portfolio around an S&P 500 Index fund, Total Stock Market Index fund, or placing significant retirement dollars in a Target Date fund, might just help control cognitive bias. Index fund investing is a meaningful first step toward building a highly diversified, good quality portfolio that will help reinforce the patience required to avoid flushing during those inevitable and unsettling Bear Markets investors experience along the road to retirement.

Munger perhaps made his most colorful - and impactful - observation about index fund investing during an interview on CNBC's Daily Journal 2023, "...It's not difficult to buy an index fund and sit on your ass. That's the great default position."

In addition to index fund investing, he cautions against overspending, which could be viewed as a vote for...SAVING.

Although a multi-billionaire, Munger appears to view the world from the perspective of the little guy. He doesn’t spend money on fancy cars, big yachts or private jets. “I prefer a more conservative, less expensive way of life,” he noted in the WSJ interview.

Munger has lived his long life in a way that both impacts his happiness and his ability to accumulate wealth. For example, he lives in the same house he built 70 years ago.

Munger cites Socrates, the renowned ancient Greek philosopher, who said, “He that is richest is content with the least.” Or perhaps Henry David Thoreau, the American naturalist, who said, “That man is richest whose pleasures are cheapest.”

When asked to what he attributes his success, Munger said, “I read a lot. Did so even as a young child. I don’t know how to get smart without reading a lot.” Makes a lot of sense to me!

Next time you see Charlie Munger mentioned in the press, take a moment to read what he has to say. You might learn something important about investing. And remember, dare to be average. Very few active traders earn greater returns than index fund investors over the long haul.