The BBC interviewed Charlie Munger in 2012 and Munger in that interview states that “you can never take the booms and busts out of a capitalistic economy.” He goes on to say that he and Warren Buffett have seen their portfolio drawdown by 50% three times over the years. Charlie says this is a part of investing, and if you can’t stomach it you shouldn’t be in it.
Munger’s point he was making is that markets need to be dampened as he puts it. Big run ups need to deflate in order for the next run up to happen. These run ups can only go as far as the weakest link in the system will allow. It’s a capitalistic endeavor. Continued growth needs to fix itself in order to reset. Just as a runner has to rest or reset his or her body after an injury in order to continue the next run, so does the economy. When economic growth happens weak links get missed or ignored that rear up and show their faces at the point when the glee seems highest. In the 2000 tech bubble investors ignored the realities of running a business in place of a futuristic dream of technology which would take years to develop. In the 2009 financial crises how mortgages were being sold and packaged ignored the strength of the actual mortgagee to the point of collapse. Today the 2020 virus crisis has occured because a possible pandemic was ignored as a possibility and little preparation was in place even though other countries had faced such dilemmas in the past with SARs and Ebola.
In Scott Nation’s book entitled A History of the United States in Five Crashes he walks the reader through a few of the worst market crashes of our history. He reviews the 1929 great recession, black monday of 1987, and 2008 financial crises as examples. In every crash evidence was present and communicated to officials that something was amiss, and it could be a disaster if not addressed. In every case the information was ignored, because times were too good, and the money was flowing.
My point here is that no matter how savvy of an investor you believe yourself to be, you won’t be able to stop these events from happening, and they will always be a part of investing. As Charlie Munger discusses in his BBC interview large reductions in portfolios or losses are a part of big gains. You can’t have one without the other. So he and Buffett take the mindset of acquiring the entire business when reviewing a possible investment, and they only stick with businesses they understand as a way to mitigate their emotions during these crashes or crises.