Thursday, April 18, 2024

Billionaire investor Charlie Munger says stock market ‘gambling’ is as addictive as ‘heroin’—but he sees no way to fix it

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Speculative trading boosted “meme stocks” and shares in many other risky companies during the COVID-19 lockdowns and helped retail investors profit tremendously before the market tanked. 

Charlie Munger, Warren Buffett’s lieutenant at Berkshire Hathaway and a veteran long-term investor, thinks this kind of speculative trading is akin to an addiction—one that it should be done away with. 

“They [people] love gambling, and the trouble is, it’s like taking heroin,” Munger said in an interview with Berkshire Hathaway investment officer Todd Combs taped in April 2022 and published earlier this year. “A certain percentage of people when they start just overdo it. It’s that addictive. It’s absolutely crazy, it’s gone berserk. Civilization would have been a lot better without it.” 

Munger said during the interview that the stock market attracts two types of traders: long-term investors and people wanting to “to do casino gambling.” The trouble comes when these two categories are allowed to trade together, according to the billionaire.

“Now, what earthly good is it for our country to make the casino part of capitalism more and more efficient, and more and more attractive, and more and more seductive? It’s an insane public policy,” Munger said, adding that it causes harm to the country. “On the other hand, I think the chances of changing it are practically zero.”

Munger believes the effects of speculative trading caused the Great Depression, which started with the worst stock market crash in history in 1929. And while there are obvious perils of this form of “gambling,” he says nothing can be done about it.

At the time that Munger gave the interview, meme stocks like GameStop and AMC had surged almost 100-fold. Before the speculation-driven bump to its shares, AMC was at risk of  bankruptcy, and GameStop’s was worth only a tiny fraction of what it had ballooned up to. And while market conditions have changed dramatically since then, meme stocks have seen good days even in 2023, especially when stocks seem to be climbing, adding to the frenzy.

Munger differentiated between investments in stocks versus sectors like real estate because stocks can be bought and sold quicker. As a result of this liquidity, he said that speculation in stocks had lately gone “berserk.” 

“When I was in Harvard Law School, it was a rare day when they’d pay for a million shares a day,” he said, referring to daily trading volume. “Maybe it would happen once or twice a year. Now they trade billions of shares every day.”

Buffett’s business partner has spoken several times about how speculative investing can harm the stock market, and simply won’t work as a strategy for investors over the long term.

“The world is full of foolish gamblers, and they will not do as well as the patient investor,” Buffett wrote in Berkshire Hathaway’s shareholders letter in February.

To be sure, this isn’t the only category of investing that Munger is critical of. He has strongly criticized cryptocurrencies, calling Bitcoin “stupid and evil” and said he wished crypto was never invented. Earlier this year, he said he was “not proud” of America for allowing crypto to be traded and wanted it banned. In an op-ed for the Wall Street Journal, he called crypto a “gambling contract with a nearly 100% edge for the house.” 

“It’s worthless, it’s no good, it’s crazy, it’ll do nothing but harm, it’s antisocial to allow it,” he told CNBC in February. “I don’t think there is a rational argument against my position.”

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