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In the world of investing, there are a huge number of people with high IQs trying to be more skilled than average. It's hard to imagine any other activity that attracts so much attention. Strange things happened a few years ago. One of our local investment advisory firms, a very large one, sought to gain an advantage over other investment advisory firms.
Yes, they were looking for a way to gain an edge over other investment advisory firms, and they reasoned as follows: We have all these brilliant young people from Wharton, Harvard, and so on, and they work so hard to understand business, market trends, and everything else. If we asked each of our brightest men to give us their best idea, and then created a formula from this collection of best ideas, we would get results far above average.
For them, this was undeniable because they claimed that this was what was happening and that you had to go to Harvard and Wharton. So they tried the experiment, and of course, it completely failed. So they tried again, and The failure was total. They tried a third time, and it failed again. And of course, what they were looking for was the equivalent of the alchemists of centuries ago who wanted blood to turn into gold.
They thought it was enough to buy a little magic wand from a street vendor to transform it into gold. It would be a new way to make money! Oh, this consulting firm was looking for the equivalent of turning lead into gold, and of course, it didn't work. I could have told them, but they didn't ask me anything.
What's interesting about this situation is that it involves a group of very intelligent people from all over the world. There are many excellent individuals in China, where people need to be a bit more intelligent. The problem is very simple: there's a twofold question: why did this plausible idea fail?
Think about it for a moment. You've all attended some kind of fancy educational institution. I bet there's practically no one in the audience who knows where this idea failed. It's a pretty ridiculous demonstration; how can you ignore it? But it's at this point that you should be able to respond. It shows how difficult it is to be rational about something very simple.
It's very difficult. How many crazy ideas do people have that don't work? You don't even know why they don't work, even though it 's perfectly obvious they were properly educated. Now, in places like Bermuda or even the Daily Journal, we've done better than average. And now a question arises: why did this happen?
Why did this happen? The answer is quite simple: we tried to do less. We never had the illusion that it was enough to hire a bunch of bright young people for them to know more than anyone else about canned soup, aerospace, utilities, and so on and so forth. We never had that dream. We never thought we could get really useful information on all subjects, as Jim Cramer claims.
We always realized that by working very hard, we could find a few points where we were right, and those few points were sufficient. It was a reasonable expectation. It's a very different way of approaching the process. If you asked Warren Buffett the same thing as this investment advisor—give me your best idea for this year—and followed Warren's best idea, you would see that it works wonderfully.
He tried to select one or two stocks that he understood. He had more limited ambitions. I had a grandfather who was very helpful to me, my mother's father. He was a pioneer, and he left his parents' home penniless. But with youth and health, he fought Indians as a captain in the Black Hawk Wars. Then he stayed there and bought cheap land.
He was aggressive, intelligent, and so on, and eventually he became the richest man in town and in the bank. He was very well-liked, had a large family, and led a very happy life. He had the strength of mind to be He came to Iowa when land cost no more than a dollar an acre and stayed until that black earth created modern, prosperous civilization and some of the best land in the world.
Yes, he had the right attitude to foster a life like his because he was in the right place. There were few opportunities, and the trick to succeeding was to seize the few opportunities that came your way as they arose. He told this story over and over to the little children around him all summer long.
My mother, who wasn't interested in money, remembered the story and told it to me. But I'm not a natural imitator of my mother, and I knew Grandpa was right. So, from a very young age, I always knew that the important opportunities that would come my way would be few and far between, and that the trick was to be prepared to seize them when they came.
That's not the attitude they adopt at Within a large investment consulting firm, they think that by studying a million things they can know a million things, and of course, the result isn't there. Almost no one can outperform an index, but as I said, I have my Daily Journal shares, my Bshire ATAW shares, my Lilou's Asian fund shares, my Costco shares, and of course, I 'm outperforming everyone.
I'm 95 years old, I currently have no open trades, so the reality is that I'm right and they're wrong. That's why it worked for me and not for them. Another problem that has arisen in the world of stock selection, where all this money and all this effort is devoted to trying to be right and rational, is that a truly horrible thing has happened to the class of investment advisors: the arrival of these index funds that beat everyone.
And that's not all; the amount they earn roughly corresponds to the cost of running the market and the enormous changes in the In the world of investment, the entire profession is paid for having accomplished practically nothing. This is very much the case; it's not the case with bowel surgery or even criminal defense, etc.
The entire profession has chosen this activity, has chosen to have nothing to do. Members of the profession have always faced this problem and have rationalized their actions in the following way: we protect our clients from insurance salesmen and stockbrokers; the standard stockbroker serves the active trader.
They saved people from the life insurance salesman and the stockbroker who liked active trading, and I suppose that in this sense, the investor class continues to save these people from an even worse fate. But this is a very important profession that has worked so hard and is so admirable, and whose members are delighted.
If you can, marry into their families. They simply cannot do what most people are really trying to do, which is to achieve average results. How does this profession manage this terrible situation when Index investing is becoming increasingly popular, even in the most fashionable places. I suppose the answer is very simple: they're in denial.
They have a terrible problem they can't solve, so they just say the problem doesn't exist. It's a very stupid way to deal with a problem. It might be a good thing not to think about your own death, about what you can't fix, by going to the very end, but in all practical areas of life, a problem well understood is half solved or better managed.
So it's bad that all these people are in a state of denial, doing what they've always done year after year, hoping the world will continue to pay them for it, whereas if you choose the pilotless path, you're practically guaranteed to do better. I do n't have a solution to this problem. I think that if everyone did index investing, it wouldn't work, but over a considerable period of time, index investing will work better than actively selecting stocks, which requires a lot of knowledge.
This video is over. If you want to get a A concentrated dose of Charlie Munger's wisdom to improve the performance of your future investments, it's essential to get your hands on the book "Charlie Munger: The Wise Investor," which will immerse you in Munger's mindset and his unique perspective. It's one of the best books I've ever read.
I've included the link in the description, as well as a link to Moning, an app that lets you track the performance and composition of your stock portfolio before you go. Don't forget to like the video and subscribe. See you soon!
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