Edward Quince (EQ): Charlie, you and Mr. Buffett have consistently advised the average investor to steer clear of complex trading and active management. What is your basic prescription for most people seeking sound long-term returns?
Charlie Munger (CM): Most people probably shouldn't do anything other than have index funds. If you have ample diversification and a minimization of transactions and fees, and simply allow for the passage of time, you will likely enjoy dividends and capital gains.
EQ: Why is this simple, passive route superior for the majority? Is it because the average investor is not equipped psychologically or intellectually to beat the market?
CM: It is certainly not supposed to be easy. Anyone who finds it easy is stupid. Many people have a fretful disposition which is the enemy of long-term performance. You must develop a temperament that can own securities without fretting. Investors must be able to keep raw irrational emotions under control. The less prudence with which others conduct their affairs, the greater prudence with which we should conduct our own affairs.
EQ: We see an endless supply of forecasters claiming certainty about the market's next move. You've offered a memorable analogy about the futility of listening to them.
CM: People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts.
EQ: So if forecasting is useless, how should a prudent investor make decisions?
CM: You must accept the limits of certainty and cultivate humility. The key skills are patience and discipline. You must adopt the mental discipline of knowing that big opportunities come infrequently. We must realize that There are worse situations than drowning in cash and sitting, sitting, sitting. It's waiting that helps you as an investor, and a lot of people just can’t stand to wait.
The Edward Quince Takeaway
For most individuals, the path to prosperity is paved with simplicity, patience, and non-action; Munger advises that most people should simply use index funds. Avoid the trap of certainty—and the financial pundits who sell it—recognizing that the craving for forecasts is as irrational today as hiring someone to read sheep guts was centuries ago. Success is achieved by mastering your own impatience and letting time, the great exponent, work its silent magic.
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