Teaching people to trade stocks is like starting them on heroin

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charliemunger
heroin

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Warren Buffett may be the most famous advocate of low-cost index funds, but his sidekick Charlie Munger has been just as insistent over the years that, for most people, indexing is the best way to invest.

Munger, who’s now aged 95, gave a two-hour address yesterday at the Daily Journal annual meeting, and below is a downloadable link to a full audio recording.

In his address, Munger said it was time for active money managers to face up to the fact that their expertise simply isn’t worth the fees they charge.

“They have a horrible problem they can’t fix so they just treat it as non-existent,” he said. “This is a very stupid way to handle a problem.”

“It’s wrong to have all these people in a state of denial and doing what they always did year after year, and hoping the world will keep paying them for it even though an unmanned index is virtually certain to do better.”

Munger also warned that encouraging active trading is causing investors harm.

“People are trying to teach you to come in and trade actively in stocks,” he told his audience. “Well, I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin.”

Here are some other highlights from Charlie Munger’s address:

Munger on finance and investing

On passive versus active

“These index funds have come along and they’ve basically beaten everybody. Not only that, the amount by which they beat everybody is roughly the cost of running (an active management) operation. So we’ve got a whole profession that is being paid for accomplishing practically nothing.”

On the problem managers face

“If your game is money management, you have a serious problem, and I don’t have any solution.”

On managers quitting the industry

“These people who were used to winning and are now just quitting the profession — that’s a very understandable thing to do. I regard it as more noble than staying in and playing along with the denial.”

On financial chicanery

“There has always been chicanery… People just seek out the weaknesses of their fellow men and take advantage. You have to wise up enough so you avoid them all.”

Munger on life

On knowing your limitations

“It is really important to stay within your circle of competence. If you are not sure what the boundaries of that circle are for you, then you do not have real mastery of your field.”

… and on people who don’t know theirs

“Never underestimate a man who overestimates himself.”

On education

“My idea of being properly educated is being right when the professor is wrong. Anyone can just spit back what the professor is saying. It takes a really educated person to think for themselves.”

On finding a life partner

“We all know people who are outmarried — their spouses are so much better. Think what a good decision that was for them, and what a lucky decision. Way more important than money. And a lot of them did it when they were young. Just stumbled into it. Now, you don’t have to stumble into it. You can be very careful. A lot of people are wearing signs: Danger, Danger, do not touch . And people just charge right ahead.”